Record Gold

We're in a new, more expensive era for businesses and consumers.

Commodities like oil, flour, platinum, and even mushrooms are at record price levels and likely to stay there for the foreseeable future, say experts.

Gold is no exception. Its highest-ever per-troy-ounce prices are affecting the jewelry business worldwide, and inventories of last year's less-expensive gold jewelry are running out. But savvy retailers have the means to cope effectively, say industry analysts.

Since November, gold has soared to its highest-ever prices, topping $1,000 an ounce in mid-March before slipping back, and experts suggested it would keep climbing. Gold is heading "inexorably higher," said Dow Jones' MarketWatch. At the Plumb Club Forum in March, Philip Newman, research director for precious-metals consulting firm GFMS Ltd., forecast a high of $1,180 this year and an average of $970, while Tim Dinneny, managing director of metals trading firm ScotiaMocatta, predicted $1,200 in 2008. Forbes.com has suggested gold could reach $1,250 this year and $1,400 before this decade ends, driven in part by the weak U.S. dollar, says Pierre Lassonde, exiting chairman of the World Gold Council.

Factors spurring higher gold prices, say experts, include inflation and record-high oil prices; geopolitical tensions; the sub-prime mortgage and housing crises; weak U.S. dollar; and possible recession in the United States, the world's economic engine. These have pushed investors increasingly into gold, the traditional "safe store of wealth during times of economic turmoil," says the World Gold Council.

Worldwide demand for gold in 2007 rose 4 percent (in terms of tonnage), tallying $79 billion, a record 20 percent gain in value, says WGC's 2007 Gold Demand Trends, released in February. Demand for gold used in jewelry and watches—which accounts for almost 70 percent of annual output—rose 6 percent (tonnage) and 22 percent in value, to $54 billion, also a record. (India remained the globe's top gold jewelry buyer, but China took second place from the United States.)

In the fourth quarter of 2007, however, world demand fell 17 percent (tonnage), because of gold's rising and volatile price, says WGC, though value rose 7 percent (another record). Jewelry demand dropped 17 percent, but rose 6 percent in value.

While other countries saw gains for much of 2007, U.S. jewelry demand for the year fell 14 percent. In the fourth quarter, it dropped 17 percent (though value rose 6 percent). U.S. jewelry producer prices rose 6 percent in December, the biggest increase in 13 months, says the U.S. Bureau of Labor Statistics.

The impact on jewelry pricing is most apparent in the lower end of the U.S. market, where buyer resistance to entry price points has been reached, says WGC. "The budget buyer who could buy gold earrings for $30, for example, may not at $40 or $50, especially with this economy," says John Calnon, WGC USA managing director. Instead, they may buy more silver and silver-and-gold jewelry.

The higher end of the U.S. jewelry market is more resilient, not only because luxury customers can afford expensive jewelry, but also because gold's rising price adds higher value, says the WGC report. Susan Thea Posnock, spokesperson for Jewelers of America, agrees. "When the gold price rises, consumers tend to automatically appreciate gold jewelry more. An increase in real value reinforces their emotional sentiments and desire to purchase it."

Certainly, gold watches haven't been hurt by the rising price, says Jean-Daniel Pasche, president of the Federation of the Swiss Watch Industry FH. Swiss exports in 2007 rose 7.4 percent in volume (531,100 gold watches) and 24.9 percent in value ($4.4 billion), and are "still increasing despite high [gold] prices," he told JCK. January 2008 saw a 13.3 percent rise in numbers (35,400) and an increase of 24.5 percent in value ($308.7 million).

"In the past, too, an increase in gold prices didn't have negative effects," Pasche noted. "A gold watch can also be considered an investment, and if [gold] prices increase, the investment is better." (However, he added, some FH members say they "won't adapt their prices with each change in gold [but will] reduce their margin" to hold prices and clients.)

Still, luxury jewelry and watches may be feeling some pressure. This spring, some luxury watch brands raised prices on gold watches by several percent. And some newspapers are reporting consumer sticker shock at jewelry's higher prices.

The outlook for gold won't change soon for either the world market or the United States. "For gold jewelers, times are difficult," says Gold Demand Trends. "Both the trade and consumers are hesitant to commit to purchasing gold jewelry, while the price position remains both high and unstable. So, it's inevitable that jewelry demand ... will be low in the first part of 2008."

For the U.S. market, gold jewelry imports "fell considerably in 2007 and the outlook for jewelry demand [in 2008] is pessimistic as retailers—already experiencing tough economic conditions—find it difficult to keep pace with the gold price," says the WGC report. Calnon cites two concerns that aggravate that situation. "In this rocky economy, we could have a consumer-led recession, driven by fear," he says. He also wonders whether retailers and suppliers will have the ingenuity "to develop products to achieve critical promotional price points for their businesses."

Meanwhile, jewelers are changing pricing and inventory to cope with increasing prices for gold and other jewelry commodities. Sterling Jewelers Inc. (whose chains include Kay and Jared nationally, and some regional ones) raised jewelry prices across the board after Valentine's Day. Its parent firm Signet Group PLC cited recent "substantial increases in diamond, gold, and platinum costs impacting the entire U.S. jewelry sector [that] haven't been fully passed on to consumers."

Zale Corp. (whose national chains include Zales, Gordon's, and Piercing Pagoda) has made "some selective price increases to help offset rising commodity costs," JCK was told by David Sternblitz, vice president and treasurer. "We're also improving our supply chain by creating a sourcing organization responsible for narrowing our vendor base and partnering with vendors best suited to provide quality product at the best cost, to leverage our scale and buying clout." Increasing the percentage of directly sourced product, he says, should give Zale more flexibility to deal with rising gold prices.

Many independents have delayed changing retail prices as long as possible, but most will see an impact on their costs when they replenish inventory at this summer's trade shows. Jewelry manufacturers here and abroad have been affected and will pass their higher costs on to clients.

Some retailers have felt the effects. A number of designers now adjust their prices weekly. Custom work and new or special orders are now charged according to current pricing. One Pittsburgh jeweler told his local newspaper about ordering a $400 wedding band for a customer and getting it back from the manufacturer at $700. A Southern California jeweler told her paper that a gold necklace retailing at $1,000 last year now costs $1,500—with her cost now $1,000—while a pair of gold earrings goes for $150, up from $65. Idex Online (the first online international diamond exchange) forecasts 7 percent rises in jewelry supplier and retail prices this year, the biggest in decades.

Overall, gold's record prices have created "a period of challenging trading conditions ... which have heavily impacted consumer demand for gold," especially in jewelry, says James Burton, WGC chief executive officer. The real threat, though, says the WGC report, is "a period of prolonged volatility, especially at record-high price levels, which may not allow consumers and trade buyers time to adapt." Still, consumer desire for gold "remains very strong," it says hopefully. Once prices stabilize, "buyers will adjust ... and demand will return."

Smaller independents would seem to be the retailers most adversely affected by record gold prices, especially since they have fewer financial resources than larger retailers. But jewelry trade veterans like Curtis Ley, interim president and CEO of Manufacturing Jewelers & Suppliers of America, say they're also more adaptable, because of smaller inventories and the ability to control them.

"Independents also have a much stronger relationship with their gold jewelry customers, who are loyal and trust them," says Calnon. "They have a better opportunity to engage them and react to their requirements much faster. Of course, they need to have the products their customers want and—even in a time of record-high prices—continue to offer them."

The product some independents offer to hesitant midmarket consumers is more silver, gemstone, and 14k jewelry. "Classic styles are a key to success," says Helena Krodel, associate director for media for the Jewelry Industry Council. "Classic open-link chains, bangle bracelets, hoop earrings, and/or iconic and meaningful shapes like hearts, crosses, and flowers are sentimental, long lasting, and can be passed down for generations to come," she says. "Savvy retail sales associates should remind consumers of gold's longevity and intrinsic value, that it will continue to be a meaningful and worthwhile purchase."

"Consumers seek elite and aspirational products," notes JA's Posnock. "Smart retailers who sell value, not commodity price points, will find that beautiful, stylish, and classic gold jewelry will continue to sell well."

Innovation also is playing a role, Posnock notes. Designers are offering classic looks with lower gram weights at less cost, without using cutout designs or hollow pieces. "They're also mixing gold with materials like hardened ceramic, wood or ebony, colored stones, resin, mother-of-pearl, and more," she adds.

In addition, Italian jewelry suppliers are using new technology to give classic designs new finishes, hidden clasps, adjustable lengths, and other features, she says. "While the focus remains on classic, these have added versatility and multiple uses, making them even more wearable over time."

To aid promotion, WGC is working with "strategic partners [large retailers]," says Calnon, "on responses about higher gold prices, which salespeople can use with consumers, to reinforce purchase decisions at point of sale." Also, he notes, WGC's Web site (www.gold.org) has training materials to help retailers sell gold jewelry.

Some jewelers are being cautious about how they stock their store, noted an industry insider recently. But retailers can choose how to respond to gold-price volatility, says Calnon: "You can be concerned, or you can be proactive—and change the things you can."