Gold Could Hit $1,000; U.S. Market Faces ‘Challenges’

Gold’s per-ounce price could top $1,000 this year, say some gold industry analysts. Meanwhile, as global demand set records in 2007, the precious metal’s current high-price and volatility poses “challenges” to the jewelry industry generally, and U.S. jewelry retailers specifically, says a new World Gold Council report.

“The real danger to jewelry demand [is] a period of prolonged volatility, especially at record high price levels, which may not allow consumers and trade buyers time to adapt to new levels,” the WGC says.

Some financial and gold industry analysts are suggesting that gold could top $1,000 within months. Merrill Lynch, one of the world’s leading financial managers and investment bankers, for example, has substantially increased its gold price forecast. This month, its analysts said they expect gold to average $925 per ounce this year and reach $1,000 in 2009 (up from former forecasts of $750 and $800, respectively). The Market Scan section of Forbes.com in late January suggested “an ounce could go as high as $1,250 this year,” while Ross Norman, director of London-based TheBullionDesk.com, said gold could pass the $1,000 mark by the end of this quarter.

Propelling gold’s rise ($940 in January) are several factors, say analysts, including record energy costs (especially oil), ongoing geopolitical tensions, the subprime/housing crunch, the weak U.S. dollar, and a possible recession in the United States, the world’s economic engine. These have pushed corporate and private investors into buying gold bullion, traditionally seen as “a safe store of wealth during times of economic turmoil,” says the WGC’s 2007 Gold Demand Trends report, released Wednesday.

The WGC report says worldwide demand for gold rose four percent (in tonnage) in 2007, reaching $79 billion, a 20 percent gain in value for the fourth consecutive record year. For jewelry usage specifically (70 percent of the world’s annual gold production, for both jewelry and watches) demand rose six percent (in tonnage) in 2007, and 22 percent in dollars terms, to $54 billion, also a record.

However, WGC says “rising and volatile” gold prices in 2007’s fourth quarter punctured the first three quarters of growth. Overall demand fell 17 percent (in tonnage), though dollar value rose seven percent, setting a new quarterly record. (The impact of high gold is felt most acutely in India, the world’s largest gold buyer, where demand fell 64 percent in 2007’s last quarter, after 40 percent growth over the first nine months.) For jewelry alone, world demand in 2007’s last quarter dropped 17 percent (in tonnage), though it rose six percent in dollars. 

In the United States specifically, (now the world’s third largest gold buyer, surpassed by China in second), “a weak economy, poor retail environment and record [gold] prices” says the WGC dented 2007 jewelry demand, which fell 14 percent. In the fourth quarter alone, gold fell 17 percent in tonnage, but rose six percent in value.

The impact of higher-priced gold on jewelry pricing and demand is most apparent in the least expensive, so-called “lower value segments of the market,” says the WGC. There, it appears “and affordability’ mark [i.e., buyer purchase resistance] has been reached.” However, though the high-end of the U.S. jewelry market was “more resilient” to the downturn in 2007’s fourth quarter sales than the mass market, “even luxury brands experienced a lackluster Christmas season,” it notes.

Don’t expect change soon, suggests the WGC report. Overall, “continued volatility at record high prices is posing challenges to the jewelry industry.

“We’ve entered a period of challenging trading conditions in the gold market, which have heavily impacted consumer demand for gold, especially in the jewelry and retail investment sectors,” says James Burton, WGC chief executive officer.

In the U.S. market specifically, “Initial indications suggest that imports of gold jewelry fell considerably in 2007,” says WGC’s report, “and the outlook for jewelry demand in the year ahead is pessimistic as retailers—already experiencing tough economic conditions—find it difficult to keep pace with the gold price.”

What’s needed, say WGC officials, is a return to stability in gold pricing, because “the trade and consumers are hesitant to commit to purchasing gold jewelry while the price position remains both high and unstable.” When. And if, that happens in the near future, says the WGC, “buyers will adjust to the new price and demand will return”—though if current price levels remain, “there would be a noticeable decline in demand from [2007], just as there was between 2005 [the last time gold spiked significantly] and 2007.”