Report: Gold Jewelry Demand to Fall 20%

Gold demand for Jewelry fabrication may fall by as much as 20 percent in the first half of 2008 primarily due to the record prices the precious metal is demanding from investors, according to a report released Thursday.

“Price damage in first half 2008 is forecast to slash demand by around a fifth to almost 1,000 tons,” said Philip Klapwijk, executive chairman of London-based precious metal consultancy GFMS Ltd.

Klapwijk delivered a summary of Gold Survey 2007 – Update 2 report, during a seminar in Toronto organized by the firm.

In 2007, jewelry fabrication demand for gold grew 5 percent, “despite the gold rally, as gains in the more stable first half outweighed second half losses when yet higher prices and volatility took their toll,” Klapwijk said.

U.S. consumption of gold jewelry fell heavily. China and Turkey saw strong growth for the period.

“High prices and volatility were the two chief reasons that the consultancy expects fabrication to slump by almost a fifth in the first half this year,” Klapwijk said. “Less marked gains for local prices due to dollar weakness and continued robust GDP growth in many emerging economies were expected to partially mitigate the impact of the expected gold rally. Such factors explain why GFMS see the ‘jewelry floor’ (the level deemed fair and sustainable at which physical buyers return) as having moved up to the low $800s, a result which the consultancy feels to be ‘remarkable.’ “

He added, “However, doubt was cast on the solidity of prices moving forward, given the huge volumes investors would have to pick up to keep the market in balance as jewelry demand slips well under mine production.”

Gold rose 31 percent last year, its seventh consecutive annual gain, as the dollar declined against 14 of the 16 most- actively traded currencies. A weaker dollar increased demand for precious metals as an alternative to U.S. stocks and bonds.

Overall, the report expects gold prices to drop to an average about $840 for the first half of the year, with the price of the precious metal increasing to new record levels during the second half of the year. Gold climbed to a record $914.30 recently and has averaged about $875 so far this year.

“Investor appetite for gold at the moment seems undimmed and this should push gold higher over the year,” Klapwijk said. “Predicting the top is never easy but we always thought the $900 barrier could easily fall quite soon and then we have to start viewing $1,000 as a clear possibility for later this year.”

The report also noted that China became the world’s largest gold producer last year. China produced 276 metric tons of gold last year, according to the report. A 12 percent increase from 2006 and just over one-tenth of the world’s supply.

The ranking pushes South Africa into second place for the first time since 1905, GFMS said.

Overall mine production in 2007 fell by just over 1 percent, partly because of delays to development and expansion projects, according to the report. Losses centered on South Africa, Peru, and the United States, while gains were reported in Indonesia (in addition to China). Output in the first half of 2008 is forecast to grow by just over 2 percent.