Jewelers Capitalize on Falling Gold Prices

The plummet in gold prices over the past year has benefited both U.S. jewelers and consumers. While competitive pressures have spurred many jewelers to pass on the savings to customers, others have used the price drop to strengthen their own margins.

Whatever its effects, however, the low gold price may be temporary. After dipping below $280 early this year, gold began inching up again and could go as high as $390 an ounce before year end, say some analysts.

Dropping. Gold, which hovered between $350 and $450 per ounce for most of the past decade, began a slow decline last summer. After hitting a low of $278 in January, however, it began a modest rebound.

Experts cite a variety of reasons for the drop, including low inflation worldwide and extensive selling of gold reserves (at least 15 million ounces in 1997) held by central banks of many major countries, including Australia, Canada and Switzerland. At present, say analysts, many consider stable currencies – especially the strong U.S. dollar – a more secure hedge against economic uncertainties than gold bars.

The lower gold price has affected the jewelry industry in several ways. One is increased demand. Total world demand for gold reached a record 2,935 metric tons in 1997, up 9% from 1996. Much of that growth came from developing countries in Asia, the Middle East, India and Latin America.

George Milling-Stanley, manager of Gold Market Analysis for the World Gold Council (WGC), says worldwide jewelry demand – which rose 8% to 2,476 tons in 1997 – was the driving force behind the growth in gold use. That demand “remained strong into the beginning of 1998, in spite of continued weakness in some east Asian countries,” he notes.

Lower costs. Cheaper gold also lowered the cost of producing gold jewelry, especially mid- to lower-priced products. Other factors obviously affect the final price of jewelry, including design, labor and distribution. But gold and retail experts say the lower gold price alone translated into a drop of 8% to 15% in retail prices, depending on the item. In some parts of the U.S., the retail price of basic gold chain dropped as much as 15% to 25% this spring.

“The higher end of the market, such as a $10,000 piece of jewelry, really isn’t touched by this,” says one jeweler, since craftsmanship, design and other materials, such as gemstones, are much larger factors in the cost.

Many jewelers are giving customers the benefit of lower prices. For example, Zale Corp., the largest U.S. retail jeweler, “passes on any savings we find to consumers,” notes corporate spokeswoman Laura Moore. Such savings tend to be most obvious in the retail price of basic gold products, like chain, “because we buy in such large quantity.”

Because of the three- to six-month lag between when orders are placed and when consumers see the finished product, many customers are just now benefiting from the lower pricing.

Pricing by weight. Smaller jewelers also are passing on the cheaper price to their customers. The 10-store Glennpeter jewelry chain, headquartered in Schenectady, N.Y., for instance, has lowered the price of its gold chain since Christmas. It also has trimmed prices on its gold wedding bands, earrings, charms and some rings.

The gyrating gold price also led Glennpeter to introduce pricing by gram weight for some basic chains, to avoid constant reticketing, says Glennpeter President Jeffrey Weiss.

But while passing on savings may build traffic, it puts more pressure on jewelers and their staffs. Jewelers who apply the same percentage markup to lower priced gold goods will have to sell more to make the same amount of money. Not surprisingly, then, a number of retail jewelers are using the situation to improve product, produce promotional merchandise or boost margins, rather than change or trim their retail prices.

This is “a great chance to upgrade quality of product, from 14k to 18k or with gemstones, while maintaining the price,” says Zale’s Moore.

Robin Scheer Ettinger, WGC vice president of jewelry for the Americas, notes that a number of larger jewelers “have worked with manufacturers to create ‘special collections’ which they promote as a ‘special purchase’ or ‘limited-time offer’ at special prices. They get the advantage [of offering traffic-generating, special-priced merchandise] without diminishing their existing market” by reducing prices.

But many other retailers “are using the savings difference to meet their margin goals,” notes Scheer Ettinger. Thus Sterling Inc., the second largest retail jeweler in America, has changed its overall pricing of gold jewelry only on isolated items.

Even retailers who have trimmed prices aren’t actively promoting that. “We haven’t made this a special marketing initiative,” notes Zale’s Moore. Adds another jeweler, “If you promote lower prices when they go down, consumers expect them to stay down.”

But will they? Signs of a rebound already have appeared. Gold stood at $306 an ounce in early April, and some analysts expect it to reach $390 later this year. That, notes Scheer Ettinger, “encourages people to hold their current pricing, not change it.”

Jewelry demand. Meanwhile, U.S. demand for gold jewelry is at a record high, reports the WGC. Its surveys showed a “modest” 2% increase (to 326 metric tons) in gold used for jewelry last year. But both the WGC and many jewelers say sales of less expensive gold items are increasing most. Indeed, other WGC figures show the average retail price of gold jewelry sold dropped from $90.23 in 1992 to $85.54 in 1997.

“What it means is that they are making more jewelry but making less on it,” says one upscale jeweler.

Falling gold prices aren’t driving demand, however, WGC research last year found that 85% of U.S. adults polled had no idea what the gold price was, notes Scheer Ettinger, “while of the 15% who said they did, half were wrong. The reality is that from the consumer’s perspective, there is no correlation between buying gold jewelry and status of the gold price.”

What is driving sales, say retailers and the WGC, are purchases by women, who increasingly buy gold items for themselves.

Gold facts

  • Women account for 60% of all gold jewelry purchases in 1997, up from 58% in 1995.

  • 81% of American adults intend to purchase gold jewelry in the next 12 months.

  • 78% of American adults purchased jewelry in the past year. Of those purchasing jewelry, half bought gold jewelry.

  • 62% of all gold purchased in the U.S. is believed by the buyer to be 14k.

  • The average number of items purchased per buyer over the last year has increased from two to three.

  • 85% of consumers in the U.S. have no knowledge of the gold price. And half of the 15% who claim to know the price are wrong.

Source: Gold Acquisition Study 1997, conducted by Research International exclusively for the World Gold Council.

AVERAGE RETAIL PRICE OF GOLD JEWELRY (1992-1997)

Year Price
1992 $90.23
1993 $89.27
1994 $86.99
1995 $86.60
1996 $85.14
1997 $85.54
Source: The World Gold Council

TOTAL GOLD DEMAND* IN THE U.S. (1992 – 1997)

Year Metric Tons
1992 282.4 tons
1993 306.1 tons
1994 311.4 tons
1995 327.2 tons
1996 345.3 tons
1997 376.5 tons
* Includes jewelry, investment (coins), dental.
Source: The World Gold Council