Metalmania

I write this column at a time when metal prices have soared—and dipped—and many manufacturers wonder about where it goes next and how to respond. Speculative booms make us nervous.

We can make some good guesses about certain prospects for the future. Gold, platinum, and silver production worldwide is not expected to rise much over the next few years. Demand for all three will rise, especially with China and India quickly becoming big jewelry markets. Industrial use is also rising; the dollar is expected to remain weak or fall further, especially as U.S. deficits and debt will continue to climb. And newly developed exchange trading has made it easy for individuals to invest in metals. Unless I’m crazy, that all points to higher prices.

Jewelry accounts for significant portions of sales in these metals, so we can expect that price increases may be moderated, or even stabilized, if we see declining sales of jewelry. It would not be unreasonable to expect sales to suffer as these prices rise higher. We are already seeing alternative materials being used to maintain attractive price points, especially under $1,000 retail.

There seems to be a bit of insanity here. Silver prices have gone from around $5 an ounce to $14, platinum from $900 to $1,300, gold from $275 to $650, and rhodium from about $400 to $6,000! But before we get too excited, we should take a closer look at the net effect on retail prices.

Gold was in the doldrums back around May of 2001, so let’s see what $275 gold versus $650 gold means in an average 18k piece of jewelry. Without bothering you with lots of details, I worked up a model on a hypothetical piece that contains nine diamonds (from 0.02 cts. to 0.25 cts., about 0.50 cts. t.w.) in SI1 clarity and G–H colors.

I presumed a 6 pennyweight piece; labor unchanged, in part because of the shift over those years to Asian production; and markups that are median for both manufacturers and retailers. What is most striking is that diamond costs are actually lower. We know that diamond prices in larger goods and in promotional goods have risen, but here we see that in these sizes and grades, prices have actually gone nowhere. Gold, as a percentage of the total retail price, went from 18 percent to 34 percent, but the total increase over five years was 21 percent, or about 4 percent per year, compounded—barely above inflation. A $300 or so increase over five years in this piece should hardly be a problem.

In heavier diamond total-weight pieces, the change is even lower. In lower price points the impact is greater, of course. If gold resumes its climb, then we may see the public take its time absorbing the increases. For the moment, however, our focus should remain on good merchandising and marketing. The public will stay with us, for now.

Even so, long-term thinking and planning should be part of everyone’s business. We know this is a rapidly changing world, and good scenario planning is the best defense.

benjanow@gmail.com