Playing the Precious Metal-Pricing Game

Are gold and silver a runaway train? Perhaps. But moody investors, speculative skulduggery, and the vagaries of politics—not to mention mining—could always derail the ride.

The price of gold went through the proverbial roof some time ago. Now, silver is playing catch-up. Any retailer with an Internet connection and a stake in the fine ­jewelry market could probably name the spot price of each on command. Such is the cost of doing business in a world gone mad for metals.

What’s a savvy jeweler to do? It’s not easy buying or selling when the industry’s chief materials are in such financial flux; but with some key economic and industry information, it’s at least possible to anticipate where the prices are heading. The trick is to think out of the box and act quickly.

Before you can do that, however, you need to understand the dynamics of the market­place. Here’s a brief primer on some of the circumstances that can cause the prices of gold and silver to fluctuate.

Deciphering the Price of Gold

There are several reasons the price of gold fluctuates; the first two noted here are based on the supply-and-demand equation, which most of you learned in Economics 101.

? Global turmoil: When current events are dominated by geopolitical, economic, or military unrest—as is the case with the news emerging from the Middle East—­investors look for assets that are safe havens. Speculators consider gold secure and, thus, a hedge against the risk of instability because it’s not linked to vulnerable corporate assets. The demand curve moves up the economic supply curve, resulting in higher prices.

? Inflation: Historically, the price of gold “shadows” the U.S. inflation rate. So when inflation is on the upswing thanks to government monetary intervention, gold speculators are sure to follow, upping demand and price. Gold, they reason, is a safe “offset bet,” or hedge, against the costs companies absorb with higher interest rates. Again, demand moves up the supply curve, signaling higher prices.

? Exchange-traded funds: Since 2004, investors have hoarded billions of dollars of gold in a relatively new investment vehicle called exchange-traded funds, or ETFs. The ETF hoarding concept “has appealed to military strategists, investors, and squirrels,” wrote Liam Pleven in the Feb. 7, 2011, Wall Street Journal. Joking aside, ETFs offer a high degree of comfort to investors because they are (a) backed by the actual physical commodity, (b) have lower costs, and (c) can be closely managed. 

Quillpen necklace in 14k rose gold on sterling silver and 14k yellow gold chain, $1,695, Jessica Winzelberg, San Francisco, 415-986-0955;; column stacking rings in sterling silver, $400, SLANE, New York City, 212-691-5820,; African Cats sterling silver cut-out necklace, $218, Alex Woo, New York City, 212-226-5533,

Today, investors from around the globe have invested some $1.4 trillion in ETFs, much of that in gold. Frequently, ETFs have become so powerful that the purchase or redemption of gold-based ETFs can cause gold prices to fluctuate wildly. The inescapable, if frustrating, truth is that the logic of gold prices is baffling. Last month, gold hit $1,500 an ounce. In 1980, however, the metal reached $2,401 an ounce, allowing for inflation. Evidently, the price of gold still has a ways to go to establish a new record.

Deciphering the Price of Silver

According to the Silver Institute’s World Silver Survey 2011, the silver price is far more difficult to forecast than the price of gold. For starters, there’s less of the metal around, just a little more than 1 billion ounces. Changes in demand from the industrial, jewelry, and investor sectors or shifts in supply—due to government sales, for example, or the vagaries of mining—can quickly lead to more pronounced price rallies or corrections.

As a matter of fact, silver prices jumped 78 percent in 2010, sparked mostly by investor and product demand. (By contrast, gold was up “only” 26 percent over the same period.) Through the end of the first quarter of 2011, silver averaged $31.86 per ounce, compared to $20.19 in all of 2010. To be sure, the metal is no stranger to radical price shifts. Consider the exploits of the Hunt Brothers—Nelson Bunker and William Herbert, sons of Texas moneyman H.L. Hunt—whose attempt to corner the silver market in the late 1970s helped set the metal’s all-time high at $54. “That translates to $130 to $402 today, depending on whose inflation data you use,” Adam Sharp of Wealth Wire, a daily newsletter on silver and gold trends, wrote on April 14.

Charts by Rod Little

Between 1973, when silver traded at $1.73 per ounce, and 1980, when the price peaked at $54, the Hunt brothers had amassed more than 200 million ounces of silver, constituting about 50 percent of the world’s supply. Their scheme ended—badly—when the Federal Reserve System stepped in, sending the price plummeting back down to $10.80 in March 1980 and taking scores of investors down with it. The collapse of the silver bubble meant millions of dollars in losses for silver speculators.

Wild-eyed speculation notwithstanding, here are some more traditional reasons for why the price of silver moves up or down:

? Silver mining: Today’s run-up in the price of silver is not lost on mining producers, who, in some instances, recover silver as a gold or copper byproduct. Major producers in Australia, Bolivia, Chile, China, Mexico, Peru, and Russia could drive the price of silver down when they come fully online. (The Silver Institute’s survey forecasts a 3 percent production increase in 2011.)

With higher silver prices, of course, some unproductive mines and shafts may prove profitable and might be reopened. The same happens, but in reverse, when a silver mine closes or production is interrupted. In short, watch this space; news is developing fast and furiously.

? Increasing demand: As long as jewelry manufacturers in the booming markets of China, India, and, to a lesser degree, the United States continue to meet their customers’ demands, the silver price should stabilize or continue to increase. However, a softening of the economies in any of these key countries could signal a softening of the price. China’s silver exports declined by almost 60 percent when China abolished an export tax rebate on metals, underscoring the political sensitivities that influence the market.

The best indication of a possible silver price slide is the long-­standing gold-silver ratio. From 1968 to 2010, the price of gold averaged 53 times that of silver. By the end of 2011, thanks to silver’s high price, the ratio dropped to about 40-to-1. To return to the average ratio of 53-to-1, silver will have to decline to approximately $29 per ounce.

Predicting the silver price is, however, considerably more difficult than it used to be. “The problem with silver prices is the uncertainty of a weak dollar; growing debt; lack of confidence in the U.S. economic recovery; conflict in the world, especially the Middle East; and so forth,” says Michael DiRienzo, executive director of the Silver Institute, before dropping this bombshell: “Silver appears no longer to be linked to gold.”

Complicating matters is the specter of manipulation that hangs over the market. Rumors alleging fraudulent efforts to control the price of silver have swirled for years, picking up steam in recent months. As recently as October 2010, two of the largest players in the silver market, HSBC and JPMorgan Chase, were accused of making hundreds of millions of dollars in illegal profits by violating anti­monopoly rules through the use of so-called spoof trading orders. As reported by London’s Independent newspaper, two lawsuits brought against the banks “seek to become class actions, open to everyone who has traded silver, and are seeking damages potentially reaching into billions of dollars.”

Government authorities are watching developments closely. “I remain concerned about excessive speculation in metals and other markets, which can contort market prices,” Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission, tells? JCK. “The agency should, as Congress has instructed us, impose limits on the amounts speculators can invest in these important markets.”

The silver market has, in effect, become a swamp.

“I often describe (the market) as a speculative playground,” says Bill O’Neill, managing partner at Logic Advisors, a New Jersey commodities firm. “You have to be a big boy to play.”   

For the past two years, silver has outpaced gold as a perfect metal for jewelry: It’s soft, shiny, easy to manufacture, and plentiful, with agreeable price points. However, some market watchers have suggested it is now poised for a fall. Professor Yakov Amihud, the Ira Rennert Professor of Entrepreneurial Finance at NYU’s Stern School of Business, tells? ?JCK he would advise against buying silver—the peak is near.

The Upshot for Retailers

How can jewelers use all this information to their advantage in this difficult landscape? Here are some important managerial, financial, marketing, and sourcing suggestions:

? Develop a gold and silver intelligence unit to closely monitor gold and silver price changes to minimize risks and maximize merchandising opportunities. Keep tight control on inventory. Make sure your computerized inventory and costing system is up-to-date.

? Ask manufacturers and wholesalers to ship goods within 30 days or sooner. If given an option to lock in metal prices on the date of order or on the date of shipment, do so in order to minimize the risk of an adverse price change.

? Embrace two-tone styles combining gold and silver to capture the best of both metals. Don’t be afraid to set diamonds and precious stones in silver jewelry. Take a field trip to retailers that have built a strong silver department and customer following. Tiffany & Co. is always a good role model. Source foreign designs in countries such as Bali, Hong Kong, India, and Mexico, which are known for expertise in designer silver paired with unusual carved stones. 

? Promote high-end silver—pieces retailing for more than $500—which hasn’t been affected by the price hikes, says the Silver Institute’s Michael Barlerin, Silver Promotion Service director. Silver jewelry sales are way up, and many retailers are making money on inventory gain because they have marked up pieces purchased at a lower silver cost, Barlerin says. “In light of the strong consumer demand for silver jewelry, it would be prudent for the retailer to increase the assortments of silver jewelry at various price points—especially higher end.”

Unsettled metal prices make this a hand-wringing time for jewelers. But for visionary, innovative, and shrewd retailers, these price fluctuations can lead to countless opportunities.