Riding the Golden Roller Coaster

After years in the cellar, gold is once again the glittering darling of investors here and abroad, who have pushed the metal’s per-ounce “spot price” to its highest in a decade. That’s affecting the production and U.S. sales of gold jewelry, and those effects won’t soon disappear. Financial analysts expect gold’s price to remain near current or even higher levels for the rest of the year relative to political and economic problems around the world.

Up and down … and up again. Gold has had a roller-coaster ride during the past two decades. From a record high of $800 an ounce in 1980, it slipped to under $300 during that decade, then jumped to $400 in 1990 when Iraq invaded Kuwait. It tumbled during the stock market boom of the 1990s, to a low of about $250 in mid-1999, and then started creeping up again. At the start of 2002, in the wake of Sept. 11, the price was $278 an ounce and climbing, spurred by rising fears of war in Iraq, the weakening dollar, the falling stock market, and weak domestic and global economies.

“In turbulent economic and political times, people and institutions look for safe places to invest, and gold is a traditional safe haven during turmoil,” notes Rick Bannerot, U.S. marketing manager, jewelry, for the World Gold Council (WGC).

By February 2003, as international tensions worsened and major economies sputtered, nervous investors had pushed gold to $381. That slipped to $350 by mid-March, but a poll of leading financial houses (conducted early this year by Reuters) showed forecasts for 2003 and 2004 that predicted a gold price averaging $342 each year, with some even suggesting a high of $400.

‘A difficult year.’ Though pure gold represents only a portion of alloyed all-gold and gem-set jewelry, the rising price of the metal still has a significant impact on the gold jewelry business.

Manufacturers are being hit twice. First, after years of “low gold,” they’re leasing an increasingly expensive commodity. Second, as they pass on their costs to clients, those retailers must either raise prices to protect mark-up, which reduces sell-through, or buy less merchandise—either of which reduces subsequent business with the supplier.

For European suppliers, the problem is even worse. The weakening of the dollar against the euro (from 82 cents to the euro in October 2000 to $1.10 in mid-March 2003), has only added to the expense of their gold jewelry products for U.S. customers. “It’s a very difficult year, not just for the U.S. market, but for the global market,” says Michael Paolercio, co-chairman and chief executive officer of Michael Anthony Jewelers Inc., a leading U.S. gold jewelry manufacturer.

To keep the lid on prices, some manufacturers are shifting more production abroad to give customers the benefit of lower labor and operational costs. Many manufacturers also are more cautious in production, notes James F. Marquart, president and chief executive officer of Manufacturing Jewelers & Suppliers of America (MJSA). Marquart says manufacturers are “holding enough inventory to meet demand, but not overstocking.” There also is a greater-than-usual emphasis by manufacturers on fresh, new, innovative jewelry designs to encourage more purchases by hesitant customers.

Retail effects. Some gold market analysts cite studies that show jewelry consumers have little interest in, or awareness of, changes in gold’s spot price, so it doesn’t affect their buying.

But for many jewelers, the effect of higher gold prices on their own costs, pricing, and sales is of more than casual interest. Karat gold jewelry sales (both all-gold and gem-set) represent 15% to 20% of annual business for national jewelry retailers like Zale Corp. and Sterling Inc. For one in four independent jewelers, karat gold jewelry sales represent 20% of business, and more than 40% for one in three (according to a national survey of 169 jewelers conducted in January by JCK).

Only recently have retailers begun to feel the impact of the rising spot price on their gold jewelry inventory. “There was a lot [of gold jewelry] still in the pipeline [from manufacturer to retailer] at the lower spot prices, and it’s a long, slow pipeline,” says Bannerot.

Also, some retailers had been pricing their gold merchandise much higher than their own actual costs or the price of gold. “They got comfortable doing that,” says Bannerot. “Now, in this inelastic consumer market—when there’s little support for raising prices, yet management wants to increase business turn—they can’t take advantage of that cushion, and their profitability is being pinched.” (Some stunned retailers claim suppliers are inflating the prices they charge in excess of the rise in gold prices, to cover their own rising operational costs, a claim that suppliers and some large retailers deny.)

Pricing quandaries. More jewelers are feeling the impact of the rising price of gold as they renew or extend purchase agreements or make new ones. For example, King’s Jewelers, a 51-store chain in western Pennsylvania, Ohio, Maryland, and West Virginia, cancelled a spring mailing—successful in the past—promoting gold jewelry for Mother’s Day, because “we had such a huge price increase at the year’s start, we couldn’t run those items again. We had to change [to something else],” said Dale Perelman, King’s president.

Although some jewelers have begun repricing gold merchandise, many are cautious about doing so. For example, Sterling Inc.—the country’s second largest jeweler, whose chains include Kay, Jared, and J.B. Robinson—is “watching very closely the impact [of higher gold prices] on our profitability and on all aspects of business,” says chairman Terry Burman.

“There’s not a tidal rise in gold prices,” notes Bannerot. “Jewelry retailers are watching consumers closely and cross-shopping each other” before making significant pricing changes. So, this year should see “a gentle inching up” of gold jewelry prices, he suggests, as retailers take delivery of new inventory and “slightly higher pricing gently washes into the market.” He predicts that an overall rise in gold jewelry prices will take 12 to 18 months.

Offsetting higher prices. Jewelers are doing several things to compensate for, or offset, higher gold prices. Larger companies, like Zale Corp. for example, are seeking to lock in their gold purchases at a fixed price for a longer period of time and doing more direct sourcing of items such as gold chain to stay competitive and efficient.

Some jewelers are buying less all-gold jewelry, switching to gem-set jewelry (with a lower gold content), or ordering gold jewelry only as they need it. “We’re not buying anything without a reason, and we must have a reason for promoting it,” one jeweler told JCK.

Many are keeping older prices in place, changing them only if and when they reorder, and in some cases taking lower markups. There is also more use this year of gold jewelry promotions and more sales emphasis on the intrinsic value of gold jewelry.

In addition, the WGC plans to roll out new programs by June, including a worldwide advertising campaign, to spur consumer demand for gold jewelry.

$16 billion and growing. Still, things aren’t as tough as they might seem. U.S. gold jewelry sales tallied $16 billion in 2002 (almost half in jewelry stores), a 1%-plus gain over 2001 figures—despite gold’s rising price, war jitters, hesitant consumers, a sliding stock market, and a sputtering economy. Early indicators for 2003 also were encouraging: Consumers who deferred buying sparkly jewelry last year are “more prepared to do so this year,” says Bannerot, noting that “gold jewelry always performs nicely in weak economic times. Gold is a democratic metal, available at all jewelry price points, which positions it well for the growing number of women who are self-purchasers.”

Meanwhile, manufacturers’ orders were up in the early part of the year as jewelry retailers replenished low inventories after a successful Christmas. And suppliers reported that business at the major winter U.S. and European trade shows was better than expected, say WGC and MJSA.

Jewelers are selling more 14k jewelry than they did a few years ago, but it’s business in 18k jewelry (excluding bridal and watches) that has increased significantly, says WGC. JCK‘s January survey found that 43% of jewelers are stocking and selling more 18k jewelry than they did five years ago, in part because more customers ask for it.

Some analysts, manufacturers, and retailers warn against becoming too optimistic about this market too soon—especially in view of yet-unmeasured effects of current economic and political events on consumer confidence. But veteran suppliers and jewelers say the best defense in an uncertain market is to rely on smart business tactics.

Manufacturers and designers “can’t do the ‘same old, same old,’ ” says Paolercio. “We must innovate in product design and technology, become more lightweight and more fashionable. That’s how we succeed at the retail level.”

“This isn’t the first time something like this has happened in gold jewelry,” notes Dale Perelman of King’s Jewelers. “Many of us went through this when gold was $800, $600, and $400. What counts is applying good merchandising principles, with each business reacting the way it feels best able to do so, making the best of a bad situation.”

Where Gold Jewelry Is Sold in the U.S. (2001)

In Units Sold In Dollars
Source: World Gold Council
Jewelers 31% 49%
Department Stores 12% 20%
Discount Stores 48% 22%
Non-store Retailers (i.e., catalogs, Internet) 9% 9%

U.S. Jewelers’ Gold Jewelry Business

% of Annual Sales* % of Respondents
* in dollars
Source: JCK Retail Panel, January 2003
Under 10% 8.9%
10-19% 24.8%
20-29% 15.4%
30-39% 17.2%
40% or more 33.7%