The month of September has seen an historical rise in gold as the precious metal. It’s well over $1,300 an ounce with some experts predicting that it will soon surpass $1,400 an ounce and may even hit the $1,500 mark.
The combination of a weak U.S. dollar and continued concerns about the overall stability of the world economy have created a run on gold that appears to have no end in sight. The cost of gold in September was helped by seasonal demand from jewelry makers, said Jeffrey Nichols, senior economic adviser to Rosland Capital and the managing director of American Precious Metals Advisors.
Perhaps more important to price though are reports that European central banks had sold only six tons of gold this year, out of the 400 tons allowed to be sold from their reserves as part of a five-year European agreement may have a direct and psychological impact on costs, according to economists. Central banks throughout the world are also doing the same.
While there was increased jewelry demand for the precious metal for the holiday season, how much demand isn’t yet known. The World Gold Council in its Gold Trends report for the second quarter, which ended in June, had some pretty good news for the jewelry industry. It reported that gold jewelry demand edged down slightly to 26.1 tons from 27.5 tons in the year earlier period. In value terms demand increased by 23 percent to $1billion.
According to the report, this demand demonstrates “that consumer interest in the intrinsic value of gold is translating into increased spending on jewelry.” However, the WGC adds that “consumers remain cautious given record gold prices and the uncertain economic environment.”
So as we head into the holiday selling season many designers and manufacturers must be asking whether the continued rise in gold prices will make it too difficult to produce pieces at a cost that will be attractive to consumers. These consumers, many of whom are struggling to find gainful employment, will no doubt be asking whether they can afford to buy gold jewelry, particularly high-karat jewelry, this coming holiday season.
Other parts of the world are seeing a decline in gold jewelry demand as well, according to the WGC report. Thailand, Indonesia and South Korea sustained the worst losses in second quarter gold jewelry demand as consumers in these markets proved to be particularly susceptible to the high price level.
An extreme example is Turkey. Despite its relative prosperity in recent years and its low jewelry-making labor costs, the WGC said Turkish consumers took their cue from the gold price and the result was a 20 percent drop in tonnage as local prices surged 28 percent during the quarter, reaching record levels in June. The quarter witnessed high levels of recycling activity and jewelers continued to look for more ways to decrease the gold content in jewelry pieces in order to reach certain price points. A news account reported that tourist destinations in southern Turkey, has seen a 50 percent decline in jewelry sales.
The WGC noted in its report that in the U.S., silver and gold plated jewelry took an increasing share of demand at the lower end of the market, “where affordability of carat gold jewelry has been most affected by its price.”
Affluent consumers, according to several surveys, still have the means and desire to purchase jewelry. But even high-end manufacturers and designers, who previously worked exclusively with gold, have included silver lines in order to “try and build entry-level ranges for consumers at more affordable prices to offset overall sales declines due to the recession,” according to the WGC.
A recent National Jeweler survey of retailers seems to confirm this move to silver being used as a hedge against the weak economy and the high cost of gold. Retailers also said, according to the survey, that silver jewelry will retain its popularity even after the economy recovers.
However, the price of silver, although much less expensive than gold, is also rising due to the same economic uncertainty. It is now trading for more than $22 an ounce, its highest level since 1980. Meanwhile, platinum has surpassed $1,600 an ounce. So there are few safe havens for jewelry manufacturers and designers as the holidays begin.
Most economic experts believe that as long as the uncertain economic conditions persist, gold and to lesser extent silver will continue to increase in value. Platinum on the other hand is expected to experience more fluctuations.
That’s because platinum group metals (which include palladium) derive a significant part of their value from industrial use, particularly in automobile manufacturing. When investors buy platinum group metals, it’s because of a growing economy and industrial demand. To a lesser extent, silver too derives a great deal of its value from industrial demand.
Gold is different because most of its demand is monetary in nature. Nichols forecasted that because of all the factors already mentioned, gold will hit $1,500 an ounce by year’s end.
A report by IDEX says the rush to gold is viewed by investors and economists as a short term speculative action but also as a long term safe harbor investment while the dollar is weak and government spending is high. Both scenarios are not indicating trust in the economic environment.
The likely result is that jewelry retail sales may suffer this season, IDEX says. “If sales don’t materialize this holiday season, manufacturers will be forced to take back goods from retailers, and once again see their stock rising in a difficult economic climate.”
Nichols Link: http://goldnews.bullionvault.com/gold_price_nichols_100520104
National Jeweler link:
http://www.nationaljewelernetwork.com/nj/independents/retail-surveys/article_detail?id=20188
IDEX link: http://www.idexonline.com/portal_FullNews.asp?id=34542
