Wednesday, December 29, 2010

Buoyant gold price squeezes diamond content in jewellery

The jewellery industry could only watch as the price of gold rose throughout 2010. For manufacturers, there was an urgent need to reduce both gold and diamond content in order to maintain price points.

Although for much of the year the financial columns have busied themselves with identifying the precise reasons for the sharp rise in the price of gold, the jewellery industry has been dealing with the phenomenon’s impact. The increase in the cost of gold has meant that many jewellery manufacturers have reduced either the amount of gold or diamonds, or both, they use in their products, in a bid to maintain price points.

That has been all the more the case in the European and American markets where economic recovery remains fragile and customer confidence uneven. Retailers have faced a tough battle of margins as they attempt to attract custom by keeping prices down while paying higher prices for goods. The price of gold has risen around 28 percent this year to around $1,340.

What does this mean for diamonds? In many cases jewellery manufacturers have pushed back downstream to try and secure lower prices for diamonds, although it is not clear how successful they have been. They have also changed buying patterns with a trend to smaller diamonds.

“We have seen clients putting in demands for smaller diamonds of lower qualities,” said one diamond company executive. “That is clearly a result of the need to cut costs. It is obvious that rising gold prices are forcing a change in the composition of jewellery. We have seen some downsizing in the diamonds being requested.”

Meanwhile, Dirk De Nys, of DTC sightholder the IGC Group, said: "First of all, it is very frustrating to see the sharp rise in the price of gold when in the diamond industry we are struggling to push diamond prices higher. We have seen in the U.S. market that an impact of the rising price of gold is that jewellery manufacturers have moved to using less gold and using more silver.

“As far as we are concerned, 40 percent of our diamond production goes to jewellery brands and these are large companies that are not going to cut back on either gold or diamond content. They are able to pass the rises on to their customers. It is crucial for them that they stay with their brand identity so they are not cutting back the quantity or quality of their products,” De Nys said.

Another consequence of gold’s rise is a noticeable move to silver jewellery in the U.S. and European markets. Indeed, silver has marked a sixth straight quarterly advance, the best run since the beginning of 1980. While all eyes have been fixed on the rise in the price of gold, silver has risen much higher, up around 75 percent this year to more than $29 per ounce.

Although consumers have not suddenly lost their liking for jewellery, they are content to wear less expensive items and to move away from gold. In this respect, the impact of the rising price of gold and the move to jewellery at a price that fits the budget of most buyers during the economic downturn that is still plaguing many parts of Europe and the United States can be seen in the financial results of jewellery maker Pandora. The producer of low-cost silver and gold bracelets and charms has seen soaring sales in the United States and Europe and a much less spectacular performance in the Asia region – which is a reversal of what is happening in the diamond world.

Pandora reported an almost doubling of sales in the Americas region in the third quarter of this year, up 93 percent. Meanwhile, in Europe, the expansion of sales was even more dramatic, jumping 191.2 percent. The continent accounts for 48.4 percent of the firm’s global sales. In the Asia Pacific region, where the impact of the recession has been considerably lower and which emerged from the slowdown well before Western states, Pandora saw its sales up by 30.3 percent, while sales in the region were responsible for only 11.1 percent of total worldwide sales.

But not only is the rising price of gold reducing diamond content in jewellery, it is also reducing the gold content. In the United States, purchases of gold jewellery are estimated to have fallen by around a third by volume in the past three years, and in Europe manufacturers are mixing gold with steel and ceramics to reduce the gold content and keep prices down. In India, where gold jewellery has been a must-buy for centuries, hollow bangles are being made to look like solid gold.

The Richline Group, an American manufacturer of fine jewellery, now sees 40 percent of its sales being in gold compared with more than 70 percent in 2006. At Signet Jewelers Ltd., one of the largest jewellery retailers with more than 1,300 shops in the United States and about 550 in the United Kingdom, more silver, tungsten and titanium jewellery is being offered for sale. And even Italy’s Bulgari SpA, the world’s third-largest jeweller, has increased the range of rings in its B.Zero 1 line, which were solid gold in 2000 and now mix ceramics with the yellow metal.

“We are focusing more than in the past on the combination of different materials,” Bulgari CEO Francesco Trapani told the media. “This is an interesting way to introduce something more appealing, more exciting, to the final client, a way of proposing things that can be less expensive.”

Could the rising price of gold and also platinum be filling the war chests of producers, giving them the power to launch acquisitions? At the end of a year in which gold, platinum and other commodities have moved inexorably higher, a media report in mid-December suggested that mining giant Anglo-American, which owns 45 percent of De Beers, may be preparing a bid to buy the Oppenheimer family’s 40 percent stake in the diamond miner.

A further side-effect of the rise in the price of gold has been the growth of companies offering cash for gold. Advertisements from companies offering to buy gold jewellery on the spot for immediate cash have sprung up on roadsides, in cities and in newspapers and magazines across the world. Although the recession officially ended in the United States more than a year ago, continuing high levels of unemployment mean many people are keen to raise money by selling off jewellery.

Gold has risen progressively higher this year due to range of factors. These include investor concern at the huge amount of cash being printed by the U.S. Federal Reserve Bank and fears that the U.S. economy will be buffeted by high inflation. Other investors bought gold this year on worries about ongoing financial turbulence in Europe, which started in Greece, and concern the global recovery may slow.

Although the price of gold has slipped back on several occasions during 2010, these dips only served as buying opportunities for investors who quickly sent its price back up. Although gold did not achieve the $1,500 per ounce level predicted by some analysts, many investment houses say there is strong enough demand to prevent a long-term fall in the price.

The global gold market has seen a transformation since the year 2000 when gold was selling for around $250 an ounce. For many years, jewellery had been the backbone of gold consumption, but, a sharp rise in demand from investors changed the picture. The impact of investors, especially buyers of physical gold through bullion-backed exchange traded funds, has provided a critical shift in the gold market.

The World Gold Council (WGC) says that jewellery accounts for around 70 percent of worldwide gold demand, whereas investment demand is less than 20 percent.

UBS, the Swiss bank, in its annual poll of central bank and sovereign wealth funds, found nearly a quarter of central banks believed gold would become the most important reserve asset in the next 25 years. Analysts also said Asia’s central banks, from India to the Philippines, were the most likely to buy gold. They added that central banks and, crucially, sovereign wealth funds in the Middle East were also keen on the metal, although some bankers pointed out that sovereign wealth funds were more likely to be tactical buyers, seeking price appreciation and profit-taking, rather than being strategic buyers seeking diversification and long-term security.

The buying spree meant that investors last year purchased more gold than buyers of jewellery for the first time in three decades, highlighting the growing impact of speculators on bullion prices. However, some analysts believe the fact that investors are buying more gold than the jewellery industry is a sign of a bubble.

GFMS, the consultancy that compiles benchmark supply-and-demand data on the precious metal, said earlier this year that investment demand doubled to 1,820 tonnes in 2009, while jewellery purchases fell by 23 percent to 1,687 tonnes, a 21-year low. Philip Klapwijk, executive chairman of GFMS, earlier this year warned that investors were likely to buy more gold again this year, but added that the bullion market could become vulnerable to a correction over the medium term if investors turned to other asset classes.

If the bullion market corrects, an upward shift in diamond content in jewellery is likely. What is certain is that, one way or the other, the price of gold will remain a significant factor in the volume and quality of diamonds being bought and sold.

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