Gold continued its meteoric climb on Wednesday reflecting India’s central bank’s buying gold and the continued weakening of the US dollar. The New Delhi Reserve Bank announced it had swapped dollars for 200 metric tonnes of gold from the International Monetary Fund. The swap price was $1,086.10/toz, about $25 higher than the PM London Close of $1,061. According to India’s Finance Minister, the move was because the “economies of the US and Europe had collapsed”. That news propelled gold prices even higher closing at $1090 on November 4, 2009, according to the PM London Fix.
Whether other countries will follow suit remains to be seen. Clearly China, America’s largest debt holder, has sufficient dollars and adequate foreign exchange to also swap excess dollars for hard currency, like gold. In any case, India’s purchase was equal to about 8% of the world’s annual production according to one report, suggesting additional buying by Asian countries would continue to drive gold prices higher in the immediate future.
This could mark a turning point in the fine jewelry business if gold continues to increase as central banks diversify their dollar holdings in to alternative currencies and gold. The question is when does the price of gold reach a point where 10 karat and 14 karat alloys become too expensive to make wearable rings and jewelry? Part of the answer is subjective in that it depends on the emotional connection jewelry has with the consumer. While jewelry has never been a necessity if viewed in terms of such tangible purchases as shelter, food, and transportation, it has been an emotional necessity for many consumers during the better part of the last 60 years. Simply put, many consumers included certain types of fine jewelry, such as engagement rings, on their “must have” list.
That special relationship between consumers and their jewelry, especially diamonds, weakened over the last decade. That weakening was the consequence of proliferation of lower quality products in the market and rampant discounting, both of which devalued fine jewelry in the eyes of many consumers. The recession has only accelerated the effect of those earlier forces. Now, the many jewelry buyers are more discerning and conservative about what they are buying and how much they spend. Tantamount on their mind is value; generally described as good quality, good utility, and good price too. Not the lowest price, if it means low quality and poor utility, which is how many current jewelry owners would describe much of the jewelry they bought over the last decade. The point is the stronger that emotional connection, the more likely consumers will continue to buy fine jewelry in spite of the higher gold prices.
Another part of the answer is perceived value. While jewelry retailers have been protective of entry level price points, the time is fast approaching when wearable 10 karat and 14 karat gold jewelry may start at prices above $500. Up till now, mid-market jewelers have typically used a combination of lighter weight rings and jewelry and lower quality gemstones to maintain entry level price points. This process has also corrupted the quality of higher price point product and arguably contributed significantly to the erosion of the consumer’s perception of value for fine jewelry in general. A case can be made that if gold continues to escalate in price, jewelers need to vacate lower price points and reposition fine jewelry to reestablish a good quality-good value perception, especially in terms of physical attributes like thickness of the shank, prongs, number of casting pieces, quality of finish, and stone quality too. Again, the higher the perceived value the more likely buyers will continue to purchase fine jewelry despite higher absolute prices. In retrospect, the earlier proposition that sacrificing quality to get first time buyers to purchases diamond and gold jewelry was clearly a huge marketing misjudgment.
2nd London Fix Gold - 2000 to today
What the price of gold will be tomorrow is anybody’s guess, but what is certain, the more central banks swap dollars for gold, the more incentive they have to intervene in the gold market to maintain certain prices levels. That won’t be hard with the abundance of dollars held by large foreign governments like Russia, China, Saudi Arabia, and India. Add hundreds of billions of extra dollars that will saturate the market from the Fed as the new economy emerges and you have even stronger forces to push gold prices higher as a hedge against inflation.
Up to now, the jewelry industry has been mostly reactive to changes in consumer buying behavior as well as emerging macroeconomic forces. What’s becoming clearer is wait and see isn’t a viable strategy any more. Accordingly, mining, manufacturing, and jewelry retailing leaders need to address key issues such as cost structure, global inventory levels, selling methodology, and distribution channels, with the goal of minimizing cost to consumers, while maximizing value.
- Nicholas White
- India buys 200 tonnes of IMF gold
- www.telegraph.co.uk
via Note To Jewelry Industry-Wait and See Isn’t a Viable Strategy – GLG News.
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