All that glitters … is unaffordable

by Peter Koven

Jewellery market under pressure as gold hits US$1,000 an ounce

Andrew Costen used to sell gold jewellery to people because they liked to wear it and look good. But today, with gold breaching US$1,000 an ounce, it is a very different story.
"It's kind of bizarre. Customers have started to look at it as a kind of investment as prices go up," said Mr. Costen, president of custom retailer Costen Catbalue in Vancouver. "To me you shouldn't be buying jewellery for that purpose. But these prices have certainly got people interested."
The fact is that the stunning run-up in gold prices in the past few years has been driven almost completely by investment demand. Jewellery demand, which remains the cornerstone of the market, has been largely forgotten, raising questions about what happens when the investment demand dries up.
Gold has enjoyed its record run because of a number of factors coming together, including a global credit crisis, a crumbling U.S. dollar, stagnant mine supply and inflationary pressures.
As prices have gone up, more evidence has surfaced that jewellery demand is declining fast. In India, which is a key market, gold imports plunged 72% in January, according to the World Gold Council.
In the 1990s, jewellery made up around 85% of gold demand. Today, the precious metals consultancy GFMS Group puts the number at a little more than 60%. That decline has been more than offset by buying from exchange-traded funds, commodity funds and other investment sources.
"What's happened here is that the public has taken up the call to buy gold, where once upon a time it was central bankers," said Martin Murenbeeld, chief economist at DundeeWealth Economics.
Experts believe these investment sources could continue to drive gold higher well into the future. Even at US$1,000 an ounce, prices are less than half as high as they were in 1980 on an inflation-adjusted basis. A price of US$2,000 an ounce or higher is a real possibility amid the global economic turmoil.
"Tell me when all the bad U.S. news is going to be out of the market and I'll tell you when the turning point for gold is coming," said Paul Walker, chief executive of London-based GFMS. "It's very difficult to know."
Mr. Walker's big concern is what happens once gold does hit its peak and the investment demand dries up.
At that point, the only thing that will sustain the market is jewellery demand, and his prediction is that customers in India, China and elsewhere will wait for prices to "drop really significantly" before coming into the market.
He said that consumers have gotten used to buying cheaper silver and copper jewelry in the face of high gold prices, and they may not be so quick to return to gold.
"I'm really worried that with these high sustained prices, you have a secular shift in the [jewellery] industry," he said.
Bart Melek, global commodity strategist at BMO Capital Markets, does not agree with the notion that sinking jewellery demand is a concern. He points out that a lot of the jewellery market is actually investment demand, a fact supported by Mr. Costen's business in Vancouver. And in the Middle East, one of the key sources of gold demand, petrodollars are providing plenty of currency to buy more.
"Ultimately some people get priced out of the market. But some people get rich enough to buy it for the first time," Mr. Melek said.