Global gold demand: the new gold rush?

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Courtney Hagen on the changes taking place at market level.

The World Gold Council’s latest gold demand trends revealed UK gold demand fell 21% in the second quarter, while the rest of the world’s demand rode high. Gold refiners and market experts tell Courtney Hagen about the changes taking place at market level.

Industries focused on design and style, whether fashion, beauty or interior design, tend to deal in cyclical trends. One season gives way to another in an ever revolving circuit marked by the age-old adage that design which is now out of fashion will come back again in due course.

The jewellery industry is no exception to this rule. Over the past few years, trends in silver and fashion jewellery have dominated, driven in no small part by the past decade’s ever-rising gold price.

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The cooling of gold prices in the past year has not yet driven demand for gold in the UK, according to the latest figures from the World Gold Council (WGC). Its research for the second quarter revealed a continuing drop in demand for gold in the UK, even though sales are picking up in many other parts of the world.

The WGC report showed that sales volume dropped to from 3.8 to 3 tonnes in the UK, a decline of 21% compared to the same quarter in 2012. The value of that gold was hit even harder because of the fall in the price of gold. Total gold sales in the UK reached £85.6 million in Q2, a whopping 31% drop over the previous year. The average price of gold fell by 9% over the 12 month period between second quarters, from £1,016 in 2012 to £921 per ounce.

According to the WGC’s head of jewellery David Lamb, April’s gold price drop has lead to a heavy shift in demand towards Eastern markets. “If you take the India market, for example, you’re looking at gross margins on jewellery at around 11% to 13% and that covers the entire supply chain,” says Lamb.

“Because Indian consumers have already seen higher prices for gold, the notion of a 10% drop in the rupee price for gold essentially means that if you were buying finished gold jewellery in the second quarter, you were buying it at the price you would have paid for raw material in the last 12 months, which just seems like one heck of a deal.”

The sharp drop in gold price has also impacted markets in China which, along with India, has generated the largest volume increase of gold jewellery, with almost 120 tonnes of the Q2 global increase in demand from the two nations alone.

In China, continued expansion of the domestic jewellery retail network and growth in production capacity has positively impacted jewellery demand. “While gold [trading] has left Wall Street it has actually done extremely well on the high streets of Shanghai and Mumbai,” Lamb notes.

The boom period in India and China’s growing economy does not mesh with the levels of uncertainty that are still rippling through the UK and many parts of Europe, in countries still reeling from recessions and economic bail outs. Part of this is down to what Lamb deems the social currency of jewellery.

“Any significant purchase is uncertain but as jewellery has a social currency it’s quite difficult to be seen to splash out or to make lavish statements when your close friends are going through a more difficult time,” he explains. “[And] I think the UK jewellery industry is perhaps a little behind America in not yet getting a premium [national] merchandising strategy in place for yellow gold.”

A tougher economic climate has caused a cyclical shift to greater expenditures at less significant price points. Safer purchases in unstable markets sway towards bridal, sterling silver, or fashion jewellery. With higher gold prices, even venerable fashion houses such as Prada and Marni have had to opt for alternative materials such as brass, wood, and resin where they would have once used gold. The focus appears to be evolving to concentrate on safe, timeless design rather than the metal itself.

In response to the fluctuation away from buying gold outright, jewellers are also finding different revenue opportunities through gold recycling. “Arguably gold scrapping is one of the ways that, in the last three or four years, every professional jeweller has made money,” Lamb notes.

This is echoed by Gary Williams, director of Presman Mastermelt, one of the largest recyclers and processors of precious metals in the UK. For years Presman has enjoyed the benefit of high gold prices, with demand now levelling out to a more stable level. Yet Williams reports that enormous demand for gold investment bars and coins remains, so much so that the company has started offering Presman branded gold and silver bars and gold Kruggerrands to the trade.

“We are experiencing an increase in non-selling retail, wholesale and imported gold [jewellery] stock that is sitting on the shelf being scrapped due to the downturn in gold sales to consumers, “says Williams. “[Retailers and wholesalers] need to free the capital back into their businesses.”

This sentiment is echoed by Capella Manufacturing, one of the UK’s leading bullion dealers and precious metal refiners, and one of only a handful of gold refiners with FLO-CERT accreditation to refine Fairtrade gold.

The company is currently experiencing an influx in demand from the jewellery industry for scrapping non-moving gold stock. “This reflects the sector’s growing desire for recycled gold,” states Capella managing director Kevin Bloor.

The company also takes scrap metal from a growing number of jewellers for repurposing into other forms of jewellery, and is finding that demand for its refined metals is higher than ever. “The refining aspect of our business is also increasing. As a company we are now, more than ever, looking at new avenues to source more metal to refine to keep up with demand,” Bloor states. “To help meet the increasing demand for refined gold, we recently invested more than £50,000 in a new, state-of-the-art integrated refining system, [which has] doubled our capacity overnight.”

While the WGC report shows physical demand at a retail level is down, the demand for refined gold and bars currently being felt by the likes of Presman and Capella shows that the industry still sees potential in gold, just presented in a different form.

So is the industry is hedging its bets on a comeback for gold? “I am fortunate to be able to speak to many suppliers and retailers and it was obvious at IJL that there was much more interest and orders placed for fine jewellery than there had been for quite a while,” Williams reveals. “Branded fashion and silver is, of course, now firmly established in the high street but the feeling is that the circle is starting to turn.”

This Hot Topic feature was taken from the October issue of Professional Jeweller. To read this issue in full online, click here.
 

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