Hoarders Drive Up Gold Price, Despite Slump In Jewelry Sales October 8, 2002 – Posted in: Press

By PETER A. McKAY
Published: October 8, 2002
Wall Street Journal

When people stop buying jewelry, that often spells trouble for the gold market, which depends on rings, necklaces and other baubles for about 80% of industry demand.
So how is it that amid a slump in jewelry sales, gold prices are surging?

The answer fulfills one of the wildest dreams of longtime gold bugs. Even though a recession in the U.S. has tarnished sales of luxury goods such as jewelry, hoarding by wary investors, who see gold as the ultimate safe harbor, has more than offset the slump in sales. The result is that gold prices are jumping, flirting last month with a 2 1/2-year high of more than $330 a troy ounce. Monday, the run up took a pause, with Comex gold futures down 20 cents at $321.90 in afternoon trading in New York, as most stock indexes fell.

Nevertheless, the stock market’s fall swoon has boosted gold most days lately, as has strong investment demand for the metal. According to the World Gold Council, a mining-industry trade group, global gold demand was almost unchanged in the second quarter, comprising $7.33 billion of metal. Jewelry demand, though, was down about 1.7%, to $5.84 billion, while investment demand rose 3.6%, to $570 million for the period.

The latest rally represents a reversal of a long-term trend, with a surprising number of investors apparently opting to squirrel gold away in bank accounts instead of wearing it on their bodies.

“Anecdotally, I think the investment that’s going on may be even greater than the numbers reflect,” said Joe Foster, manager of Van Eck International Investor Gold Fund. “We’re seeing interest from commodity traders and hedge funds that have been taking positions in both gold bullion and mining-company shares.”

Mr. Foster said his fund, with about $175 million in assets, increased its holdings of derivatives pegged to gold bullion in the first quarter of this year, to 10% from about 6%. The rest is invested in the stocks of mining firms, a common way for investors to track the gold price financially without having to physically store the metal.

Gold, of course, has long been considered a hedge at times of political or economic crisis. Its recent rally over $300 started after last year’s September terrorist attacks, and the recent stock-market swoon has boosted the metal’s price.

But it is also true that as often as gold has shown promise in turbulent times, the metal also has disappointed. Throughout the dot-com collapse, for instance, gold prices stayed sluggish, as investors turned to U.S. dollars, government bonds or other financial havens.

So, the recent shift toward investment, as opposed to retail, buying as a determinant of gold prices vindicates the view of gold enthusiasts who long have seen the metal’s primary appeal as a financial asset.

“There’s quite a nice feeling of upside potential in the market right now,” says Kelvin Williams, marketing director for AngloGold, the Johannesburg, South Africa, mining concern. Mr. Williams said he is convinced jewelry and investment demand soon will get back in sync. He says jewelers in recent years have gotten used to ‘buying on the dips.’ This strategy has worked because, invariably, gold always has tumbled shortly after a run up.

But if the rally persists, jewelers may have to start capitulating to higher prices and buying anyway.

Jewelers in part have been able to offset the lower sales with high prices, although several companies’ most recent results, which came out in August, contained cautionary notes about the jewelry market.

At Zale, fiscal fourth-quarter profit leapt 24%, to $3.65 million, or 11 cents a share. However, comparable-store sales, or sales in stores open at least a year, only rose 2%. Before the jeweler lowered its earnings expectations in July, Zale had expected a 5% increase in same-store sales.

Whitehall Jewelers reported second-quarter net income of $571 million, or 3.9 cents a share, contrasted with a loss of $643 million a year earlier. The chain attributed the return to profitability to cost-cutting, but said its same-store sales slipped 0.6%.

Even smaller outlets have noticed the jewelry slowdown. Gemologist Tobina Kahn said there has been a stream of people recently in Chicago and Palm Beach, Fla., selling gold pieces to her family’s estate-jewelry business, the House of Kahn.

Such anecdotal selling helps explain why there is little demand in the broader gold market for metal to make new jewelry, because the few consumers who still want to buy pieces have a robust supply of existing jewelry from which to choose. “People who need cash are looking at the pieces they have lying around, stuff they probably never wear, that they can sell,”Ms. Kahn said. “Gold is probably the only thing they’ve got like that. I mean, they can’t sell their stock for cash. It’s worthless.”