Issue 53

Gold Jewellery Consumption: The Impact of the Economic Crisis

Reviews of gold jewellery consumption typically focus on the price sensitive countries of the developing world, in particular India, because of their marked fluctuations in demand. The industrialised world’s more stable consumption, however, is still worthy of analysis.

Firstly, it remains sizeable, at around 600 tonnes last year, and has the scope for massive change. As illustrated in the accompanying chart, this grouping’s consumption has roughly halved since its early 1990s peak. Secondly, its relatively price insensitive nature means it has the active ability, at least in theory, to boost or undermine the gold price, in contrast to the developing world’s consumption, which may well just passively inflate or deflate in response to price moves caused by other factors.

This loss of almost 600 tonnes of demand, as implied above, had three main causes, namely background structural changes, higher and more volatile gold prices, and recent macro-economic problems. The explanation and importance of each is assessed below.

Background Structural Trends

A historical review of consumption in the industrialised world shows a downward slide since 1992 that has been remarkably smooth. The chief reason for this seemingly relentless decline is that the bulk of losses within this period are attributable to secular changes. One such change is market share loss by all forms of jewellery to other areas of discretionary spending, such as consumer electronics or short break holidays.

A second is that consumers have been choosing to devote an ever greater percentage of expenditure when buying jewellery to elements other than precious metals. These elements can be physical, such as diamonds (which explains the norm in most markets for the share attributable to gemset over plain pieces to rise inexorably), or intangible, such as the perceived value of a branded item. One manner in which this has occurred is the long term slip in average weights as lighter pieces have higher making charges on a per gramme basis. There has also been market share loss by gold to other precious metals in several markets.

It is important to note here that this does not imply the value of gold jewellery consumption has been falling. A simple multiplication of the fine weight by the average price shows a strong uptrend in value this decade and that is before we take into account inflating margins (branded, lighter and gemset pieces invariably carry a higher markup than plain, unbranded and heavy items).

The Gold Price Rally

Structural changes, however, cannot explain the acceleration in the pace of decline from 2006 onwards. Instead, it seems fair to blame much of this acceleration on the gold price rally. It might be thought that this would primarily hit consumption through consumers’ budget constraints. However, of seemingly far greater importance is the trade’s management of margins.

In theory, the rise in the gold price could have been accommodated by a drop in the markup over the fine gold content that the consumer ends up paying but, instead, far more attention seems to have been paid to shaving the weight of gold to keep pieces below key price points, especially in the United States. Such methods have included swopping from solid to hollow items or the adoption of electro-forming (a process geared to producing light weight articles). There has also been an intensification of structural trends, such as incorporating more non-metal elements (a pendant on a leather cord rather than a gold chain for example) or adding small, inexpensive diamonds to boost apparent value.