By John Mcdonald
When the price of gold rises, most people think, “How lucky for the people who invested in gold while prices were lower.”
If you own gold in your own investment portfolio, you probably think, “How much higher can it go? Should I hold or should I sell? This is exciting!”
If you are a jeweler, however, you may not be quite so excited. Depending on your business model, an extended yellow-metal bull rally could sink your business.
Over the past 10 months, the price of gold has risen as high as $1,549, 20 percent over its lowest value this year. A combination of global economic uncertainty, U.S.-China trade tensions, fears that the longest economic expansion in U.S. history could be drawing to a close, and an extremely volatile stock market has sent even risk-tolerant investors to the precious metals exchanges to invest in physical gold or in gold futures.
Gold’s status as a “safe-haven investment,” which means it is an asset that investors can safely expect to either retain its current value or rise in value during market turbulence, makes it incredibly attractive to investors at this point in time.
For jewelers, who use gold as a commodity rather than as an investment vehicle, the demand for gold today could mean business troubles tomorrow.
Although large jewelers like Tiffany & Co. may opt to permit their gross margins to take the hit rather than pass costs on to customers, smaller businesses may not be able to sustain that option.
“As a small business owner, I’m always nervous to raise prices,” explained sustainable jewelry company owner Al Sandimirova to Markets Insider.
However, he continued, if gold prices continue to rise and he does not raise prices, he will soon find himself unable to purchase any more gold with which to make his product.
For larger jewelers like Tiffany & Co. and Signet, the ability to keep prices low for consumers is an incredible market advantage.
They may only spend about one-sixth of their commodities budget on the purchase of gold. However, the impact of letting the costs hit gross margins will begin to show after as few as three quarters, which could hurt the companies long-term.
Sustainable jewelers can make the argument that prices should rise on their product because they are offering a product that is better for the world around it.
Some jewelers are actually thriving in this tough environment by promoting their products as being made from recycled gold, precious gemstones, and other precious metals.
Interestingly, as gold climbs in value, the value of diamonds is falling due to a glut in the market and investor perception that diamonds are not as valuable as gold during an economic downturn.
When this happens in the diamond market, gold and diamond jewelry becomes particularly valuable since the markets do not have a demand for rough diamonds but create premium prices on recycled ones.
Paired with the demand for gold, jewelry recycling can be a great way for smaller jewelers to weather the storm.
Source: Markets Insider