Gold Demand Declines in the US as Retail Jewelry Sales Weaken

Implications: Demand for gold in the US declined as September retail jewelry sales growth sharply dropped.  Increased investor demand for gold products like ETF's and higher domestic gold usage in emerging countries helped push metal prices to recent highs; leaving 4th quarter jewelry sales growth in doubt.  Structural changes in the gold market may permanently change the US jewelry market.  Here's why. 

Analysis:

Demand for gold and jewelry may be growing globally, but it is declining in the US. Contrary to some reports, actual US demand gold declined by about 13% in the third quarter. This is the second year in a row that US gold demand has declined. However, one thing is different. For the first time, the demand for gold for investment products like ETFs exceeded the demand for gold to make jewelry

Declining gold demand coincides with the slowdown in retail jewelry sales growth in September too. That leaves 4^th quarter jewelry sales growth in doubt. According to the Commerce Department, September jewelry sales increased about 2.2%. That’s a substantial decline from its YTD growth of 4.0%. Observers had expected 4^th quarter sales to moderate a little to about 3.5% to 4.0%, but with September sales sharply slowing, 2.5% to 3.0% growth may be more likely now.

Gold, like most other commodities, is being used at an accelerated rate by developing countries like China and India. Middle Eastern countries are also absorbing more gold for domestic jewelry consumption. Driven in part by the rapid rise in oil prices, many Arab nations are wash in dollars, while government policy changes in China and India have kindled free market enterprise; creating a new middle class. Whether apparel, electronics, cars, or jewelry, pent up demand and higher incomes are fueling consumer demand in these countries and driving commodity prices up in the process.

According to the World Gold Counsel, demand for gold exceeded supply by about 12.3% in the second quarter. That shortfall probably reversed itself by 3^rd quarter’s end as the gold supply increased to about 1,045 tons over the previous year. The increase was because of central bank gold sales and dehedging by mining companies, not increased production. In fact, actual mine production declined for a second year in a row. The decline has been attributed to mining company decisions to garner low yielding ore now while gold prices are high. Their logic, higher gold prices will offset the increased cost of mining the low grade ore.

Just what these trends suggest about future price of gold, the strength of US jewelry sales and the condition of the US economy is uncertain. Clearly there is a component of the gold price that is a consequence of speculation. There is also that element that is related to a weaker dollar. These can change as quickly as investors take profits or fiscal policy changes in the US. However, unless some calamity reduces economic growth in China and India, $400 gold is probably as much history in 2007 as was $35 gold in 1971 when the price of gold was deregulated.

That fact has significant consequences for consumers in the US. For instances, many traditional price points for fine jewelry will disappear from store assortments; at least if product functionality and durability are important attributes to jewelry buyers. Another consequence is US jewelry tastes will have to change as manufactures design products for growth markets like China and India. With the US jewelry manufacturing industry declining in size, there fewer and fewer domestic jewelry manufactures designing product for the American consumer.

US jewelry sales may also stagnate. Once considered the ultimate gift, jewelry has struggled to keep its premier position as the leading gift for the last decade. Competing with other luxury gifts like travel and electronics, jewelry gift giving has been declining. For instance, while 2006 was one of the best years for jewelry sales growth in the last 5 years, actual unit diamond jewelry sales declined in the 4^th quarter. This bears out BLS research suggesting that jewelry’s share of the consumer’s wallet is also declining. With higher gold prices and higher price points, consumers may continue to substitute other luxury gift items for jewelry unless jewelers change their current buying and marketing habits.

Another interesting point is that in spite of a weak dollar and higher prices for shelter, food, and energy, and disappointing 3^rd quarter profits, US investors appear to be buying gold at a slower rate than in other countries. Obliviously, many foreign investors see gold as a save haven; choosing it over dollar denominated financial assets. But if that becomes the predominate international view, central banks in Europe, China, and the Middle East may also begin to liquidate dollars in favor of stronger currencies, making it more expensive for the US to finance its growing deficit. For example, President Chavez of Venezuela suggested oil prices should be redenominated in Euros. A point OPEC took under consideration last week.