Volatile Gold Prices Could Cost Zale (ZLC), Signet (SIG), and Tiffany (TIF) Sales This Fall.

Implications: Fluctuating gold prices and metal shortages could cost jewelers both sales and margin this fall.  Here's why.

Analysis: Fluctuating gold prices couldn’t come at a worse time for the jewelry industry.  Many large jewelry chains began placing orders for fall gold jewelry and diamond items in late June and July, targeting September and October to launch new lines and set showcases for 4th quarter business.  Gold’s recent decline in price has complicated that time line, forcing retailers to rethink pricing and promotional strategies for the fall.   

If gold remains at about $800/toz or declines further, many jewelers may need to change ticketed pricing before the fourth quarter.  Otherwise they risk being over priced this fall.  The best time to do that is before the goods arrives in the stores.  However, if they reprice now and gold returns to its higher levels margins could be squeezed.   

Timing is critical.  Many jewelers are finalizing direct mail flyers and catalogs that have to go into print in late August and September for in home delivery in stores and home late October.  Changing prices in store after advertising is printed is an operational nightmare; especially for companies like Zale that have historically had execution problems both in store and at the home office.  

Another concern is merchandise delivery.  Gold bullion buyers are being told refiners can’t guarantee gold metal delivery.  It’s unprecedented, but dealers are guaranteeing price, despite obvious shortage in metal.  That could interrupt manufacturer’s fabrication process, delaying both the delivery of initial orders, but subsequent reorders for best sellers later in the season.  That translates into lost sales for a big companies and small alike.  

Just what is going on in the metals market isn’t clear.  Gold’s precipitous decline in price comes in the face of record high inflation in July.  Nevertheless, the dollar improved in part due to a $29 billion purchase of Treasuries directly through the Fed.  That’s a huge purchase that only several foreign countries could make.  Analysts think that it was China with the goal of decreasing commodity prices which would be good for Peoples Republic’s faltering manufacturing industry.  However, without continuing Chinese investment, it remains to be seen just what the long term effect will be on gold price.  

Metal shortage is another issue.  Some think bullion dealers don’t want to take the write down on higher priced gold inventory, while others believe speculators are driving prices down.  Mike Fitzsimmons writes, “My suspicion is that there is a tremendous unwinding of leverage in the gold market causing a short term price drop that is neither fundamental nor warranted.”  If he’s correct, metal shortages may continue throughout the third quarter and gold prices could significantly rebound above previous highs in the 4th quarter.  

Frankly, anticipating the movement in gold price is no longer a matter of supply and demand since China intervened.  If China continues to invest in US Treasuries, gold could continue to decline in spite of the fundamental weakness in the US economy.  That means companies like Tiffany and Movado that depend on tourism and sales in overseas markets for a material part of their business could see sales decline this fall.

Unfortunately, those sales declines won’t be offset by a stronger US sales.  That's because the dollar's strength was triggered by political manipulation of the money supply rather than improvement in the economy such as increased new job creation and real growth in wages.  The upshot of all this is the economy may not be getting stronger, but weaker and more volatile too, if recent changes in the value of gold and oil is the measure.