NOVEMBER 18, 2010.
Gold's Rise Re-Crafts Jewelry
Designers Buy in Bulk, Switch to Silver So Keepsakes Don't Become Too Dear .
By LIAM PLEVEN And ANN ZIMMERMAN
For jewelers, all that glitters this year isn't necessarily gold.
Big jewelry chains are scrambling to cope with the rising price of bullion while striving to keep their baubles affordable for consumers still cautious in their spending.
Bloomberg News
Some are cutting back on the amount of gold in their products and turning to less expensive metals from silver to tungsten. Jewelers also are buying precious metals in bulk at fixed prices to hedge the risk of further spikes.
Even so, jewelry prices are likely to rise due to higher material costs. This year, gold prices have risen 22%, settling Wednesday at $1,336.80 a troy ounce, near a record high in nominal terms. Silver is up 52% and platinum is up 12%. A 14 carat gold chain that cost $250 10 years ago now sells for over $1,000, said Brian Ree, co-founder of retailer GoldenMine.com Inc.
"If our costs go up, customers understand prices will go up as well," said Mark Aaron, vice president of investor relations at Tiffany & Co.
The moves are aimed at helping the industry recover from anemic sales in the last few years. U.S. jewelry sales fell 2.7% in 2008 and another 1.6% in 2009, according to market-research firm Mintel International Group Ltd.
Gold's growing favor among investors worried about inflation and falling currencies has made the gold market far less reliant on jewelry demand. Jewelry accounted for 52% of gold demand through the first three quarters of this year, down from 73% in 2005, according to GFMS Ltd., which tracks the gold market.
In tonnage terms, the amount of gold used for jewelry plummeted by 35% between 2005 and 2009.
The fall-off has coincided with the decade-long gold rally, driven by investor interest. Since the end of 2000, when the gold price settled at $272 a troy ounce, it has nearly quintupled.
Jewelers have scrambled to adjust. Ben Bridge Jeweler Inc., a division of Warren Buffett's Berkshire Hathaway Corp., is selling more silver and platinum items, and has added wedding bands made of cobalt and tungsten at its 73 stores in 12 mostly Western states, according to Jon Bridge, a company executive. The chain sells a men's size nine gold wedding band for $750; the same band in tungsten is $279.
"We've been looking at a lot of different alternatives," said Mr. Bridge. "Part of it is price driven, part of it is fashion driven."
Signet Jewelers Ltd., which operates more than 900 Kay Jewelers stores in the U.S., is taking traditional gold pieces and re-designing them to use greater amounts of silver in its place, said Ed Hrabak, senior vice president of merchandising.
"I could add a pound of silver and still not equal the amount of gold," he said. Silver was $25.50 a troy ounce on Wednesday, a fraction of the cost of gold.
Still, gold continues to hold its allure. Regardless of the spiraling gold prices, Katelyn Collier, a Dallas publicist who married two months ago, bought her husband a wedding band made of white gold. "The jeweler convinced me it was more durable and would hold its value better," Ms. Collier says.
David Lamb, managing director of jewelry at the World Gold Council, a mining trade group, said in an email that some jewelers are "rotating product styles more frequently and investing in new inventory to keep customers coming back to their stores."
At online retailer Blue Nile, an 18 carat white gold wedding band for a woman costs $580; a platinum version costs $1,230.
Jewelers are buying precious metals in bulk at fixed prices to hedge the risk of further spikes.
With precious metals prices up broadly, some big merchants also are attempting to contain costs by buying large amounts at a preset price, a strategy called hedging. Such contracts can help protect companies from unexpected increases in costs. On the other hand, a retailer could wind up paying more than it has to if the price drops below the level set in the contract."We don't do it to speculate, but just to smooth out the price bumps," said Signet's Mr. Hrabak.
Tiffany has a hedging program for platinum and silver, but not for gold, which the company uses less of, said Mr. Aaron. About 40% of Tiffany's products are diamonds set in platinum and 30% are silver jewelry.
Tiffany's customers are "less price-sensitive," said Adrianne Shapira, a Goldman Sachs analyst, though she said in a recent research report that higher precious metals costs could "pressure" the firm's margins in 2011.
Mr. Aaron declined comment on the report, but he said metal costs are a component of price, as are labor and gems. If gold goes up 20%, the price tag won't go up by the same amount.
The cost-containment strategies are intended to help jewelers take advantage of improving sentiment. Consumers who said they want jewelry as a holiday present rose 13% from a year ago, according to a study conducted for the National Retail Federation by BIGresearch.
For department stores, that means being able to hold prices at key thresholds, such as $99, because consumers are unwilling to pay more for what are seen as luxury items, said Ms. Shapira. "It's all pretty much discretionary."
Limiting the impact on consumers may prove critical to the industry's health. The Mintel study found that jewelry sales hit a recent high in 2007 at $50.2 billion, but forecast they would stay below $50 billion in 2010 dollars through 2015.
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