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Is Surging Gold Price Affecting Jewlery Sales?
Asks the London Financial Times this morning?
The high price of gold could reduce jewelry demand by a fifth this year, according to The Yellow Book, a bi-annual analysis published by Virtual Metals Research & Consulting and Fortis Bank.
The analysis also predicted that the gold market would swing into surplus this year if prices remained at current levels, leaving the market increasingly dependent on support from hedge funds, pension funds and retail investors.
Physical demand has been badly affected by gold’s surge towards $600 a troy ounce this year and total jewelry demand is forecast to fall by 21 per cent this year to 2,341 tons.
Jewlery accounts for about 75 per cent of the demand for gold, which has very few industrial applications.
VM Group also forecasts that the amount of gold scrap being recycled will rise 19 per cent to 998 tons this year.
Demand for gold through Exchange Traded Funds is expected to decline by 10 per cent to 173 tons, although this forecast does not include the potential launch of a gold ETF in India or the Far East.
The combination of weaker physical demand and higher scrap supply will swing the market from a deficit of 310 tons last year to a surplus of 422 tons in 2006, according to VM.
“There is no doubt that the price activity of the past six months has disrupted the physical markets and we have yet to see at what trading range an equilibrium will be re-established,” said Jessica Cross, VM’s chief executive.
VM said it would be three years before the increase in new mine supplies – resulting from the rise in gold prices over the past six years – had any market impact.
Gold hit a 25-year peak at $591.50 a troy ounce during trading on Monday.
The trigger for hedge funds and pension funds to reassess the allocation of their portfolios to gold and the price implications of such a shift remained unclear. However, the importance of the physical market in providing a base for the price should not be under-estimated. VM said that a correction down to the $520/$540 range could trigger a resumption of physical buying. But if prices persisted at current elevated levels, there would be a greater acceptance of these higher trading ranges by more price-sensitive sectors such as jewelry.
Gary Mead, a VM analyst, said the impact of greater Chinese demand for gold jewelry and talk of China buying gold to help diversify its huge foreign exchange reserves had been overstated.
He said China could be expected to have a deficit of just 78 tons a year by the end of the decade if current supply and demand trends were maintained.
Interesting outlook; To date, we have not seen a drop-off in Gold Jewelry sales in our business. Stay tuned.
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