The Gold Rush: What do high gold prices mean for the jewelry industry?

The recent surge in gold prices has caught almost everyone off-guard. Even the most seasoned investors or buyers are not used to seeing monthly double-digit percentage gains for the precious metal, but that’s what we’ve seen since early March. The extraordinary rally to all-time highs has perplexed many analysts, but what does it mean for fine jewelry designers, manufacturers and retailers?

Our industry is already facing multiple headwinds, from diamond sanctions to supply chain transformation and from retail consolidation to changing consumer demands. It’s easy to see the gold price as just another challenge to overcome, but is the high gold price actually a real opportunity to differentiate in a competitive market? Does it empower you to tell a more compelling story about the premium nature of your business?

Golden demand

We know from our clients that there’s still huge customer demand for gold after a resurgence in 2023. That’s why, despite the high gold price, we’re advising the majority to continue to use 18K gold. For those who aren’t, we believe they should use more premium gold, provided it aligns with their target customer and average unit retail target. This speaks to the continued popularity of gold with consumers and the resilience of gold as a luxury product. We would encourage luxury designers and manufacturers to maintain and grow their gold strategy rather than retreat in response to the volatility we’re seeing in gold prices right now.

Of course, it’s a fine balance at the more mainstream end of the market if your margins are already squeezed, but for fine jewelry the customer demand is still strong enough to absorb higher prices for the foreseeable future. This speaks to the importance of responding to ‘aspirational buying’ and attracting customers to your brand who desire to purchase ‘affluent’ materials, such as gold.

However, that doesn’t mean you shouldn’t plan for all eventualities. We’ve already seen how unpredictable the gold price can be in the current market, and if we have higher prices for even longer, then there are important questions to consider:

• How much of the gold volatility should you absorb as a designer or manufacturer?
• When should you pass it on to your customer?
• How can you ensure that the operational side of your business can mitigate the risk of even higher gold prices and squeezed margins?
• When should you consider offering less expensive alternatives, including palladium, titanium, silver or vermeil?

Higher gold prices look like they’ll be a feature of our industry for the foreseeable future. That’s why we want to give you the tools and strategies to plan now to meet your customers' gold desires while creating sustainable growth for your business.

What’s driving the price of gold?

Predicting this current historic gold rally may feel obvious in hindsight, given the uncertainty in the global economy and two geopolitical conflicts in Ukraine and the Middle East. Gold has always been seen as the safest of ‘safe havens’.

However, the picture is far more complex, and the catalyst behind the recent price surge is less clear than you might think at first glance. Economic uncertainty and geopolitical tension have been the dominant global narratives for the last two years, and that has supported higher gold prices. Still, even when Russia invaded Ukraine in 2022 and disrupted almost every commodity supply chain, gold only just reached $2000 per troy ounce before retreating — at the time of writing this article, we’ve seen gold rise to over $2300 in just a few weeks.

What’s clearly true is that global conflict and the slow economic recovery are part of the picture. Yet, this most recent rally is also a perfect storm of a number of different factors.

The U.S economy and interest rate cuts

The market still hopes the U.S. Federal Reserve may begin cutting interest rates in June, but the expectation of multiple cuts across 2024 has diminished. Rate cuts are generally bullish for gold because they increase the likelihood of inflation and a weaker dollar, increasing the value of the precious metal in relative terms.

A clearer driver of the gold price surge may be recent worse-than-expected U.S. inflation numbers and a growing sense - media hype or not - that all may not be as positive with the U.S. economy as the official numbers suggest. What’s probable is that we won’t see market volatility settle until after the U.S. elections in November.

Central banks

Central banks' demand for gold has grown steadily over the last decade but has accelerated rapidly in the last two years. A significant factor is a lack of trust at the national level in the global financial system, which is denominated in U.S. dollars.

After the G7 brought in sanctions against Russia following the Ukrainian invasion, including the freezing of its central bank's foreign reserves, it made many central banks rethink the type of reserve assets they should be holding.

Speculation

Gold is now far more of a financialized commodity than a raw material. Portfolio investors, such as hedge funds and wealth managers, use it to hedge against inflation. In just two weeks in March, hedge funds alone bought 250 tons of gold futures—a quarter of the volume that all central banks bought in a whole year. Hedge funds make money by trading the momentum of an asset price, which is why their investments always intensify price movements up or down.

Consumer demand

We shouldn’t overlook individual consumers' appetite for gold as an important part of the gold price narrative in 2024, particularly in China and India. Last year, Chinese consumers bought over 630 tons of gold jewelry, up significantly year on year. Much of that was in the form of 24 karat ‘Chuk Kam’, which loosely translates as ‘pure gold’. Demand for bars and coins, used mainly for investment, rose by 28% to 280 tons. Chinese investors have been looking for a ‘safe haven’ after the collapse of China’s real estate market and stock market slump.

Goldman Sachs also highlighted the strong retail demand for gold jewelry from the “rapidly growing cohort of affluent consumers in India” as a key factor supporting higher gold prices.

How should the fine jewelry industry respond?

Whether consumer demand holds if gold continues at these levels isn’t clear, but for the moment our clients are all telling us the same thing: customers still want gold, and they’re willing to pay for it. We believe the fine jewelry industry should remain cautiously optimistic about the desire for luxury gold jewelry even at higher prices.

Our Principal Consultant and merchandising expert, Nan Lung Palmer, sees a split in the industry’s approach to gold between luxury and mass-market:

Wherever your business sits in the supply chain, there are still important strategic decisions to be made if you want to stay ahead of any changing trends in the gold jewelry market:

Designers

Fine jewelry designers should be confident in the consumer demand for gold products, but that doesn’t mean you shouldn’t be exploring ways to maximize your use of gold through efficient and innovative designs. This includes gold jewelry design that retains its premium look and integrity but uses less gold weight. This also might be an opportunity to start using laser cutting for precision if you’re not already.

Nan believes this might also be a good time to incorporate alternative metals into your designs: “I’ve been suggesting to clients that they consider using sterling silver with their gold and other metals to lift their average unit retail (AUR).”

Another option for designers (and retailers) is to move some products (especially, but not only, bridal) to platinum - which is currently offering a lower price per ounce than gold. Platinum has been more stable over the last decade and less responsive to economic and geopolitical volatility.

Its greater density may still mean that the piece ends up at a slightly higher price point overall than a similar piece in gold. Still, the perception of value should be even higher, providing an opportunity for a higher margin.

The high gold price and customer demand also present a clear opportunity to tell a compelling story about the quality of your gold designs. More than ever, there is real potential to position your gold jewelry not just as a product but as an investment and a symbol of exclusivity.

You should look to inspire your customers across all your marketing channels with the enduring value of gold, the sustainability of your sourcing, and the design and artistry involved in each piece. This will not only justify the premium price but also play an important role in elevating your brand’s value proposition.

Manufacturers

If you’re a manufacturer, this could be a great opportunity to embrace more advanced technologies in your process, such as 3D printing or computer-aided design (CAD). These techniques enhance design precision and reduce material waste.

Just as you have been reviewing your supply chain in response to the Russian diamond sanctions, we’d also advise strengthening your supply chain management in relation to your gold suppliers. With such volatility in the gold price, delays in supply could significantly erode your profit margins.

This is also a good time to review your operational systems and processes to ensure they’re responsive and resilient enough to manage your buying process and mitigate the impact of these current gold price increases.

For many luxury jewelry manufacturers, using more gold, not less, still makes sense in this current market of high customer demand. Our Principal Consultant, Andrea Lucille Pooler agrees: “Our analysis for clients shows that many need to expand into more 18k gold and higher-end gold price points, if they’re not already.”

Retailers

Strong inventory management is essential for retailers when the gold price changes daily. You want to be responsive to your customers’ needs while minimizing your carrying costs as much as possible.

There is also a clear challenge around pricing your gold jewelry correctly in the current climate. If you respond to every fluctuation with an adjustment, then customers will soon lose trust in your products. Instead, pick a price percentage change (5-10%) that makes sense within your pricing strategy and stick with it. Only change your price when it reaches that number.

Don’t mark down your prices if you’re struggling to sell some of your gold pieces. Instead, use smart messaging around the value and premium nature of your gold jewelry. Raising your prices can sometimes be a more effective strategy to increase interest.

If you offer bespoke jewelry design services, you also need to consider how to manage customer expectations around price. A returning customer may be put off by a higher price point if they’ve bought less expensive products from you in the past. In that instance, it’s important your team is confident in justifying the higher price, while also being empowered to suggest alternative solutions such as different karat weights and combining gold with other precious metals such as silver.

If you're ready to learn more about how we can help your business to navigate the changing landscape and strategically position you for success, or if you're interested in collaborating with our industry experts, get in touch with us at inquiry@hillandco.co