Gold No Longer Jewelry’s Dependable Crutch

Gold is no longer the solid, dependable crutch it used to be for the Indian jewelry retail industry. Despite what appears to have been record consumption along with record high prices for the yellow metal, the World Gold Council (WGC) notes in its Gold Demand Trends review of 2011 that global jewelry demand for gold decreased as compared to 2010. The report noted, however, that due to the double-digit annual price increases of the yellow metal, value-wise consumption of gold in jewelry was good in 2011 and was set to look good for this year as well.

“It doesn’t mean people will necessarily buy jewelry,” said one jewelry retailer from Delhi, who asked not to be named. “Our problem is that we have depended on gold the commodity, to drive our businesses. We haven’t taken charge of our market and made our product the main impeller of sales. This is why we are at the mercy of the forces that determine commodity prices – factors totally outside our control.”

But, he acknowledges, taking charge of the product is easier said than done. “In developed markets, well-established brands have been the drivers for jewelry consumption outside the obligatory segments like the diamond engagement ring. But here in India, the store itself – in most cases strongly connected to individual personalities – has been the main brand for most consumers. We all know the big issues of trust involving the gold content of our product as well as their valuation, including diamonds and gemstones. That is a major stumbling block in the attempt to generate demand for our product itself, irrespective of raw material prices.”

Raw material prices, including that of diamonds, but particularly that of gold, have had a major impact on the entire industry’s performance over 2011 and seem set to shape it even in the current year. “Indian consumers got hit by a double punch,” says independent gold analyst Sanjiv Arole.

“After having peaked at $1,895 per troy ounce, Indian consumers saw gold slump to the $1,600 level and stay roughly around the $1,700 level through to today. At the same time, however, the rupee has slumped against the dollar and thus in rupee terms, the price of gold remained high – above Rs.27,000 ($4,822) for 10 grams. This turned Indian investors – a sizeable number of whom still buy jewelry with an investment motive – off and so demand has slackened. Normally this would lead to a softening of prices, which would in turn slowly prod a return of Indian investor interest, but the currency exchange rates and the international economic situation have meant that prices have remained pretty much unchanged. So the demand in India remains uncertain too – there has been something of a ceiling on demand since Diwali last year. It’s likely to remain that way unless there is a major movement in prices. The upcoming marriage season beginning in April should give us some ideas as to what is likely to happen.”

Difficulties In Developing Brands
Other factors have also complicated matters, even for those who have established genuine, countrywide product brands. The excise duty on branded jewelry, with the uncertainty and confusion surrounding the use by retailers of identification imprints in the jewelry sold by them, have slowed down any move toward large-scale transition to branded products.

Mehul Choksi, chairman of the Gitanjali Group, which owns the Gili, Nakshatra, Sangini, Asmi and D’Damas brands among others, said in a pre-budget statement that in the interests of developing a modern jewelry sector in India, the government should consider the complete abolition of excise duty on branded jewelry, ensure that VAT was capped at 1 percent under the soon-to-be-introduced General Services Tax (GST) regime and create an “Indian Brand” development fund to enable Indian companies to compete successfully with established jewelry brands the world over.

Being able to compete successfully in the global branded jewelry market would have a very positive effect on the development of brands in India itself, the Delhi retailer notes. “We have got to get consumers to want our product for something other than the value of the gold and diamonds,” he says. That this is something necessary is apparent from a telling observation that Arole makes.

“Jewelry demand for gold is now need based,” he says, implying that buying is triggered mainly by socio-religious drivers like weddings and religious occasions. This puts demand stimulation out of the hands of the retail industry.

Those outside factors are clearly at work in the Indian market. Arole notes, “There is a liquidity crunch with Indian consumers. They have less disposable income and so they are careful about what they spend it on. Most of their yellow metal purchases have been, therefore, of primary gold – biscuits and bars. So our 2011 gold import figure of between 1,000 and 1,100 tons isn’t much help for the jewelry retail industry. Even silver, which India imported more than 4,000 tons of last year, was mainly driven by primary bullion purchases for investment. Overall, buying was reduced.”

An additional factor in the consumption of gold, Arole notes, is that the Indian pipeline has expanded dramatically in size. “There are many more agencies now licensed to sell gold, many more retailers who have bought the yellow metal and much more stocking overall. The actual off-take by the consumer isn’t quite in direct relation to the raw bullion figures.” The WGC Gold Demand Trends report bolsters Arole’s assertions, pegging overall jewelry and investment demand in India at 933.4 tons, or a drop of 7 percent over the previous year. The detailed break-up of the this demand is interesting – gold jewelry accounted for over 500 tonnes and the investment market demand reached 366 tons. Indian investment demand accounted for 25 percent of total bar and coin demand worldwide.

Even globally, jewelry demand for gold, at 1,962.90 tons worth $99.20 billion, was down 3 percent over the previous year according to the Gold Demand Trends report. Overall, however, global demand for gold in 2011 rose to 4,067.10 tons worth an estimated $205.50 billion – the first time that global demand has exceeded $200 billion and the highest tonnage level since 1997. However, the report noted that the main driver for this increase was the investment sector where annual demand was 1,640.70 tons, up 5 percent on the previous record set in 2010 and with a value of $82.90 billion.

Slowdown In Recycling
That gold purchases in India are now mainly driven by investment, has also had a major impact on another key factor in the Indian jewelry retail industry – the use of recycled of old gold went down. Globally, the use of recycled gold in 2011, at 1,611.90 tons, was down 2 percent as compared to the previous year. This was the second consecutive year-on-year fall in the recycling of gold from the peak of 1,694.70 tons in 2009.

Interestingly, markets such as Europe, the U.S. and Japan, which are relatively new recycling markets, saw an actual increase in the use of recycled gold. The net global fall was due to the sharp fall in the established recycling markets of India, China and Turkey. Given the 28 percent increase in prices, this fall is indicative of the fact that near-market supplies are drying up – people are holding out for higher prices. For the Indian jewelry retail industry, the fall in recycling is an indicator of the fall in overall jewelry fabrication.

Changing the gold supply scenario significantly is the fact that most central banks the world over, have become net buyers of gold – a trend that was established in 2010. Purchases by central banks soared from 77 tons in 2010 to 439.7 tons. This reflects the need to diversify assets, reduce reliance on one or two foreign currencies, rebalance reserves and ultimately protect national wealth.

The WGC is bullish on the outlook for gold this year, but this is based mainly on the yellow metal’s investment appeal. In India and China, the world’s two largest emerging markets, are facing pressures from a slowing global economy and have also taken strong countermeasures to contain inflation. The slowdown in India, according to the WGC, has had a strong enough effect to have masked the actual growth of gold consumption elsewhere in the world.

But it thinks gold consumption in India over 2012 will be strong. The trouble is, this consumption is going to be investment driven. This isn’t good for the jewelry retail industry. “Last Diwali, customers bought a lot of gold biscuits and bars from us – and other retailers all over the country. There’s very little margin for a jewelry retailer in selling these,” says the retailer from Delhi, adding, “and those trust issues have plagued us here as well – why else would consumers be willing to pay significantly higher prices than the market rate to buy epoxy-sealed gold biscuits from banks?”

As the WGC notes, India is still the biggest consuming market for gold – though there are signs that China might soon overtake us. And the high prices that the yellow metal commands are despite increases in production. Last year, gold mine production reached a new annual record of 2,809.50 tons, 4 percent up on 2010. Worldwide, gold is still the consumer’s metal of choice for jewelry. But for the Indian jewelry retail industry, the worrying thing is that gh prices are likely to act as a turn-off for purchase of its product.

“Intrinsic value is an integral part of jewelry everywhere in the world,” says the retailer, “but elsewhere, purchase decisions are not driven so much by the desire to acquire intrinsic value as much as the aspiration to own something beautiful (of high intrinsic value). That is the key difference.” He adds, however, “I’m not saying we have to jump into the water to try and emulate them. We have our own traditions here in India – they’re thousands of years old – and they won’t just go away overnight. But lifestyles are changing and the perception of jewelry is changing. What the consumer thinks is value, worth having, is also changing. We have to tap into that change and offer our customers something that transmits value without simply depending on the cost-price of its raw material. We can’t just go on using gold as the crutch for our business.”