By: GZ on Mercoledì 11 Giugno 2003 02:52
Gold still missing the point
By: Stewart Bailey
Posted: 2003/06/08 Sun 09:33 EDT / © Mineweb 1997-2003
PRINCETON, NJ -- It was hardly surprising that jewellery was left to suck the hind tit at this year’s LBMA Conference in Lisbon. After all, leaving the most important component of gold demand to the penultimate session of the two-day gold forum has become de rigueur for an industry obsessed with uncovering an investment silver bullet which has hitherto remained well hidden.
Put in context, according to the most recent Gold Fields Mineral Services (GFMS) data, jewellery accounted for 2,700 tons off offtake last year, or 68 percent of total demand figures of 3,978 tons.
The contrast with investment figures couldn’t be more marked. Net investment and bar hoarding together came in at a rather anemic 382 tons, or only 10 percent of total demand. Even if the temporary producer dehedging phenomenon at 423 tons of offtake is considered an investment, the total still comes in at only 20 percent.
Any way you slice it, jewellery demand sliding
Anyway you slice it, the figure is low in comparison with a jewellery market which is soaking up a lot more metal than investors are, despite a set of macroeconomic conditions which should say otherwise.
Admittedly, the nebulous jewellery figure which has India as its single biggest component, includes an appreciable chunk of dual purpose purchases – with a single piece often bought for its adornment and investment qualities. But regardless of the purchase motives, total jewellery demand remains on the decline.
Disturbingly, though, it is the very factors which have been driving the gold price higher – the usual suspects of macroeconomic uncertainty, perilous equity markets and geopolitical strife – that have been helping erode the bedrock of jewellery demand. Last year the jewellery category demonstrated its high elasticity of demand, dropping 11.5 percent, or 349t, as the gold price rose 25 percent, or $68.85/oz, to $347.20/oz by year end.
The trend this year is no less disturbing. The first quarter saw 586t of jewellery offtake, compared to 655t in the first quarter of 2002, during which time the price rose 21 percent from $290/oz to $352/oz.
Investment, meanwhile, continues to show encouraging gains, but off a low base and still forming too small a percentage of total gold offtake to rescue stagnant demand. “There is a sense of if it doesn’t happen under the current circumstances, when will it happen,” says GFMS managing director Philip Klapwijk.
Fiddling while the market burns
So while appetite for their product continues to dissipate, gold producers, traders and bankers continue to dither. The World Gold Council (WGC), under previous chief executive Haruka Fukuda, launched one haphazard attempt after another at fanning demand for gold jewellery – most notably with its Bain-inspired ‘Glow with Gold’ campaign. We’ve not heard much about that since and neither has its merits been reflected in jewellery demand growth.
Even the rival project cooked up by a band of dissident North American producers and McKinsey consulting at the 2001 Denver Gold Forum, has fizzled out. The project was expected to add 340 to 500 tons of additional gold demand by 2006, which would in turn jack the price up by $30/oz to $40/oz. According to the marketing document, this would lead to a net present value of $9 billion to $12 billion for the producers, “spread across every ounce of production”.
Instead, the rebels, railing against Fukuda’s ineffective and autocratic regime at the WGC, have been drawn back into the fold by Chris Thompson. The reigning president has promised to make a more concerted stab at resurrecting gold, as both a credible investment vehicle and perhaps more importantly, as a tasteful fashion accessory.
Harsh criticism – anyone listening?
Jewellery pundits will be hoping Thompson and senior LBMA officials were listening to the World Jewellery Marketing body’s Tawhid Abdullah, who doubles as a senior jewellery trader at the Dubai-based Damas jewellery group.
Clearly passionate about the industry in which his family has worked for three decades and knowledgeable enough to spot a disturbing trend when he sees one, Abdullah warned gold producers that the writing was on the wall for their product. Those who used to “go blindly into jewellery”, says Abdullah, now spend their free cash on “entertainment, travel, watches and perfumes”. He should know.
The forgotten metal
“Today’s customers have forgotten about gold jewellery and will find enough happiness from non-precious jewellery,” he says. It is the luxury jewellery groups, which have become the paragon of marketers the world over, who pose the biggest threat to gold’s market. “The competition is better structured, better financed and better organized,” says Abdullah.
He says producers, bankers, manufacturers and dealers have lived off the marketing efforts of retailers. In a harsh reprimand to the upper end of the industry, Abdullah called on the gold elite to “consider the posh offices and comfortable lifestyles” that they enjoyed because of the success “provided by the (gold jewellery) trade”.
“If you do not support the trade and jewellery, the trade will not support you anymore. Please wake up now and think of the long term future. Be fair to the jewellery trade and contribute some of what you’ve gained.
“Marketing is the only way to compete effectively and it needs more money, Are you prepared to give,” said Abdullah.
The answer may be a long time coming. In the meantime, AngloGold and to a lesser extent Harmony, remain the only majors which have thrown their weight behind any serious marketing effort. In the main, their peers appear either wholly disinterested, or have masked their apathy through their WGC tithe.
But the marketing initiatives of the South African duo are more apt to provide some equity differentiation – separating them from the herd if you will - rather than having a discernable impact on overall demand volumes.
Just about everyone linked with the industry, aside from a hard core of gold monetarists, believe something drastic needs to be done. The problem, however, is that the industry’s financial clout and effort are being diverted to drumming up gold investment demand through exchange-traded gold-backed securities, which until now have hardly set the financial markets alight.
While that persists, very little focused attention is likely to be given to a battered jewellery market, buckling under the strain of rising prices. While the market continues along its current course, the recommendation made at last year’s LBMA by the indomitable Andy Smith, looks like it may come to pass. He suggested the only way to move large amounts of gold jewellery was to “stack it high and sell it low”. MacDonalds was Smith’s first choice of retail outlet for discounted gold jewellery, given its extensive network and populist appeal.
They scoffed last year, but a look at the GFMS demand trends show that unless this industry comes up with a workable marketing plan, “two Quarter Pounders and a Gold Mac” could become an increasingly popular refrain