The gold bubble problem

Jewelry Discussion
1

Has any else noticed the price of gold and all the metals are up and
not likely to come down. Being a small scale special order jeweller
and manufacturer, and paying close attention to how the gold market
is doing.

I also look at what the local retailer are doing in price on what
they have in the cases and what the prices are in there mail outs of
what they are sell this season.

Knowing how to break down how much the material cost and what the
lob cost, I know when they bought their inventory. It was bought when
the market was at 800.00/oz, there hasn’t been much business to turn
it over this season.

At least here in Canada. So they haven’t had to re-order any new
stock. This is really great for the customers, not so good for me
because, the Jewellers think I’m out of my mind with prices I charge
because I’m current with the present gold market. The current price
per oz is 1200.00

The market went up because, India bought 200 metric tons of gold,
due to the fact that the US dollar has been replaced as the
international trade currency with a group of currencies and gold.
200 tons of gold, I’ve heard is one sixth of the world gold supply.
India is poised to do it again! Why, because they use it for paying
for things like oil.

The result is the after Christmas dip in gold isn’t going to happen,
rather it’s going up. The price of gold has affect silver and the
rest of the metals as well. Retail jewellers have been depending on
low labor rates from India and China to keep the prices the same on
the stock in the cases. Even China and India have to sell gold at
the current market value for the year and putting no labor the
inventory is going to prevent the prices sky rocketing.

The result of this is there is a plague of gold re-buyers that hit
North America, and the other is people are bringing in gold to have
it made into new items. I specialize in this, so, it’s good for me.

In Summery, I would say that next quarter will be livable, but the
second quarter of 2010 is going to see a cascade of jewellery store
closing.

Am I way off base here? What do you think?

Jim
Jim Zimmerman
Alpine Custom Jewellers & Repair

2

Hi Jim, Remarkable, isn’t it? You would think this would be a subject
dominating this forum. Can’t figure out why nobody wants to talk
about it.

Knowing how to break down how much the material cost and what the
lob cost, I know when they bought their inventory. It was bought
when the market was at 800.00/oz, there hasn't been much business
to turn it over this season.

My situation as well. Sales are bad enough, without raising the
prices. If the prices were driven by jewelry demand in our own
economy, by now jewelers would be in high cotton. It is going to take
some creative effort to match current jewelry demand, or lack of it,
to the costs and price structure.

Back in the 1979-1980 price bubble, suddenly heavy gold and silver
jewelry was all the fashion. Not now. Why not? Any ideas?

In Summery, I would say that next quarter will be livable, but the
second quarter of 2010 is going to see a cascade of jewellery
store closing. Am I way off base here? What do you think?

I think you are right on, but I expect the closings will be more of
the bigger stores and national chains. Already been happening for a
year. The smaller stores and individual craftsmen I think are more
resilient. As long as they are not forced out of business by debt,
more likely to be a pay-as-you-go and ride out the feast and famine
of our business.

Stephen Walker

3

Well, I can’t point to any instances where someone didn’t buy
because the price of a piece is now $1000 instead of last year’s
$800. I don’t think people look at jewelry that way, I don’t think
they have that close a perspective on it. Yes, there are always a few
ruthless price shoppers where nothing matters but the maximum
discount, but really, they are to be avoided anyway.

I think people buy because they want it. If all the emotional
particulars are there(your job) and you can make the deal work (your
job again) you’ll have a decent closing ratio. Example… guy walks
in recently, wants a ring but is quite open about his financial
circumstances. By adjusting the variables at hand I offer a proposal
to make essentially what he wants in the price range he’s comfy with,
and I make the peripheral aspects attractive enough that he hands
over the plastic without self debating for days on end. See, that’s
your job. Make him want YOUR presentation. As he’s leaving he says,
“Thanks Neil, you made it easy”. This was our first deal.

The name of the game is quality and service. THAT’S what we’re
selling, not shiny hunks of a commoditized industrial product.
There’s no romance in that. You need to fill the client’s needs.
There are lots of tools available to you so you can construct a
package that fills his needs and then some. The ‘and then some’ is
what brings him back next time. The ‘next time’ is what keeps you in
business. After a couple of ‘next times’ I’m sure the guy above will
want a more lavish item and he’ll feel so comfortable dealing with me
that the transition to higher price ranges will not be a problem.

As to the relative jewelry volume compared to past gold
bubbles…this time out the reticence is probably more due to the
general economic environment than the price of gold itself. In
another thread is mentioned switching to bronze from sterling to keep
the price down. I think this may be a good idea not for the price
itself but for the price POINT. You have shoppers who traditionally
buy within a price range. That is an emotional aspect as well as a
financial one. By filling that customer requirement you are still in
the game.

I think it was Franklin who said, “Keep thy shop and thy shop will
keep thee”.

4 
Back in the 1979-1980 price bubble, suddenly heavy gold and silver
jewelry was all the fashion. Not now. Why not? Any ideas?

Because in 79-80 the general economy was not nearly as badly
thrashed as it is now.

James Binnion
James Binnion Metal Arts

5 
I think you are right on, but I expect the closings will be more
of the bigger stores and national chains. Already been happening
for a year. The smaller stores and individual craftsmen I think are
more resilient. As long as they are not forced out of business by
debt, more likely to be a pay-as-you-go and ride out the feast and
famine of our business.

I believe it’s closely related to the number of mines claims and
exploration that began about a year ago showing placer deposits
turned productive or projecting productivity by mid 2010- I think by
next summer central and south American claims, and some Canadian
fields will be flooding the market with raw material, which by the
end of summer should begin to trickle down to most vendors that we
use offering more reasonably priced raw materials in the 7-800
dollar range per troy oz.

Consumer demand for jewelry is way up according to some analysts and
as such sales of handcrafted gold jewelry is in demand - even this
year (my sales are skyrocketing at the moment and not related to
holidays or mardi gras custom work) Also, as the 2ed most popular
luxury item handmade gold and silver jewelry and other items in an
art market context, will deliver a good retail market next holiday
season, if not before…

6 
Back in the 1979-1980 price bubble, suddenly heavy gold and silver
jewelry was all the fashion. Not now. Why not? Any ideas?

Bubble is a loaded term. It may be a bubble, or may be not. The
unique attribute of the price rise this time is real shortage of
supply.

I used to be an investor in Newmont Mining. I sold at 55 several
years ago when gold reached $600. Today gold is north of 1200 and
Newmont stock at 52. How could it be? Gold miners used to work with
deposits yielding 12 grams per ton. Now I am hearing, they have to
go to yields as low as 4 grams per ton. Combine it with banks going
back into gold, demand from India and China… I am not so sure that
current situation should be described as bubble.

Leonid Surpin

7

Hi Steve,

Back in the 1979-1980 price bubble, suddenly heavy gold and silver
jewelry was all the fashion. Not now. Why not? Any ideas?

As far as what I’ve seen, customers want to live and spend money as
though it were three years ago, so they would like to buy new fashions
of about the same size and price. With the gold market being what it
is, that means ultra thin walls on jewellery to remove the weight,
and keep the total price of the piece close to what it what in 2006.

I would suppose it basically means some more labor that can’t to
added on to the price tag. The other thing is all those rubber molds
that were made with to much weight, are now worthless. Nothing new
about that really because it’s about the life span of a mold anyway.

So it’s a new challenge to make the stock that will sell well, at
the right price.

Jim
Jim Zimmerman
Alpine Custom Jewellers & Repair

8 
Combine it with banks going back into gold, demand from India and
China... I am not so sure that current situation should be
described as bubble.

I wouldn’t describe it as an asset bubble either. Gold is definitely
in shorter and shorter supply, while worldwide demand, for varying
reasons, is going up. And as the US dollar goes down in value, the
dollar cost will continue to go higher and higher. Current US
monetary policies have nearly destined the dollar to continue on its
downward spiral, causing gold price to soar ever higher. Take the
time to read several of the various daily articles on KITCO website
to get a better feel for world precious metal markets, as well as
currency markets that drive so much of this. Near the top of the
kitco webpage is a a little chart that defines how much price change
is attributed to US $ ups and downs, versus price change from
investors selling and buying. Other than the last day or so, the
price is pushed upward by devaluation of the dollar nearly daily.
Yesterdays big gold price drop was initially started by a radical
overnight improvement in dollar value, forcing the gold market to
head south. When investors saw the trend they began to sell portions
of their positions to lock in some of their profits before the price
went to low. But still the long term trend is for large buyers,
countries and institutional buyers, to continue to increase their
positions, while supply continues on a downward trend. We’ll
continue to see corrections like yesterday, 12/4/09, and some even
more drastic, but still the long term trend seems to be directed to
higher and higher prices based on normal economic theory.

9 
Back in the 1979-1980 price bubble, suddenly heavy gold and silver
jewelry was all the fashion. Not now. Why not? Any ideas?

I have noticed the disparity between then and now on gold sales. I
was selling jewelry for a regional chain at the time, in an
Indianapolis mall. Daily, we were selling big, heavy, gaudy, gold
chains that our company had by the drawer full in all of its 11
stores. People were dropping 500-2000 bucks each for chains that 1 yr
earlier we couldn’t sell for 30% of that. And while we were selling
gold, the coin shop 3 doors down had people lined up daily for
several weeks buying their scrap gold. Sometimes there would be as
many as 100 peeps in line, all waiting to get their turn to sell to
the openly gun toting guys behind the counter in the coin shop.

I have pondered this very issue a considerable amount, and have yet
to come up with a specific reason for the difference. I do find that
many people still like and want the heavy stuff, but usually only
sells when I have a nice quality/ condition used piece that I bought
as scrap from someone else. When I price new, heavy weight goods to
them, at current market prices, it seldom sells. I think that
electronic media makes a difference in modern mindset, as well as
buying habits. Negative attitude spreads much quicker nowadays.

10

Gold prices are not related to its rarity or supply and demand as
much as it is the strength of the dollar, petroleum prices and
speculative demand. Gold supply is about 4 times as plentiful as
platinum and is much cheaper to derive from the mined ore but they
are close to each other in price. Why is that, it is because there
is so much speculation in gold and relatively little in platinum.
Platinum’s market price pretty much is driven by supply and demand.
Gold on the other hand has this irrational aura of being a hedge
against inflation or as the investment for troubled times. However
like most “market” based investments it is mostly the market
operators who make the money and a very few lucky investors.

Once the economy stabilizes the price of gold will come back down.

James Binnion
James Binnion Metal Arts

11 
I am not so sure that current situation should be described as
bubble.

We can only know that it’s a gold bubble if it bursts.

Gold prices are where they are because of a weak dollar. Gold is a
commodity and in troubled economic times speculators who would
normally hold dollars go to gold.

Speculation is what causes this rise in the price of gold. It’s not
that the use of gold in products has risen so much.

Watch the exchange rates and watch particularly the rate between the
Euro and the dollar. If the dollar grows stronger the price of gold
will decrease. And this will only happen when the US economy grows a
lot stronger. KPK

12

Back in the 1979-1980 price bubble, suddenly heavy gold and silver
jewelry was all the fashion. Not now. Why not? Any ideas?

I have pondered this very issue a considerable amount, and have
yet to come up with a specific reason for the difference.

Been talking this over the breakfast table. We think that the early
80s fashion for big blingy gold was a trickle-down from coke culture
and all the conspicuous arrogance that went with it.

Fast forward to today. My 2009 college graduate daughter finally got
a job, and a good one. The thing she rushed out to buy was a new
phone with all the latest features and service to support them. This
seems typical of the times. Fashion and accessories seem to be a bit
less compelling these days.

While it is interesting to know why the gold market is up so high
and why it may or may not come back down, we jewelers need some kind
of plan to deal with it as jewelers rather than commodity
speculators. I am hopeful that this discussion might yield some
insight.

Stephen Walker

13

Hi Jim,

I appreciate your thread on the gold bubble. I agree that alot of
businesses that are stretched a little too thin may be hurting 90
days after the first. That is the ones who borrowed and also found a
lender or a vendor with terms. I believe we could see an end to a
good percentage of suppliers. We’ve had companies that we’ve done
business with for 40 years that are changing their terms. Local
lending institutions are also tighting their requirements, therefore
consumers and businesses tighten their belts. Not sure where this
will take everyone, but I do know business as usual won’t be the
same.

14 
While it is interesting to know why the gold market is up so high
and why it may or may not come back down, we jewelers need some
kind of plan to deal with it as jewelers rather than commodity
speculators. I am hopeful that this discussion might yield some
insight.

We are going to have to reacquire the respect for gold as precious
metal. When I started working in USA, I was shocked with cavalier
attitude towards gold. With prices going up and up, jewellery is
going to change. Instead of using bulk to give pieces strength, we
will have employ engineering solutions. The craftsmanship would
become more important than weight. So I suspect that changes required
would be very healthy for the industry. We may even become goldsmiths
again, instead of been gold merchants. So I like it.

Leonid Surpin

15

I frequently have clients that bring in their old gold (and stones)
andwant something new made. When I tell them what my work will cost
they sometimes think I am asking too much. Now, with the price of
gold so high I ask them if they realize the value of the gold that
they own. We talk about it and calculate it out and it has been
easier for me toask the correct price for my work and get the order.

Lois

16

I got a ring in last week to do some work on. It was a ring made in
England most likely around 1900 or so. What a marvel of the jewellers
are. Everything was hollow except the bottom of the shank. This was a
strong ring. Part of it was made by a stamping, and some of it was
sheet. The rest was filigree turned up and solder together. The
detail of the heads was flawless.

This ring should of weighed around four and half grams but was only
a gram and half. I know for sure that stamping weren’t CNC made being
the age it was. I think that kind of craftsmanship is what it’s going
to take. Just in a updated version. Those jeweller were able to
stretch an oz of gold into probable 60 or 75 mounts. Rather and than
the meager 20 mounts in North America jewellers do as a norm.

It’s what I has my interest lately.

Jim
Jim Zimmerman
Alpine Custom Jewellers & Repair

17 
Been talking this over the breakfast table. We think that the
early 80s fashion for big blingy gold was a trickle-down from coke
culture and all the conspicuous arrogance that went with it.

I had a similar thought the other day and googled ‘hip hop.’ Turns
out it officially began in 1989.