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A massive rally in the price of gold and silver this year has sparked talk of a debasement trade — the idea that precious metals are a hedge against governments eroding the value of their fiat currencies. For some of gold’s largest end consumers, however, the rally may be an incentive to pursue a more literal type of debasement: a reduction in the gold content of products.
Jewellers have been attempting to counter spiralling costs by changing designs to use less of what’s more costly, and analysts expect some companies to replace precious metals for base ones.
Jewellers are traditionally the largest source of demand for gold, accounting for about a third of the total even amid the recent buying boom, but gold consumption for jewellery fell 19 per cent year on year in the third quarter to 371 tonnes, according to the World Gold Council. That marked the ninth consecutive quarter of year-on-year declines, the longest downturn on record in data going back to 2011.
Surging prices are causing issues even at the top end of the market. Luxury house Kering — which owns jewellers such as Boucheron and Pomellato — told investors earlier this year that it would look at changes to prices and “production efficiency” to offset the impact.
But passing on cost increases is particularly hard for midrange brands with more price-conscious customers. Add on concerns about consumer sentiment in the US and many European markets, and the picture ahead of the key Christmas season looks especially tough.
Copenhagen-listed Pandora and US group Brilliant Earth both cut their forecasts for profit margins last week. Brilliant Earth chief Beth Gerstein said the company was fighting “some of the most challenging input cost pressures our industry has ever seen”.
Pandora, known for its silver charm bracelets, highlights the delicate tightrope lower-end brands must walk. Silver accounts for 30 per cent of its cost of goods sold; an obvious way to reduce that exposure would be to reduce its silver usage in favour of alternatives such as stainless steel, but that risks tarnishing its image. Chief executive Alexander Lacik was adamant the company would not “turn into a costume jewellery player”.
It is working on other ways to protect margins, but innovation takes time. In the meantime, however, for anyone who thinks the metals rally has gone too far — or who needs a hedge against falling silver prices — it might create a useful opportunity. Pandora’s stock has fallen 40 per cent year to date and it now trades at a distinctly dull 10 times next year’s earnings; even a partial pullback in silver would help ease the pressure.
