Gold Prices Tarnishing Watch, Jewelry Sales

The global downturn has impacted luxury, but one of its less obvious effects has made firms pay particular attention to gold prices.

The price of gold has hit new highs.
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WWD Basel Preview issue 03/26/2009

The global downturn has impacted luxury like everything else, but one of its less obvious effects has made firms that count precious metals as a business cost pay particular attention to gold prices.

This story first appeared in the March 26, 2009 issue of WWD.  Subscribe Today.

The price of the precious metal, driven by investors and speculative funds that see it as a hedge against market volatility and the declining dollar, hit an all-time high of $1,032.70 an ounce in March 2008. Since then, gold has hovered between $700 and $1,000 an ounce. It has not fallen below $800 since Jan. 1, and some in the metals community are predicting new record highs in 2009.

Jon Nadler, an analyst at Montreal-based precious metals dealer Kitco Inc., said demand for gold from jewelers and watchmakers has dropped as prices increased. Nadler said everyone from ring makers to watchmakers has begun to balk at rising material costs.

“The time has come where consumer prices are feeling the end effect,” he said.

Most watch manufacturers say the main forces driving the price of their pieces are the craftsmanship behind them and the complications of their movements.

“A watch that’s $10,000 in steel might be $20,000 in gold,” said Mike Margolis, senior U.S. representative for Hublot. “Obviously, there’s not $10,000 worth of gold in that watch, but the cost of manufacturing is higher.”

Though they might use far less gold, platinum or silver than fine jewelers, watchmakers still have to strategize for the market. Most, if not all, buy their metals forward to try to bring some consistency to raw-materials costs. Several watchmakers suggested the industry could also be looking to other materials such as alloys or palladium to offset the higher price of gold.

Corum chief executive officer Antonio Calce said with the rise in gold costs
over the last three years, he’s seen significant growth in the number of watches using the metal in combination with other materials, such as steel and carbon.

“Steel and gold watches, which were quite popular in the Eighties and had strongly declined at the end of the Nineties, are now recovering consumer favor,” Calce said.

The effect of the downturn on consumers’ collective taste could also be taking watch design and production in new directions. It’s been suggested the recession has killed the aspirational luxury market, and even those who can still spend discretionary dollars on gold or platinum watches might be turning down the volume on their wrists.

“Conspicuous consumption or anything that is loud and conspicuous is not really correct at this point,” admitted Patek Phillippe U.S. president Larry Pettinelli.

He said his customers are approaching purchases more carefully and don’t want to feel guilty about anything they buy.

“People are still interested in buying quality, they just don’t want to throw it in people’s faces,” Pettinelli said. “If it’s a good model, it’s a good model. If it’s a good, strong design and the movement is of interest to a collector, the [metal] preference of a collector is less important.”

Even timelessness, though, has a price. In a market where gold could soon fetch $1,000 an ounce again, some collectors have apparently found an entirely different use for older pieces, one that brings their precious metals full circle.

“I’m reasonably sure that people that need to raise cash in the wake of the crunch or in the wake of Bernie [Madoff] don’t mind scrapping a watch they don’t wear anymore or are afraid to wear anymore,” said Nadler at Kitco.

He added the firm’s refining unit has taken in a fair amount of scrap gold recently that, based on its component makeup, was at one time part of a timepiece.