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An uncertain economic outlook in the U.S. and abroad could have jewelry makers contending with even more increases in precious metals prices in the second half of the year, analysts said.

This story first appeared in the July 7, 2008 issue of WWD.  Subscribe Today.

Industry merchandisers said that, as go metals prices, so will go the importance of fashion and artisanship in their product lines.

Fine jewelers raised prices by between 10 and 20 percent this spring because of already spiraling precious metals costs. That same time, gold hit an all-time high of $1,032.50 an oz. before settling around the $900 mark for most of the second quarter. The metal climbed to $934.40 an oz. last week on inflation fears, while silver traded at $18.29 an oz., platinum at $2,016 an oz. and palladium at $469 an oz.

“I think we’ve seen the high for the year,” said James Steel, a precious metals analyst at HSBC. “Having said that, the possibility that commodity prices will remain at an elevated level will keep gold prices bubbling.”

Gold is often seen as a hedge for investors in unstable markets and usually runs counter to the dollar. Silver and platinum, meanwhile, have seen increased demand for their industrial uses in the electronics and auto sectors in recent years. As the economy continues on its current downturn and demand for precious metals increases, jewelers looking to restock could feel the pinch.

“We’re expecting gold prices to dip over the next couple of months, over July and August, and pick up in September, over the last quarter and into next year,” said Carlos Sanchez, an analyst with CPM Group, a New York-based commodities market research, consulting and investment-banking firm.

Sanchez said despite the possible price rise, CPM Group expects gold jewelry demand to rise 8.1 percent to 72.5 million ounces. this year. The firm expects platinum jewelry demand will be down 5.8 percent, but that jewelry demand for its less-expensive sister metal, palladium, will be up 3.8 percent.

It isn’t only the softening economy that is contributing to uncertainty in metals prices. Most analysts pointed to power concerns in South African mines causing trouble in the platinum market.

“Production costs are a source of concern,” said Stephen Platt, a futures strategist at Chicago-based Archer Financial Services. “We’ve seen a dramatic rise in cost for producers because of energy prices and even the price of skilled labor.”

Should commodities costs continue to rise, it’s likely jewelers will have to again raise their own prices or find new ways to accommodate consumers.

Mark L. Aaron, vice president of investor relations for Tiffany & Co., said the company participates in a hedging program for platinum and silver that helps mitigate higher precious metals costs. He noted, however, that increased material costs eventually get passed on to consumers.

“We’re adjusting our prices if necessary,” Aaron said.

Though high-end jewelry consumers have continued to flex their purchasing power, retailers and designers are beginning to make adjustments for mid- and low-tier customers.

Geri Bondanza, of New York-based jewelry district wholesaler Michael Bondanza Inc., said the company is proceeding cautiously and, in its fashion jewelry, making the most of the metals in each design. She said her company hasn’t recently been as quick to replace its most high-end pieces as it has been in the past.

“They still sell, but they sell slower,” she said. “We’re stocking about 15 percent less.”

Jewelers have also taken to working with alternative materials in an attempt to keep prices within customers’ budgets and expectations.

“Designers who are worried about holding price points are incorporating less expensive materials,” said Jim Rosenheim, chief executive officer of Tiny Jewel Box in Washington. “Someone who was making all gold products is now incorporating silver and other metals. The quality of the workmanship doesn’t necessarily change, but the materials designers work with might.”

Scott Kay, owner and ceo of Teaneck, N.J.-based Scott Kay Inc., hopes that line of thinking could eventually make the fashion accessories segment of the jewelry world less dependent on the price of precious metals.

“The jewelry industry is starting to get out of the mind-set that we’re a commodities industry and into the mind-set that we’re an artistic industry,” he said.

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