The precious metals crash is a gift to the jewelry companies.
Gold prices were already hitting a five-year low when a seller from China dumped 33 metric tons in two minutes on Monday, causing trading in the precious metal to halt twice when prices collapsed by $40 an ounce. Gold hasn’t been alone in the selling. Silver prices began to drop in May and now selling in that metal looks to be accelerating as well. Silver has declined 0.6 percent to $14.80 an ounce. Platinum has broken below its 15-year trend line and momentum watchers believe it will also continue to sell off. Platinum for immediate delivery dropped 1.6 percent to $978.76 an ounce, the lowest close since 2009.
Jewelry companies like Tiffany and Signet, which owns Zale’s, Jared and Kay Jewelers, hedge their commodity costs to protect themselves from swings in precious metal prices. However, hedges are usually placed to protect the companies from the prices moving higher, not lower.
“I think it’s a happy surprise for them,” said Laura Champine, an analyst with Cantor Fitzgerald, “Tiffany’s is not completely hedged. The question is whether the gross margin lift is enough to offset weak sales.”
Champine added, “Tiffany has been able to raise prices, so these lower gold prices are definitely good news to gross margins.” A real bonus because Tiffany’s sales of gold jewelry rose in the first quarter, but that growth was offset by soft sales of silver pieces, such that fashion jewelry sales were unchanged in the three-month period. Worldwide net sales for Tiffany decreased five percent to $962.4 million in the first quarter.
Kristine Koerber of Barrington Research thinks Tiffany will benefit from the favorable commodity environment although it won’t be immediate. “We’ll see some tailwinds over the next quarter or two from lower prices,” said Koerber.
She pointed out that Blue Nile buys its product in real time and will benefit from the gold crash, but that the site is predominantly a diamond seller. Blue Nile reported that sales increased 2.6 percent in the first quarter to $106.5 million and the stock is up 20 percent for the past year.
Signet reported its first quarter total sales had jumped 45 percent $1.5 billion, but its guidance of earnings per share for the second quarter of $1.11 to $1.16 disappointed analysts and the stock has sold off, tracking gold on the way down. Signet stock is up 12 percent for the 12 months, but in the last three months has dropped 9 percent. It could use the gift of cheaper gold.
David Bouffard, Signet vice president, said, “The jewelry industry is generally affected in the price and supply of diamonds, gold and, to a lesser extent, other precious and semiprecious metals and stones. The cost of raw materials is only part of the costs involved in determining the retail selling price of jewelry, with labor costs also being a significant factor. It’s Signet’s policy to minimize the impact of precious metal commodity price volatility on operating results through the use of hedging instruments.”
Greg Kwiat, chief executive officer of Fred Leighton, agreed that the drop would benefit the jewelers. “I think the whole jewelry industry will benefit from gold at a lower price,” he said. Kwiat pointed out that $1,100 gold was much more consumer friendly than $1,900 gold. Kwiat also noted that the investment demand for gold was the culprit behind the volatility in physical gold prices.
According to David William, director at Strategic Gold Corp., there is a 90-to-one ratio of paper gold to physical gold. This huge amount of investment gold, or paper gold, versus physical gold causes the prices to swing at the whims of traders. Kwiat said the volatility in gold makes it hard for jewelers to design and plan. Having said that, Kwiat still finds $1,100 gold a welcome gift even if jewelers aren’t passing the lower price on to shoppers.
“Consumers are always hopeful that the crash in metal prices will result in lower retail prices; unfortunately that is not always the case,” said Alberto Petochi, President of ANIMA Group, a company that markets, brands and sells Italian jewelry companies. The jewelry industry veteran said, “I do believe that if the prices of fine metals stay at these low prices, we will see new collections coming out at better prices since you are buying gold today for future collections as well.”