Is gold still the ultimate safe-haven asset? Yes, it appears, according to its stellar performance amid the coronavirus crisis.
Continuing to register constant increases, the rising price of gold, valued on May 19 at $1,743 an ounce, might significantly dent the profits of jewelry companies this year.
According to Luca Solca, senior research analyst, global luxury goods at Bernstein, the issue might affect more small and medium-sized companies, rather than jewelry giants. “In a very uncertain global scenario, the price of gold increases as it is an ultimate safe heaven, especially in light of the programs of debt monetization predisposed by the major international central banks. This is an issue for the weakest brands, since their products will cost more,” Solca said.
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“As it comes to luxury, we can say that trends in the gold price have an impact especially on small-medium brands as a substantial increase in the price of gold would significantly increase production costs and make their business unsustainable. As a result, small to medium-sized jewelry brands can suffer,” agreed Filippo Bianchi, managing director and partner at Boston Consulting Group, highlighting that an analysis of revenue growth of brands that heavily use gold in their products shows that sales tends to correlate inversely with the price of gold. More precisely, revenues correlate directly to the expectations of growth in the gold price by consumers.
“In general, however, if we focus on big and high-end luxury brands, we expect that it won’t have a big impact since its weight on costs is marginal compared to the cost of craftsmanship in assembling products and skills/capabilities required to make these products. Therefore the overall effect of price changes in gold is limited on these maisons,” added Guia Ricci, principal at Boston Consulting Group.
According to Marco Carniello, group brand director jewelry and fashion at IEG, the company organizing the Vicenzaoro jewelry trade show, Italian jewelry companies are well-equipped to manage raw material fluctuations and they also have a competitive advantage. “The most serious issues they have to face are determined by price shocks rather than constant increase or decrease trends,” Carniello said.“In general, Italian goldsmithery and jewelry feature an outstanding design value and in most of the cases the amount of gold crafted to make the jewelry determines only a part of the overall value,” said Carniello, forecasting that Italian jewelry brands in the next months might adopt technologies to create products offering the same volumes and design with less use of gold, giving companies the opportunity to leave prices unchanged for the final consumer. Channeling uncertain times due to the COVID-19 crisis, Italian high-end jewelers will try to avoid having to increase final product prices in order to compensate for the higher price of gold.
“So far, we don’t plan to raise prices, but if we have to do that, changes will be tiny. Our decision to keep the prices unchanged wants to confirm the credibility of the brand on a global scale and show our respect to our clients in such a difficult moment,” said Vicenza-based jeweler Roberto Coin, who added that since the beginning of the year, the industry was expecting that the price of gold to increase significantly. “For sure, the health emergency has further boosted and accelerated this increase. The extraordinary money injection made by the different countries to support the difficult economic situation might determine a further growth of the price of gold,” he said.
To work around the problem, in future collections, Coin might experiment with other materials. “In the past, we already adopted different materials, such as silver, steel, wood and combining them we created successful collections. Among them, I particularly remember CapriPlus, which featured ebony and gems, which felt quite unusual for the jewelry industry,” the jeweler said. “But beyond the commercial success, we understood that our clients want the brand to stay loyal to its identity, which means that gold has to remain the protagonist of our collections. The introduction of stones will pepper the design, but won’t radically change our identity. This year, the margins will be smaller but credibility has always been the most important value we invest in and today this is more important than ever.”
“The price of gold actually spiked in the past two months, when we have been closed. We are now monitoring the situation,” said Silvia Damiani, vice president of the Damiani Group, which operates the Damiani, Salvini, Bliss, Calderoni jewelry brands, as well as the Rocca 1794 retailer and the Venini glassmaker. “For the moment, we don’t plan to raise prices. We want to understand if this significant increase is connected to speculations linked with the crisis and we want to see how consumers react.”
Despite the uncertainty of the markets, Damiani sounded optimistic about the restart, especially leveraging the timeless appeal of jewelry as a safe-haven asset. “The positive side of the stellar price of gold is that our inventory gained value and in this economic and social climate I think that people are keen to invest more on something durable, which, as the market is showing, can increase its value also during a health and economic emergency,” she said.