“Jewelry Industry 'Hostage' to Gold Bubble”

Jewelry Industry 'Hostage' to Gold Bubble

Posted: 22 Dec 2010 07:33 AM PST

Jewelry makers and vendors are trying to adjust to the brutal surge in the gold price, from reopening old mines to designing products that use less of the precious metal

By Ben Elgin, Madelene Pearson and Benjamin Harvey

(Bloomberg) — In June, Bill Doddridge flew his single-engine Cessna 400 to Twentynine Palms Airport near California's Mojave Desert and headed for an abandoned mine, a .45-caliber pistol on his belt. He was looking for gold.

The firearm was to ward off rattlesnakes. The precious metal would be a sideline to his jewelry business. He sifted through dirt, climbed into shafts, and later bought the property, shuttered since World War II.

"If we're not making money selling gold, we might as well get into mining it," says Doddridge, 55, chief executive officer of Tustin, California-based Goldenwest Diamond Corp., a privately held company that owns 17 Jewelry Exchange stores and an online site. "It's a whacked out world."

The rising value of bullion—reaching a record $1,431.25 an ounce on Dec. 7—has upended the economics of jewelry for buyers and sellers alike, with a mix of outcomes around the world. U.S. purchases of gold jewelry have fallen 36 percent by volume in three years. Women in India, where demand is booming, are buying hollow bangles made to look like solid gold. European jewelers are mixing the metal with steel and ceramics. Turkish exporters are closing offices as orders fall.

"The jewelry business is being held hostage by something completely out of its control," says Michael Langhammer, CEO of Quality Gold, a Fairfield, Ohio, privately held wholesaler that Langhammer says is redesigning pieces to use more silver.

Customers' Buying Power

Gold's price has climbed about 200 percent since the debut in November 2004 of a bullion-backed exchange traded fund created by a World Gold Council trust, allowing the metal to be acquired on the New York Stock Exchange as easily as shares.

Global purchases of gold jewelry were $20.9 billion by value in the third quarter, 38 percent above the year-ago period, according to the London-based World Gold Council, which represents mining companies, and GFMS Ltd., a research firm in London. Demand by volume has diminished in some countries and increased in others, and the gold jewelry industry has to adjust to customers' buying power depending on where they are.

Not knowing how high the price will go makes deciding on styles and ingredients a challenge, Doddridge says. He acquired the mine, for a sum he won't disclose, as a defense. "Gold is the only thing screwing up this business," says Doddridge, who expects his total 2010 sales to be up about 7 percent and sales of gold items to be down about 25 percent.

Tungsten, Titanium

Designers are scaling back on gold parts or relying on gold that isn't as pure. At Richline Group, a manufacturer in Mount Vernon, New York, owned by Warren Buffett's Berkshire Hathaway Inc., 40 percent of sales are in gold, compared with more than 70 percent in 2006, says Chief Marketing Officer Mark Hanna. Signet Jewelers Ltd., with more than 1,300 shops in the U.S. and about 550 in the U.K., is offering more silver, tungsten and titanium, says Ed Hrabak, senior vice president of merchandising at the world's largest jewelry retailer.

Rome-based Bulgari SpA, the world's third-largest jeweler, fine-tuned the diamond encrusted rings in its B.zero1 line, which were solid gold in 2000 and incorporate ceramics now.

"We are focusing more than in the past on the combination of different materials," says Francesco Trapani, Bulgari's CEO. "This is an interesting way to introduce something more appealing, more exciting to the final client—a way of proposing things that can be less expensive."

'Gold-Centric' Customers

Tara Jewels Ltd. invented Honeydium, a mix of silver, copper, zinc and indium that the Mumbai-based company says on its website gives "the perception" of 10-karat yellow gold.

In India—both the largest consumer of bullion and biggest manufacturer of gold jewelry—the passion for gold bangles, necklaces and earrings is centuries old. Despite the price, third-quarter growth in demand for gold jewelry was 36 percent, according to the World Gold Council.

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