“The retail price of gold jewelry is headed higher – a lot higher.” That’s what IDEX Online Research Director Ken Gassman told Dow Jones earlier in December in an exclusive interview.

 

The video interview with Dow Jones, for its online MarketWatch, was held in New York at the company’s studios in lower Manhattan. Gassman spoke with business reporter Milena Jonanovitch. The following is an edited version of their question-and-answer session.

 

Dow Jones: Gold prices are up sharply. Have gold jewelry prices risen, too?

 

Ken Gassman: Over the past two years, gold prices have risen from just over $500 per ounce to just over $800 per ounce, a gain of about 52%. However, gold jewelry prices at the producer level have risen by only 13% in the same period, according to the Bureau of Labor Statistics. At the retail level, the price of gold jewelry is up by an estimated 10% over the past two years.

 

So, in answer to your question, gold jewelry prices have not kept pace with the inflation rate of gold bullion used to manufacture gold jewelry.

 

DJ: Why haven’t gold jewelry prices risen at the same pace as the price of gold?

 

KG: There are several reasons that gold jewelry prices haven’t risen substantially over the past couple of years. First, in lower-priced jewelry – say, under $500 retail – labor is the largest cost component, followed by the cost of the gold content. While the cost of gold has risen, many gold jewelry manufacturers have moved their production facilities to overseas locations with much lower labor costs. China and other countries in Asia are important suppliers of gold jewelry to America; the cost of labor in those locations is a fraction of the cost of U.S. labor. These lower labor costs have largely offset higher gold costs in the jewelry. That way, suppliers can continue to keep gold jewelry prices at reasonable levels.

 

In addition, gold jewelry suppliers have absorbed some of the increased cost of gold. The industry is highly fragmented, and no single supplier has pricing power. A gold jewelry supplier knows if he raises his prices too much, the competition will take the business from him.

 

DJ: Are there any other reasons that gold jewelry price inflation is much more modest versus the sharp rise in the price of gold?

 

KG: Actually, there are two reasons. The first, one that most consumers won’t see unless they look closely, is that jewelry suppliers are producing more jewelry with a lower gold karatage. For example, a gold chain that might have been made with 14 karat gold last year will be made with 10 karat gold this year. The “look” is about the same, but there is less gold in a 10 karat chain. By reducing the gold karat weight in the chain, retail prices appear to remain relatively unchanged. The customer is getting less gold with the 10 karat chain, but the value of the gold content in that chain remains about what it was when it was produced with a higher purity of gold.

 

Second, and this is something that only bankers and financial analysts will appreciate, the inventory turn on jewelry, including gold jewelry, is about one time per year. So, the gold jewelry that is being sold currently was theoretically bought by the retail jeweler about a year ago when gold was just over $600 per ounce, significantly below today’s $800 per ounce price.

 

DJ: So does this mean that gold jewelry prices are poised for a sharp increase?

 

KG: You bet! Retail jewelers have to replace their lower cost inventory with high cost inventory. This means that the retail price of gold jewelry is headed higher – much higher – beginning in early 2008.

 

We’ve already had a public announcement by Sterling, which operates Kay Jewelers, Jared and a host of regional brands, that they plan to reprice their entire line of jewelry – including core pieces – right after Valentine’s Day 2008. Other jewelers will follow Kay’s lead – they will be forced to raise prices in order to maintain a reasonable profit.

 

DJ: So, our listeners should buy gold jewelry now?

 

KG: If shoppers want to own gold jewelry at today’s prices, they need to buy now. Prices will rise in 2008 and beyond. Suppliers aren’t about to continue to absorb higher gold prices and remain in business. Retail jewelers have experienced shrinking margins for years, and they no longer can earn a reasonable profit unless they raise prices.

 

But rising gold commodity prices are just one factor driving higher retail jewelry prices. In the same two-year period, silver prices have risen by about 63% and platinum prices are up just over 50%. It is important to note, however, that gold jewelry represents about 10% of all jewelry sold in the U.S., based on retail sales, and gold mountings and other gold jewelry that include precious stones accounts for as much as another 20% of all jewelry sales. Silver and platinum jewelry together account for 4% of the value of all jewelry sold, at most.

 

Diamond prices overall are up only about 2% over the past two years, but this is a somewhat misleading statistic. Small diamonds used in inexpensive “flash for no cash” jewelry really haven’t risen much at all, but larger diamonds – say, 3 carats and above – have doubled in price.

 

Just as prices of other commodities have risen, the price of commodities used in jewelry manufacturing – particularly precious metals – have also risen sharply.

 

Jewelry is as inexpensive now as it is going to be for a long time. Shoppers need to buy now for the best price.

 

DJ: Is jewelry – diamond jewelry and gold jewelry, in particular – a good investment?

 

KG: Unequivocally, jewelry is not an investment product like stocks, bonds or real estate. You buy jewelry because it marks a significant life event – an anniversary or birthday, for example. You buy jewelry because you want to show a token of your love for someone else. You buy jewelry because you like how it looks, how it makes you feel. You don’t buy jewelry as an investment.

 

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