Summer holidays are a great time to catch up on one’s reading. Picking only materials by perennial optimistic and good humored authors, I selected some of the recent reviews by my colleague Ken Gassman. Earlier this month he reported good news for jewelers who target the bridal market. “Gold wedding band sales have been stable since 1993, when the World Gold Council (WGC) began keeping statistics. Gold wedding rings are just the proverbial “tip of the iceberg” for jewelers.” Gassman then projects that the bridal market will grow by at least 30 percent over the next decade as a new population bubble – Millennials, the children of the Baby Boomers – marry. Forecasts call for the number of annual weddings in the U.S. to rise to nearly 3 million annually from a run-rate of about 2.2 million for the past several years.”

             By focusing on the good news in the long term, however, it is easier to ignore the worrying signals short term. This is vacation time; who wants bad news?
            I cannot help but look at the supply side. The WGC this week reported on gold supply/demand in the second quarter of 2006. The Council noted a massive drop in jewelry demand, which represents some 70 percent of total gold demand, of 24 percent over the same period last year. The higher gold price is clearly having a very sharp negative impact on demand – especially in India, which accounts for a third of world gold jewelry demand and where demand dropped 38 percent.

            Nevertheless, quarter-on-quarter jewelry demand (second quarter versus first quarter) actually increased by 2 percent even though the average gold price had jumped by 13 percent.    

           Trying to look for the positive: when gold price goes up, jewelers tend to “shave” weights off the jewelry they are selling to maintain the price under certain below price points – and they are turning to diamonds and other gemstones. The extreme price volatility in gold has affected the distributors’ appetite to maintain stocks (not everything can be hedged) and the WGC quite “worriedly” refers to the “ongoing shift from plain jewelry to gem-set.” Bad news for the Council; good news for us.

            Gassman’s data refers specifically to the United States market. Gold jewelry production in the United States hit a 14-year low last year, greatly caused by the inroads made by jewelry imports and – and this is worrying – by a small decline in domestic jewelry consumption when measured in gold weight. 

            Interestingly, the rising gold price does not seem to have an immediate impact on consumer purchases. Last year’s data suggests that most retailers did not raise their prices, mostly because of supplier agreements, which ultimately saw manufacturers and wholesalers absorb a large portion of the higher raw material costs. (This sounds awfully familiar to a diamond person.) The same, however, could not be said for the independent and small chain stores, which lacked the buying power of the major retailers. Thus, as a result of their reduced price competitiveness, this sector continues to see a raft of closures. This, in contrast, with the top-end jewelers that continue to do well, as their target consumer groups remained unaffected by, for example, rising heating and gasoline prices.

             Just as with diamonds, we are constantly watching the actual cost of production of gold worldwide. In 2005 the gold price averaged $444.45, its highest level since 1987; the average was 9 percent above 2004. Gold’s global mine production (of 2,519 tons in 2005) rose 2 percent in volume and 7 percent in value terms. The weighted average price of the worldwide gold output was $269 per ounce. Similarly to diamonds, these cost averages are very much influenced by the strength/weakness of the South African rand vis-?-vis the U.S. dollar. Let’s go back to Gassman's predictions about the future weddings of the baby boomers’ children – and let’s concentrate on the baby boomers themselves.

            I have been wondering if these aging baby boomers still have a role to play in consumption after retirement. Asking this question, I received astounding answers, with some suggestions that the retirement of baby-boomers may actually become the beginning of an economic disaster, including a stock market crash.           

The “Future” of the Baby Boomers… 

            Quite shocked, we did some further homework. Apparently there are many members of U.S. Congress who hold similar fears and they asked the General Accounting Office (GAO) in Washington to research the issue. The GAO, in a just published 70-page study, says that “the aging of the U.S. population is expected to present great fiscal and economic challenges in the decades ahead. The first wave of the baby boom generation, the 78 million Americans born between 1946 and 1964 and alive as of 2005, will turn age 62 and become eligible for Social Security benefits beginning in 2008. The retirement of the relatively large baby boom generation, combined with other demographic trends, is expected to strain the nation’s retirement and health systems. This impending event has also raised concerns about the potential market effect should baby boomers sell off large amounts of financial assets in retirement. If proportionally fewer workers are available to buy these assets, some market observers fear that the increase in supply of stocks, bonds, and other financial assets relative to demand may place downward pressure on asset prices. At the extreme, some observers have raised the possibility of a market “meltdown,” a sharp decline in stock or other asset prices, precipitated by the baby boom retirement. In contrast, others have noted that such an outcome could be mitigated by a rising demand for U.S. financial assets from developing countries and by immigration.” 

            There is good news. The GAO’s analysis of national survey and other data suggests that baby boomers would be unlikely to sell enough financial assets in retirement to precipitate a market meltdown, or a sudden and sharp decline in asset prices (including houses). Firstly, a large majority of boomers have few financial assets to sell, and the small wealthy minority that holds the large majority of this generation’s assets will likely need to sell little, if any, of their assets in retirement.

                The GAO’s examination shows that the wealthiest 10 percent of boomers owns about two-thirds of the financial assets held by this generation, excluding assets held indirectly in defined benefit (DB) pensions. About one-third of all boomers do not own any assets in stocks, bonds, mutual funds, or retirement accounts. Secondly, if baby boomers behave like current retirees, a rapid and large sell off of financial assets also appears unlikely. The GAO analysis of data on current retirees’ saving and investment behavior reveals that most retirees slowly spend down their assets in retirement, with many actually continuing to accumulate assets.

            Other factors that would mitigate against a sharp and sudden decline in asset prices include the 19-year span over which boomers will reach retirement age, the extended life expectancy of boomers, and the expected increase in boomer employment past traditional retirement ages, which would facilitate additional asset accumulation and reduce the need to sell assets to provide retirement income. Finally, to the extent that boomers may be less reluctant than prior generations to treat their homes as a source of retirement income through such strategies as reverse mortgages, they may also depend less heavily on selling their financial assets for income. Thus, concludes the GAO, “Researchers and financial industry representatives largely expect the baby boom retirement to have little or no effect on stock and bond markets.”

             What a relief. There is also some very good news in the GAO report for the children of baby-boomers – the category Gassman calls “the Millenials”. Baby boomers are determined NOT to spend their money because they do want to leave an inheritance to their children! Says the GAO, “A factor that may explain the observed slow spending down of assets among retirees is the bequest motive. National survey data show that many retirees intend to leave a sizeable bequest, which may explain their reluctance to spend down their wealth. Because more than three-quarters of retirees have a bequest motive, many may never sell all of their assets. To the extent that retirees bequeath their assets instead of selling them for consumption, the result could be an intergenerational transfer rather than a mass sell-off that would negatively affect asset markets.”

            This gets me back to the good news of Gassman’s survey on the future weddings of the baby boomers’ children. If we don’t live “too” long, they will have far more money to spend on their wedding jewelry – and if we decide to hang in there somewhat longer, our money will be spent on the gifts at anniversaries or at special moments of the Millennials. But jewelers shouldn’t write off the baby boomers. “The share of the population aged 65 and older is projected to continue increasing until 2040 – at which point it is expected to plateau.” Don’t write off the Golden Years – yet.
 

            Have a Nice and Relaxed Weekend.