Gold has captured the imagination since the beginning of time. A prime symbol of wealth and status, the yellow metal has been used as adornment and a form of currency for millennia. And, since it does not tarnish, all the gold mined throughout human history still looks the same as when it was first extracted from the Earth.
Today, gold is used in science and technology, bought and sold as investments and used as a hedge against inflation or rising oil prices. The major use, however, is in jewellery. As a commodity, the value of gold rises and falls according to the demand. When it comes to gold jewellery, the demand has shown fairly steady average growth over time, although prices fluctuate because of the underlying metal values.
The demand for precious jewellery stems from many factors. It serves as decoration, an indication of status, a store of wealth, and a combination of all three. A number of socio-cultural traditions such as weddings, birthdays, birth of a child and anniversaries, among other occasions, all contribute to the demand for gold jewellery. Many of these traditions are specific to particular cultures, while others are more universal in nature. Because precious jewellery is expensive, sales are generally a function of the buying power of consumers. And, this buying power is changing on a global scale.
Global gold jewellery demand
In the last five years, gold jewellery accounted for an average of 58 percent of the global demand for the metal, compared to 35 percent for investment. According to the World Gold Council (WGC), total gold demand in the third quarter of 2015 was 1,121 tonnes, an increase of eight percent over the same period the previous year. Total consumer demand, ie jewellery, coin and bar, totalled 928 tonnes with a 14-percent up. Strong levels of demand were seen in Europe as a result of the Greek debt crisis and uncertainty in Eastern Europe, with demand climbing 35 percent. In China, investment demand grew some 70 percent, stimulated by the gold price weakness in July, which was further fuelled by the nation’s mid-August foreign exchange reform. In India, the gold investment demand rose six percent. Total global supply was up slightly (one percent) at 1,100 tonnes. On the other hand, mine production was down slightly and recycling declined further in Q3 2015. Analysts expect supply to remain constrained as the mining industry works to manage costs and optimise operations.
During the same period, global jewellery demand was up six percent at 632 tonnes, the strongest third quarter since 2008 and 13 percent above the long-term average. India alone saw a 15-percent increase in jewellery demand, in part because of festival purchases and the decline in prices in July. China was up four percent while demand made double-digit gains in Indonesia, South Korea and Vietnam due to the dip in gold prices. Europe was fairly stagnant, while the United States (the world’s third largest gold jewellery market) and the Middle East saw modest gains of two percent and eight percent, respectively.
Research shows that rising incomes boost jewellery demand, as exemplified by a rising middle class in Asia, which as a region accounts for 88 percent of the world gold jewellery demand. The two dominant markets, China and India, account for around 45 percent of total demand, according to WGC. To get an idea of where gold jewellery might be headed, we need to look into more detail at these two important markets and their impact on demand.
China
In China, children of affluent parents are said to be born with “golden chopsticks” in their mouths as compared to “silver spoons” in the West. Gold jewellery and other ornaments are traditionally given as gifts for a child’s birth and offered as presents during the Chinese New Year, Valentine’s Day and other occasions. The nation accounts for about 30 percent of the world jewellery demand.
China is now the number one gold producer and just recently fell to second place in gold consumption, all in less than a decade since the country’s gold market began to liberalise. A WGC report suggests that Chinese private sector demand for gold will grow by 20 percent over the next three years. As a result, innovators continue to design original financial products and extraordinary jewellery for China’s aspirational and increasingly wealthy consumers. And finding this gold jewellery is not difficult since there are now approximately 100,000 jewellery outlets in China.
Chinese women aged 20 to 30 have the greatest influence on the gold jewellery market, and are moving away from buying or receiving jewellery only on special occasions to become self-purchasers. While they do not disdain ‘pure gold’ (24-karat) articles - which is the great majority of jewellery demand - these young consumers are increasingly purchasing 18-karat gold, often Italian design, as well as gem-set pieces from Hong Kong. In China, Shenzhen is the planet’s largest gold jewellery manufacturing centre, accounting for more than 70 percent of China’s production, with about 85 percent destined for the domestic market.
By 2020, China will add 170 to 200 million new middle class consumers who can afford gold jewellery. With its pro-gold culture, rising middle class and economic growth - even if slowing - as well as a supportive government, the market outlook for gold jewellery is positive in 2016.
India
Historically, India has been the world’s largest consumer market for gold jewellery. It lost this distinction to China in 2013 but gained it back in 2015. The strong incentives for Indians to buy jewellery, made generally in 22-karat, are related to gold’s perceived store of value. As long as the economic backdrop for gold is positive, Indian consumers will first consider gold above any other jewellery options.
By 2020, India will add 75 million middle class households with above average earning power, who have the ability to purchase more gold jewellery for weddings, religious festivals and cultural occasions. While traditional 22-karat designs remain strong and 22-karat bridal jewellery accounts for more than half of jewellery sales, 75 percent of Indian women say they are looking for new designs. Younger consumers also want jewellery that they can wear beyond the wedding day.
Currently, India’s households, temples, and other institutions own around 25,000 metric tonnes of gold, locked away in cupboards and vaults according to Sanjiv Arole, wrote in Solitaire International (October 2015). In order to reduce gold imports, the government came up with a Gold Monetisation Scheme (GMS) last year, whose objectives are to provide a stimulus to the gem and jewellery sector by making gold available as raw material on loan from the banks, and to reduce imports to meet domestic demand. Under GMS, private holdings of gold are lent to the scheme, where they would earn interest until final repayment in either gold or rupees. The GMS could then lend or sell the metal to gold users, such as jewellery manufacturers.
The big question is whether the schemes will be successful in extracting gold from the domestic hoards. In recent years, India has imported 700 to 900 tonnes of gold annually. If this should fall significantly because of GMS, it could have a major impact on the global supply and demand balance of gold, and of course on cost. With prices probably remaining low in 2016 following the declines of the previous few years, it is expected that gold jewellery growth will remain positive in India.
Trends
As mentioned above, the major types of jewellery in China and India are more traditional 22-karat and 24-karat yellow gold pieces. With the younger generation, however, more women are self-purchasing, looking for jewellery that they can wear every day to express their personalities. Consequently, we are seeing more modern designs, some set with diamonds and coloured gemstones, which should continue into 2016 and beyond. To an extent, the gold jewellery market in the Middle East mirrors that of India, with 22-karat pieces making up most pieces sold with the same phenomenon of self-purchasers moving into more contemporary pieces.
In the United States, gold jewellery has traditionally been 14-karat, and with rising prices, pieces are now as low as 10-karat. In Europe, 18-karat gold has traditionally been the norm, although the UK is now going down to as low as 9-karat in its lower-end designs. All over the world, higher metals prices have forced designers to be creative and, as a result, we have seen more openwork pieces, a trend that is continuing in 2016.
In fine jewellery, gold is the favoured support for diamonds and gemstones, and comes in a variety of colours - yellow (still the favourite), white and rose. Traditionally, white gold is the preferred metal in bridal pieces in the West and Japan, unlike in Asia and the Middle East where yellow gold is the most popular tone for all jewellery.
Around the world, though, the Millennials are viewing luxury on their own terms and looking for creativity and design as major factors in their purchases, including the innovative use of coloured gemstones. Very connected by social media, they seek out their peers and role models whose opinions set the taste agenda. Millennials also have a spending power their parents did not have and are quite comfortable purchasing jewellery online, which will increase in 2016.
The younger generation is also increasingly demanding that their pieces are sourced in a sustainable and socially responsible manner - as much for gold as for gemstones and diamonds. To this end, recycled gold has become the metal of choice for a number of jewellery designers, so much so that a major refiner in the United States has created a whole division selling recycled gold, dubbed as more eco-friendly than mined gold.
While few have a reliable crystal ball, many analysts predict the price of gold to hover around US$900 to US$1,250 an ounce over the next year. As Michael Pace, consultant to the luxury goods industry notes: “When prices are low, the middle-range consumer will purchase gold jewellery. When prices rise, the high-end will continue to buy.” Even in uncertain times, such as we are experiencing now, gold jewellery will continue to maintain its glitter as a safe-haven as well as a beautiful form of adornment.
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