While the jewellery sector has not been directly targeted by the dangerous game of sanctions and counter-sanctions played by the United States and the European Union on one side and Russia on the other, it has indeed become one of its collateral victims.
The problem is gold prices. Uncertainty over Eastern Europe caused the bullion to grow around 8 percent in the first months of 2014, peaking at $1,380 an ounce in March. Prices averaged $1,300 in August, before suddenly crashing in September.
Once again, gold is under the spotlight after last decade’s uncontrolled inflation. Between 2000 and 2012, the value of gold increased more than fourfold due to investors using it as a safe haven against the global economic downturn.
The gold jewellery sector was badly damaged by a combination of rising production costs and reduced purchase power fr om customers, who could not afford to spend big money on jewels. Unable to sell at reasonable price, thousands of goldsmiths were forced out of business.
Finally, in summer 2013 prices finally began to make a downward turn, as a recovering US economy made it convenient for investors to sell their reserves and put money back into the stock market. By the end of last year, gold had dropped by 25%.
But the beginning of the Ukrainian crisis halted the fall of gold price abruptly. In January 2014, the general trend reversed, with the bullion entangled in a roller coaster effect caused by price volatility.
Fears of a US-led blockade on Russian financial assets have prompted the Russian government to disinvest its dollar reserves in favour of gold bullions in an attempt to minimize its exposure over Washington’s policies.
Over the month of July, Moscow expanded its gold reserves by 9 tonnes, bringing the total stockpile to a new record of 1,100 tons. The estimate cost of the operation was US$ 400 million.
Moscow reinforcing its gold stockpile was not the only cause of the 2014 price surge. Another reason has been the slowing down of the German economy, which for the first time in decades entered a recession phase (-0.2%).
Sanctions imposed by Berlin played without any doubt an important part in this historical slowdown. The value of German exports to Russia dropped by 15 percent, or €2.5 billion, in the first half of 2014.
With prices soaring, jewellery manufacturers tried to lim it the damage by stocking up more gold. Several Indian goldsmiths took the decision of buying large amounts of gold before the Ganesha Chaturthi festivity, which this year took place at the end of August. Traditionally, festivities are a good occasion for buying jewellery in India.
Unfortunately for them, during the following month the landscape changed abruptly. First, on September 3rd the US dollar made an unexpected leap against its main trading partners. Then, two days later, the governments of Russia and Ukraine, together with representatives of the independentists and of the Organization for Security and Co-operation in Europe, brokered a ceasefire agreement.
With easing geopolitical tensions, by the half of September gold prices had already fallen down to January’s level, and continue to decline.
For those jewellers who had just decided to buy gold this is all but good news. The value of their stock is plummeting and they will have a hard time trying to cover losses at today’s market level.
In April 2013, a similar sharp and unexpected decline in gold price forced several jewellers out of business due to wrong timing in replenishing their stocks.
By simply plotting gold price statistics over the last 12 months with a timeline of major events in Ukraine, the role played by escalations and de-escalations in Eastern Europe appears distinctly.
Investors clearly consider deteriorating political relations between the Russian Federation and the West a major concern in international economy. A prolonged crisis punctuated by threats of an economic war, or even worse, will inevitably destabilize the gold market further.
As long as volatility remains so high, every decision on when to buy gold will be critical. In today’s jewellery industry the skills and knowledge of a stockbroker are more appreciated than those of a fine artisan. The best handcraft products in the world cannot make up for a single bad investment.
For this reason, a smooth realignment of gold price and inflation rate with that of other luxuries is considered a fundamental step for the jewellery industry to restore confidence in gold over the long period.
High prices and high volatility have been pushing goldsmiths towards alternative material, such as silver and bronze, or low-karat gold alloys. Many small and medium-sized producers consider gold to be still too expensive and risky to be viable.
Customers, on the other hand, traditionally estimate gold as their primary choice in jewellery. They often prefer to delay purchases rather than buying non-golden products, thus increasing the industry’s frustrations.
Matteo Butera, Rough&Polished
