Gold price turns high-end jewellery into a dead weight

Demand for the yellow metal will decline as bling sales fall

A gold price of more than $1000 an ounce is not all good news for the industry because it is causing jewellers to become thrifty.

Jewellery gold consumption last year was about 2427 tons, a 23percent decline from 1998.

Philip Klapwijk, chairman of gold market research firm GFMS, expects worldwide gold supply to remain level despite declining output from South Africa.

Klapwijk presented GFMS's latest annual survey in Johannesburg last week.

Last year, GFMS claimed that China had overtaken South Africa as the world's biggest gold producer.

"China is admittedly an opaque market. But we are pretty sure of our data because we look at the few refineries in the region, and these show China is producing more gold now than South Africa," Klapwijk said.

The gold price has soared on the US sub-prime crisis, with high-net investors buying it as a safe haven for their nest eggs.

Klapwijk expects more "skeletons in banks' closets" will keep the gold price high for another two years, but it will inevitably decline back to around $600/oz again.

One reason is the current high prices have made gold jewellery unaffordable and jewellery remains gold's primary market.

According to GFMS's research, more than half of the 161000 tons of gold which has been mined has been turned into jewellery.

"Even in Japan, where purity is a big selling point, jewellers are switching from 24 carat to five carat rings," Klapwijk said.

That represents the gold content of the metal used to fabricate the jewellery dropping from over 99percent to around a fifth.

"At five carats, it isn't even gold anymore. ''Japanese jewellers agree, but they tell me now that people are buying five carats, they are unlikely to ever sell 24 carats again."

Around 18percent of the world's gold is held by central banks. Exchange traded funds and other private investors hold 16 percent, and "other fabrication" accounts for 12 percent.

Consumption of gold in electronic devices is small but growing: 224 tons of gold went into cellphones and other electronic devices last year, up 37percent from 1998.

A problem with gold is that, unlike other commodities, it is not consumed.

"Gold is always available if the price is right," Klapwijk said.

Source: TheTimesSouthAfrica