Higher Gold Prices, Harder Hit for Jewelry Stores
On September 18th, spot gold prices soared to a record high of $2570.91 per ounce. So far this year, the increase in spot gold has accumulated to over 20%, nearly reaching the full-year increase of last year, sparking a surge of interest in spot gold trading. Following conventional wisdom, one might expect the gold jewelry market to follow suit with the skyrocketing gold prices.
However, the reality is that many gold jewelry merchants are facing tough times. In the first half of this year, a wave of gold shop closures occurred domestically. Data disclosed by Chow Tai Fook shows that in the second quarter of 2024, it closed a net of 91 stores in the mainland market, and 89 in the first quarter, totaling a net reduction of 180 stores in just half a year. Many other gold jewelry merchants, such as Chow Sang Sang, have also experienced store closures and declining performance.
According to data from Tianyancha, 414 gold-related enterprises established within half a year this year have gone bankrupt.
The windfall from the surge in gold prices seems to have bypassed the gold shops. Why is there such a stark contrast between the spot gold and gold jewelry markets, leaving many puzzled? For us ordinary people, what is the difference between spot gold and gold jewelry?
01 A New Wave of "Gold Fever" is Coming
Under the surge in gold prices, some are selling bracelets while others are buying gold bars. According to a report from Guangdong Radio and Television, recently someone cashed in a pile of gold, including more than 320 grams of gold bars and more than 450 grams of gold jewelry, with over 120 grams of dragon and phoenix bracelets, totaling a value of more than 400,000 yuan. Some netizens commented, "Why not cash out at such a good time, waiting for it to drop?" At the same time, many people are buying gold bars.
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An individual investor stated that when they bought a kilogram of gold bars in January this year, the base price of gold was 480 yuan/gram, but now the base price has risen to 582 yuan/gram, earning 100,000 yuan in just nine months. Due to the significant price increase, many believe that the best investment this year is gold bars, thus significantly increasing their investment expenditure in gold. The World Gold Council's "2024 Q2 China Gold Market Review and Trend Analysis" shows that investment demand for gold ETFs and gold bars and coins has reached a new high. Statistics from the China Gold Association show that in the first half of this year, the consumption of gold bars and coins increased by 46.02% year-on-year.
Undoubtedly, a gold craze is on the horizon, driven by the continuous rise in gold prices. So, what is driving the price increase? Recently, the expectation of interest rate cuts by the Federal Reserve has been the biggest driving force behind the rise in gold prices. The world is watching whether the Federal Reserve will cut interest rates in September this year, which not only directly affects global economic changes but also the trend of gold prices.
For instance, as a non-interest-bearing asset, a rate cut by the Federal Reserve would reduce the holding cost of gold and the opportunity cost for investors to buy gold, thereby increasing the demand for gold.
Secondly, rate cuts usually lead to a weaker US dollar exchange rate. Since gold is priced in US dollars, this reduces the cost for investors holding other currencies to buy gold, thereby increasing gold demand and driving up gold prices.
Furthermore, rate cuts may lead to inflation, and gold is seen as an effective tool against inflation. Thus, in a situation where inflation expectations are rising, investors tend to buy gold, which pushes up the price.
In addition, rate cuts reduce the yield on holding US dollars, and funds flow to assets with relatively higher returns, such as gold, boosting price growth. Over a longer period, gold, as a financial hard currency, has extremely high risk resistance compared to other financial products. The greater the uncertainty in the global economy, the higher the value and price of gold will rise. Looking at the global situation this year, Middle East conflicts and other geopolitical risks have created a series of complex uncertainties, increasing investors' risk aversion and driving up gold prices. In summary, under the influence of various factors, gold has been in a continuous upward trend this year. However, many gold jewelry merchants are on a downward trend. Why is that?
02 The Lonely Gold Shops in the Gold Craze
The Mid-Autumn Festival should have been a peak sales season for major gold shops. However, many stores do not have the usual stream of customers. In a shopping mall in Wuhan, only a few customers are scattered among a row of gold shops, and some staff members say that customer traffic and performance have plummeted compared to the past. In fact, the data from the first half of this year has already shown this.
From April to June this year, Chow Tai Fook's retail value decreased by 20% year-on-year, with a 18.6% decrease in mainland retail value and a 28.8% decrease in Hong Kong, Macau, and other markets. Capital is obviously not optimistic about this performance, with Chow Tai Fook's stock price falling from a high of 12 yuan in March this year to 6 yuan now, almost halved. In addition to Chow Tai Fook, other gold jewelry merchants are also struggling. Luk Fook Group's operating data for April to June this year shows an overall retail revenue decrease of 23% year-on-year, with a 31% decrease in Hong Kong and Macau markets and a 3% decrease in the mainland market. In terms of stores, Luk Fook Group has closed a net of 99 stores worldwide and 102 stores in the mainland. According to Chow Sang Sang's performance for the first half of 2024, both the company's turnover and net profit have declined. The consolidated turnover from continuing operations decreased by 13% to 11.313 billion Hong Kong dollars, and the profit attributable to the owners of the company was 526 million Hong Kong dollars, a decrease of 36%.
Additionally, in the first half of this year, Chow Sang Sang opened 25 new stores and closed 47 stores, resulting in a net reduction of 22 stores. Why are the performances of these gold jewelry merchants declining amid the gold craze? The main reason is the reduced demand in the consumer market. Statistics from the China Gold Association show that in the first half of this year, the consumption of gold jewelry, which has always performed well in the past, decreased by 26.68% year-on-year. Data from the Shanghai Gold Exchange and the World Gold Council show that the demand for gold jewelry in the Chinese market in the second quarter of this year reached a new low for the same period over the ten-year average (2014 to 2023).
Why, with the surge in gold prices and the increase in demand for spot gold, has the demand for gold jewelry declined? First, we must distinguish between spot gold and gold jewelry. For gold jewelry merchants, spot gold is the raw material, equivalent to "flour," which they need to process into "bread" to create brand premium.
Under normal circumstances, the price of gold jewelry from most merchants is 20% to 30% higher than the international gold price, plus an additional processing fee. When spot gold rises, it leads to an increase in the "purchasing" cost for gold jewelry merchants, which in turn pushes up the selling price of gold jewelry products. Nowadays, consumers are rational and cautious, and they will not place orders when the price of gold jewelry exceeds a certain level. In essence, buying spot gold is an investment with high expectations. Buying gold jewelry, on the other hand, is a consumption and not suitable for investment, so the motivation is not strong. At the shareholders' meeting in May this year, the chairman and general manager of Chow Sang Sang Group also stated that due to the rapid rise in gold prices this year, consumer desire is constrained, and the sales performance is worse than expected.
A gold jewelry merchant told the author that most of the customers buying gold jewelry this year are those in urgent need, such as newlyweds who need "three golds" or "five golds," and very few people buy gold jewelry as an investment. What is even more troubling for merchants is that a considerable number of young people who are getting married do not even go to gold shops to buy gold jewelry; instead, they go directly to banks to buy gold bars and have them processed into jewelry, which is cheaper than in gold shops. This generation of young people has taken saving money to the extreme when it comes to buying gold.
03 How Can Gold Jewelry Merchants Break Through?
In fact, it is not only China's gold jewelry consumption market that is declining; many other countries are experiencing the same trend. Wang Lixin, CEO of the China region of the World Gold Council, stated that the significant decline in gold jewelry consumption demand in the second quarter of this year is not a "Chinese characteristic"; major global gold jewelry consumption markets such as India, the Middle East, the Americas, and Europe have all shown a downward trend due to the historical high prices of gold. So, must gold jewelry merchants just bear the burden and move forward amid the surge in gold prices? In fact, there are still some ways to promote business growth.
Firstly, it is essential to identify the main consumer group for gold jewelry, which is undoubtedly young people at present. Data shows that in 2023, the young group aged 25 to 34 gradually became the main force in gold consumption, with the proportion of young people buying gold increasing from 16% to 59%.
The China Gold Association stated that in the future, consumers under the age of 25, the "Generation Z," will become the main force in gold consumption. Gold jewelry merchants should focus more on young people, as they are the group that can bring more growth. Secondly, young people are not averse to gold jewelry; they are more sensitive to prices on one hand and have more enthusiasm for personalized jewelry on the other. Therefore, gold jewelry merchants should attract young people by reducing prices and打动 them with design.
For example, the recent domestic first 3A game "Black Myth: Wukong" has become extremely popular among young people, and many merchants have followed the trend by launching gold jewelry related to Black Wukong, such as Chow Sang Sang's "Golden Hoop" ring and Ming Jewelry's "Wukong Knot" bracelet, which have attracted the attention of many young consumers. In addition to keeping up with the hot topics that young people care about, getting close to their interests and preferences is also a strategy. In a Trendy Hongji store in Huangpu District, Shanghai, one can see gold jewelry related to Doraemon, Crayon Shin-chan, and other cartoon IPs. These jewelry items are mainly aimed at the young consumer group and are quite popular, with some products even waiting for restocking. Some gold jewelry merchants have also locked in on the popular Chinese style culture among young people, such as Chow Tai Fook's cooperation with the Palace Museum this year to launch a series of Palace-themed co-branded gold jewelry, which has also sold well.
It can be said that aiming at young people's IP co-branded models is becoming the traffic code for gold jewelry merchants. Although the rise in spot gold prices has brought operational pressure to merchants, as long as they aim at consumers and meet potential new needs through innovation, it is still possible to tap into new growth. Finally, the author wants to say that whether everyone is investing in spot gold or consuming gold jewelry, it is a significant expenditure and should be rational. Many people believe that gold has risk-avoiding and stable attributes, so they rush to join the "buy gold team." However, there is still uncertainty about the extent of the Federal Reserve's interest rate cuts, and many other factors can cause gold price fluctuations to amplify. Therefore, everyone should maintain a cautious attitude. Don't think you understand gold; the driving factors behind the gold market are far more complex and changeable than imagined.