Runaway demand: a display of watches in a shop window celebrates the forthcoming Chinese year of the horse
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The once white-hot growth enjoyed by the hard luxury industry appears to be over – but the news is not all bad.

Consumer appetite – particularly for fine jewellery – has remained resilient and many industry observers are predicting a bright year.

Growth slowed considerably in 2013, damped by falling Chinese consumer demand – triggered in part by a recent government clampdown on corruption and ostentatious gift-giving that flattened Swiss watch exports.

The value of gold, the sector’s core raw material, plummeted 28 per cent to $1,204 a troy ounce, thwarting the end of a spectacular 12-year bull run. The silver price sank 36 per cent, while diamonds and other gemstones continue to be hampered by supply-side problems.

The macroeconomic conditions that fuelled a rush to offload bullion look set to continue in 2014 – including a rebounding global economy, buoyant stock prices, flat inflation rates and the Federal Reserve’s announcement late last year that it would start tapering quantitative easing.

But investor jitters witnessed in the financial markets do not seem to be weighing heavily on the minds of wealthy shoppers with a taste for the yellow metal.

“Total worldwide sales of gold jewellery were up 20 per cent in 2013, indicating that most markets remain unfazed by the volatility we’ve seen since April,” says Marcus Grubb, managing director of investment strategy at the World Gold Council.

“Although western markets have traditionally been driven by discretionary spending and personal taste, Asia – where investment remains the key motivation and sales are currently extremely strong – is moving that way too.

“People are purchasing both for short-term enjoyment as well as with long-term asset potential in mind. It’s a reflection of the recovery of confidence in the global economy.”

WGC data show demand for gold jewellery, bars and coins reached a year-to-date record in the first nine months of 2013 of 2,897 tonnes.

Looking ahead, weakness in the critical Indian market is expected to continue thanks to new tariffs imposed by the government on gold imports. But gold jewellery demand in China surged in December in anticipation of the lunar new year on January 31, and is set to continue in the same vein. Southeast Asian economies such as Thailand, Indonesia and Vietnam are also expected to shine, recording double-digit sales growth in 2014.

Industry observers say that soaring demand for earrings, bracelets and necklaces, coupled with lower raw material costs, constitutes a winning equilibrium for luxury brands.

“For most luxury companies, these lower prices will sit nicely on their P & L sheets. They’ll be good for gross margins, although it can take six to 12 months to appear, depending on the size of their inventories,” says Thomas Chauvet, an analyst at Citigroup.

“One of the reasons the luxury sector is attractive to investors is its ability to absorb the impact of potential commodity prices and currency headwinds and pass them on to the consumer.”

Watch and jewellery prices may have rocketed alongside that of gold over the past decade, but one thing executives say we will not see in 2014 is the price of those products coming down. Consumers purchase hard luxury pieces as permanent investments, offering price stability and the assurance that the value of a piece is not going to fluctuate.

Larry Pettinelli, US president of Patek Philippe, says that the perceived value of a luxury product must remain the same or greater – any decline would erode customer faith in what pieces and brand equity are worth. For this reason, the artisanship of a watch is as important as the materials from which it is made.

“Precious metals certainly play a role in the pricing of a product and, like many companies, we try to buy forward based on our expected needs. However, because of the extreme amount of labour involved in timepiece production – namely the hand-finishing of the movements – a significant proportion of our price is based on craftsmanship as opposed to the metal choice.”

Despite a recent slip in diamond prices, many experts believe that strong sales of precious stone jewellery will continue unabated this year.

“Prices were predominantly stable in 2013, and we saw sales go up by around 5 per cent both in North America and China, where western-style engagement rings are really driving growth,” says Stephen Lussier, an executive director at De Beers.

“Present exchanges at Chinese new year will continue to fuel consumption.”

He adds that the two regions combined generate more than half of all diamond jewellery sales worldwide.

“There’s no question that while supply is limited and increasingly hampered by problems, demand – particularly from emerging economies – continues to grow and grow.”

Patti Wong, chairman of Sotheby’s Asia, agrees. “The top end of the market is stronger than ever, as evidenced by our November sale of the Pink Star diamond in Geneva, which went for a record-breaking $83m,” she says.

“The focus in 2014 will continue to be on big stones of 10-plus carats with real quality and rarity.”

Coloured diamonds and especially pink, blue and yellow stones will continue to attract interest from buyers in the emerging Bric markets, as will the most precious gemstones such as emeralds, sapphires and rubies.

Ruby prices have doubled in the past four years as US government sanctions on Myanmar – a leading producer of the stone – remain in place. Limited supplies mean that stones are now going for anywhere between $400 to $50,000 per carat for exceptional gems.

“The coloured jewels market is a cottage industry – nothing like that of gold and diamonds – and consequently production regularly gets very dodgy,” explains Russell Shor, senior industry analyst at the Gemological Institute of America.

He adds: “When supplies are erratic, as they are at the moment, prices inevitably rise as stone dealers hold on to their [gems] and bank on selling them at a later date.”

Mr Shor believes that sales of untreated sapphires and emeralds will continue to shine in 2014, as will appetite for tanzanite, topaz, spinels and citrines.

“They are still fairly cheap,” he says of this last group, “which is why many jewellers and brands of all sizes like them. They provide greater licence for artistic creativity without spiralling costs.”

He adds that strong demand for jade of all hues will continue, given its popularity in China. In 2013, Asian sales of the stone outstripped those of emeralds and sapphires across all other markets combined.

Some experts remain cautious when forecasting watch and jewellery sales for 2014. They cite the risks of destocking by wholesalers, thanks to price points that are significantly higher than those for soft luxury products, and to purchasing patterns that are less influenced by seasonal fashion.

But most in the industry are upbeat. “Given the current climate, it is inevitable that returns on jewellery might not be quite as stellar as in previous years but there is still much cause for encouragement,” says the WGC’s Mr Grubb.

“Demand from all markets – east and west, mature and emerging – remains healthy if not thriving as the ranks of the global middle class consumer continue to swell. For now, the future for the sector is bright.”

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