Regional gold jewellery production tumbles by 33%

Drop brought about by cautious consumers and high gold prices puts off buyers, but sellers scramble to cash in.

Gold jewellery manufacturing in the Middle East fell a third by volume in the first six months of this year, a drop brought about by cautious consumers and high gold prices, an independent precious metals consultancy said yesterday. The London-based consultancy GFMS said in an update to its Gold Survey 2009 report that gold jewellery production worldwide in the first half of this year fell by a quarter, down 248 tonnes from 992 tonnes in the same period last year.

The biggest regional declines were in India and the subcontinent, which saw a slump of 37 per cent to 150.5 tonnes, and the Middle East, which saw production fall 33 per cent to 151 tonnes. Turkey was the hardest hit in the region, with a fall in production of 54 per cent to 65 tonnes, driven by the weak lira which pushed up the local gold price. Gold jewellery production in the UAE in the first half of this year was the least badly hit in the region, with a drop of 17 per cent from the same time last year, for a total of 20 tonnes.

Cameron Alexander, a senior analyst at GFMS who focuses on South East Asia and the Middle East, said the decline stemmed from lower demand for gold jewellery. Many consumers in the developing world tend to buy gold as an investment, but with prices approaching US$1,000 an ounce, it became less attractive to those buyers, he said. "Over the last 12 months, there has been a shift to gold as protection or a safe haven," Mr Alexander said. "People are now concerned that they will lose money should gold fall. The upside risk is starting to outweigh the potential gain."

Spot gold reached $998.07 a troy ounce yesterday, far from the low price of $695.40 in October last year. Mr Alexander expects total jewellery production in the second half of this year to fall by 15 per cent, which would bring levels to a 20-year low. Gold jewellery retailers in the UAE have struggled this year, with demand down 31 per cent in the first quarter compared with the same period last year, according to the World Gold Council. The second quarter was slightly better, with demand slowing by 19 per cent.

Jewellers have cut production to reduce piles of inventory, said KP Baiju, the chief executive of the management consultancy BUZ and the former chairman of the Dubai Gold and Jewellery Group. "Retailers want to stay liquid," he said. "Jewellery stockholding is less than other retailers in terms of space, but it has a huge value." Tomy Joseph, the general manager at the Dubai-based jeweller Joy Alukkas, said the chain had reduced the production of its jewellery as demand waned. Mr Joseph said he expected production to continue at lower levels in the second half of the year, unless the price of gold stabilised.

"The sales have drastically come down because of the prices," he said. "When the price goes up, people will not buy." However, what consumers have been doing is selling unwanted gold back into the market. During the first half of this year, the amount of gold sold back into the market, also known as scrap gold, increased 49 per cent in the Middle East, Mr Alexander said. In the UAE, scrap gold sales increased by 28 per cent to 18.2 tonnes, while in Egypt it increased by 116 per cent to 26 tonnes. In Turkey, it rose by 63 per cent to 183 tonnes, according to GFMS.

David Barclay, a commodities analyst with Standard Chartered Bank based in London, said he expected sales of scrap gold to fall and for jewellery demand to recover slightly in the second half. "For people with available scrap gold they are willing to sell, a large chunk of this has already hit the market," he said. "With less strength in scrap selling, you remove another obstacle." [e-mail]