Gold Prices Retreat, Jewelry Industry Still in a Cold Winter

In recent months, the fluctuations in monetary policies by the Federal Reserve and other prominent central banks have imposed considerable pressure on gold prices. Since last year, the Federal Reserve has initiated a series of interest rate hikes in response to persistent inflation. Although the Federal Reserve paused these hikes in September of this year, there is wide speculation that further increases could still be on the horizon as inflation evolves. An increase in interest rates generally translates to higher borrowing costs and a stronger U.S. dollar, which elevates the opportunity cost of holding non-yielding assets like gold, directly dampening demand for the yellow metal.

Similarly, the European Central Bank is contemplating additional tightening of its monetary policy to tackle inflationary pressures within the Eurozone. This collective tightening approach is exerting extra stress on global liquidity, further diminishing the allure of gold. Consequently, these multi-faceted factors have played a crucial role in the evident retreat of international gold prices.

The calming of geopolitical tensions has also led to diminished demand for safe-haven assets.

Geopolitical developments are vital players shaping the dynamics of gold prices. The last few years have witnessed instances of instability across a range of global hotspots—most notably, the ongoing Ukraine crisis, conflicts in the Middle East, and U.S.-China trade tensions. Such events typically nudge the market toward seeking safety in assets like gold. However, with some of these tensions easing, the fervor for safe-haven gold has waned. For instance, recent signs of cooling tensions regarding the Ukraine crisis have led to a decreased demand for safe-haven assets. Moreover, improved economic collaboration between China and the U.S. has contributed to alleviating market anxieties, further pressuring gold prices downward.

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Although a short-term decline in international gold prices is evident, the medium to long-term outlook still supports the notion of stability.

Despite the current retreat in gold prices, market analysts believe that the long-term potential remains robust. Uncertainties surrounding the global economy have not been entirely resolved, and as inflationary pressures persist, gold's role as a hedge against inflation becomes increasingly pronounced. Data from the World Gold Council indicates that central banks worldwide have continued to bolster their gold reserves this year, highlighting the recognition of gold as a strategic asset by governments. This demand from central banks not only enhances market appetite for gold but also establishes a firm underpinning for gold prices.

The trajectory of the U.S. dollar index will also play a crucial role in determining the performance of gold prices over the medium to long-term. Although the recent strength of the U.S. dollar has suppressed gold prices, historical data indicate that the relationship between the dollar index and gold is not absolute. In scenarios marked by a slowing global economy and persistent inflation, the dominance of the dollar may be difficult to sustain. Should the dollar undergo any correction, it could spur an uptick in gold prices once again.

Additionally, prevailing global monetary policies continuing to loosen may provide latent support for gold prices. Even as the Federal Reserve and other major central banks gradually tighten their policies, the fragility of the global economic recovery suggests that governments may resort to more accommodative fiscal and monetary measures in the face of economic pressures. Such measures could stimulate consumption demand, particularly for tangible assets like gold, potentially driving prices upward.

In the domestic market, fluctuations in gold jewelry prices have garnered widespread attention. On November 26, the well-known gold jewelry brand Chow Tai Fook (01929.HK) revealed its financial report for the first half of fiscal year 2025 (ending September 30, 2024). The report indicated a turnover of 39.408 billion HKD, a drop of 20.4% compared to the same period last year, with net profit attributable to shareholders considerably decreasing by 44.4%. This decline highlights the impact of gold price volatility on the company's profitability and underscores the plight faced by the entire jewelry sector.

On the same day, another renowned jewelry brand, Luk Fook (0590.HK), also published its interim results report for the six months ending September 30, 2024. During this period, Luk Fook achieved revenue of 5.449 billion HKD, down 27.2% year-on-year; operating profit fell by 53% to 536 million HKD, while net profit plummeted 55.7% to 417 million HKD. Notably, Luk Fook’s declines were even more severe than Chow Tai Fook’s, underlining the massive challenges faced by the company in navigating market shifts.

The poor performance of Chow Tai Fook and Luk Fook reflects a microcosm of an industry-wide predicament. Many notable jewelry enterprises, including Chow Sang Sang and Lao Feng Xiang, have reported year-over-year declines in revenue and net profits this year. Chow Sang Sang experienced double-digit decreases in both revenue and net profits during the first half of this year. Even Cai Bai, despite achieving revenue growth in the first three quarters, faced a drop in net profits, indicative of immense profit pressures being exerted on the company.

With domestic gold jewelry prices dipping below the 800 RMB mark, the challenges confronting the jewelry sector have intensified. This shift not only affects the profit capabilities of companies but also escalates the degree of market competition. In response to these challenges, numerous jewelry firms ramped up marketing efforts, launching promotional activities, though with limited effectiveness. Some businesses have even reported losses as they grapple with fierce market competition.

The overall downturn in the jewelry industry is not merely a random occurrence but is being influenced by multiple underlying factors. High gold prices exert the most significant impact on end-user consumption, leading to a direct blow to the jewelry sector.

The closure of numerous outlets by Chow Tai Fook has attracted notable attention amid the industry's downturn.

Convincingly, Chow Tai Fook's closure of 239 stores within a six-month span, including 36 in first-tier cities, 73 in second-tier cities, 52 in third-tier cities, and 78 in fourth-tier cities and other areas, signals a strategic pivot rather than a mere contraction in the market. As of the end of September 2024, Chow Tai Fook retained 6,968 jewelry retail points in mainland China, with approximately 77% being franchisee-operated.

This move by Chow Tai Fook reflects its strategic adjustment to align with shifting consumer shopping habits and the pervasive influence of online channels. By closing underperforming stores, the brand aims to reallocate resources to bolster competitiveness within core markets. In doing so, Chow Tai Fook seeks to enhance operational efficiency, reduce costs, and elevate brand image and customer experiences. Furthermore, the company is actively pursuing online business avenues and strengthening an integrated online and offline approach to adapt to future market evolutions.

Chow Tai Fook’s actions, however, also lay bare the structural issues confronting the jewelry industry. With evolving consumer demands and technological advancements, traditional retail models are becoming increasingly inadequate to cater to market needs. The pressing question for all jewelry businesses now is, how do they maintain brand advantages while accelerating digital transformations and enhancing user experiences?

Looking ahead, although international gold prices may continue to face short-term pressures, the medium to long-term horizon presents a foundation for potential upside.

In the coming time, global economic uncertainties, ongoing inflation, and geopolitical risks are likely to bolster gold prices. Concurrently, central banks' forays into gold procurement, the dollar index’s trajectory, and the implementation of looser monetary policies will significantly impact gold pricing.

For the jewelry sector, while the present climate poses numerous challenges, it simultaneously harbors new opportunities. The contemporary consumer, driven by increasing disposable incomes and technological enhancements, is now gravitating towards personalized and fashionable gold jewelry rather than merely valuing it for wealth preservation. To capitalize on this trend, jewelry companies must intensify their R&D and innovational designs that match the preferences of younger consumers. Additionally, fortifying digital transformations and improving integration between online and offline services will be pivotal for standing out in future competitions.

In conclusion, while gold prices may adjust in the short term, the enduring value of gold as a safe haven and hedge against inflation cannot be overlooked in the medium to long term. Likewise, the jewelry industry, despite facing significant pressures and challenges, stands to gain from the ongoing market transitions and technological advancements, identifying ample growth prospects and vast market potentials.