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Why Gold Price Drop Increases Influence of Jewelry Consumers

Gold_Bars 2The price of gold fell dramatically during the past year. Gold dropped from $1658 per ounce to just over $1200. The 28 percent decline was the biggest since 1981.

 

Although gold investors might not be happy, lower gold prices are good for two reasons. First, gold jewelry has become more affordable. Jewelry shoppers are now able to get better value for their money. Second, lower gold prices are good for the environment. Gold mining is one of the dirtiest forms of mining that exists. When gold prices fall, that reduces the financial incentive for gold mining. Less gold mining means less mercury pollution and less toxic waste production.

 

So if the environment is getting a break, does that make it less important for jewelry consumers to choose eco-friendly gold from recycled sources? Actually, no. If anything, lower gold prices mean that the gold market is increasingly becoming dominated by jewelry. And that makes the choices made by jewelry consumers even more consequential.

 

The dynamics of the gold market aren’t well known to the jewelry-buying public. To really understand what’s going on, it helps to look at some historical data provided by the World Gold Council, the gold industry trade group.

 

Let’s first take a look the price of gold during the past decade. As this first chart shows, gold prices reached a high of more than $1900 per ounce in September 2011. Since then, prices have steadily fallen, although by historic standards they remain high.

 

WGC-Gold-price

 

Why did gold prices go up? The simple reason: demand increased. This next chart shows how gold demand skyrocketed between 2004 and 2011. It then leveled off or started to decline in 2012. (Data still isn’t available for the full year 2013.)

 

Gold demand

There are a lot of reasons why gold demand rose between 2004 and 2011. Maybe the biggest one, though, is the economic downturn. As the economy crashed, skittish investors decided to park their money in gold, reasoning that it was a safe investment. During the gold boom years, demand for gold by private investors went way up, as did demand for gold by central banks. Meanwhile, because gold became more expensive, less gold was used to make actual stuff: jewelry, as well as electronics and other technology.

 

Gold demand by source

Higher demand for gold by investors, along with a drop in gold use by jewelry and technology manufacturers, led to major changes in the makeup of the gold market. These next two pie charts show the sources of gold demand in 2004 and 2012, years meant to serve as representative snapshots. Note that in 2004, close to 75 percent of gold was used to make jewelry.

 

Gold demand 2004

Now take a look at 2012. In that year, jewelry accounted for only about 44 percent of gold demand. Private investors and central banks were buying much more gold than they did in 2004.

Gold demand 2012

That was the situation until the last year or so, when the gold bubble began to burst. How did that affect the above pie charts? The trends we’ve seen over the past decade began to reverse themselves. Private investors and central banks began to pull out of the gold market. With gold prices lower, more gold began to be used in jewelry. Although data from the last quarter of 2013 isn’t yet available, data from the first three quarters suggests that jewelry is reasserting its dominant role in the gold world. The gold demand pie chart now looks a lot more like it did in 2004. About 60 percent of the gold supply is now used to make jewelry.

 Gold demand 2013

 

So what happens next? Some experts predict a modest recovery in gold prices in 2014. A prominent Goldman Sachs analyst disagrees, predicting that gold prices will keep falling and reach around $1050 per ounce this year. But it’s probably safe to say that the days of $1900-per-ounce gold are gone—which means that jewelry is poised to resume its role as the the leading use for gold.

 

All this is a welcome development for companies like Brilliant Earth, which are trying to reduce the environmentally harmful effects of gold mining. Now that investors are no longer clamoring for gold, a lot of unnecessary gold mining won’t happen. And now that most gold is used for jewelry again, jewelry consumers have a lot more power to change the future of gold mining by demanding eco-friendly gold.

 

The gold boom of the past few years has educated a lot of consumers about how environmentally destructive gold mining can be. Factor in the rising power of jewelry consumers, and the conditions for a consumer-led movement against dirty gold mining could be the best they’ve been in years.

 

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