September 1, 2017 – UK jewellers are facing a headache when re-stocking gold due to a combination of surging bullion prices and a depressed pound. This week saw gold prices rally to their highest level since U.S. elections last November due to sharply heightened tensions after North Korea tested a missile over Japan, infuriating the United States.
Gold touched USD$1,326.08 an ounce on August 29 as investors piled into the precious metal, spurred by its appeal as a safe-haven in times of geo-political turmoil. Some commentators believe gold’s surge above the key USD$1,300 an ounce level signals the start of a new bull market. The rally in gold prices this week has coincided with a deepening decline in the pound, beset by worries over struggling Brexit talks, darkening clouds over the outlook for the UK economy.
The pound has slid by some 13 percent against the dollar since Britain voted in June 2016 to leave the EU. Sterling was down around 2.7 percent in August against the dollar, the second-worst performer among Group-of-Ten currencies, according to Bloomberg data. Gold is priced in U.S. dollars, so when the pound falls against the dollar, the yellow metal costs more in sterling terms. This creates a headache for UK jewellers and jewellery manufacturers looking to re-stock gold and other dollar-denominated precious metals and gemstones.
The pound’s drop against the euro has also increased costs faced by UK jewellery retailers in stocking continental European gold jewellery brands whose prices are denominated in euros. The current gold and foreign exchange rate scenarios boost the requirement to hedge gold positions if possible, in order to reduce risks to jewellers and manufacturers from price volatility. But not all jewellers use formal hedging strategies, and resort instead to rapid re-stocking of precious metals. Some jewellers and designers are talking of reducing the weight of gold in jewellery designs. Some UK retailers have said they had to pass on price increases of gold jewellery in recent months to their customers.
In some cases, they said uncertainties over Brexit had instilled a mood of caution. Some customers may have opted for jewellery repairs instead of buying new items. The psychology of the gold jewellery consumer can change at a time of surging gold prices, with more inclined to see gold as an investment.
Frayed tensions on the Korean peninsula, slowing momentum for U.S. interest rate rises, expectations of a weaker dollar, and strong Chinese physical demand, are likely to continue to underpin gold prices.
“The dollar should be penalised next year by the weaker (U.S.) growth outlook and by the less active Fed (U.S. central bank), so we would expect the dollar to gradually weaken and that should support gold,” Bloomberg quoted Luc Luyet, a currency strategist at Pictet Wealth Management, as saying this week.
Bank of America Merrill Lynch has said gold could rise to USD$1,400 an ounce by early next year, supported by lower long-term U.S. interest rates. Commerzbank said in a Technical Outlook, that in a short-term view over the next few weeks near term consolidation in the gold price should be followed by another leg up.