High Gold Price Changes Japanese Jewelry Supply Chain

Bullish spot gold prices trading above the $520/oz level since January 2006 and soaring toward $600/oz last week have created gaps in the Japanese jewelry supply chain, local industry sources said last week.

Japan's use of gold in jewelry in 2005 is estimated at 24 mt, up 7.6% from 2004, according to Gold Fields Mineral Services data. The 24 mt total includes locally produced jewelry and imports of finished products. Japanese consumption of gold for jewelry accounts for 7.9% of the world's total.

Japanese gold jewelry manufacturers are facing an uphill battle to absorb the higher cost of gold bullion. "When the price of gold rises, jewelry manufacturers are forced to use less gold and mix it with other metals," said Hiroshi Yamada, an official at Japan Precious Metal Chain Manufacturers' Union (JPC).

According to JPC data, consumption of 24-carat gold by Japanese jewelry makers was 12.4 mt in the period from March 2005 to February 2006, during which time gold prices averaged at $444.70/oz. The consumption level was higher at 14.5 mt in the March 2001 to February 2002 period, when the average gold price was $271.20/oz.

A member of the Tokyo-based Nationwide Pawnshop Union Alliance told Platts that gold jewelry collected at their shops was melted and re-used by jewelry makers. She said members of the alliance meet once a month to trade the collected jewelry. "Some items are good enough to be showcased again, some items are smelted and re-used," she said.

The JPC official agreed that some jewelry makers might source their raw materials from pawn shops, which trade the commodities at prices lower than global spot prices, as they require repair work and contain high levels of base metals such as zinc, nickel and copper.

A Tokyo-based importer said the number of jewelry makers sourcing materials from pawn shops would be limited, however. "In 1979, when gold prices tripled from Yen 1,200 ($10) to 4,000 ($34) per gram, jewelry makers did rush to pawn shops and buy in panic. This time, the gold prices are rising at a steady pace. I think jewelry makers will be able to balance their books...they are ready for gold rising to $600/oz," he said.

JPC's Yamada said high precious metal prices had prompted jewelry makers to use more base metals to create "precious alloys".

"When the precious metal is mixed with other metals, its value as jewelry decreases, but the jewelry makers need to be creative in thinking and design," said Yamada. " Jewelry makers have resorted to production of white gold [an alloy of gold, palladium and nickel], which looks like platinum, but is cheaper."

He explained that Japanese consumers tend to favor white precious metals over yellow gold. "This was due to effective platinum bridal ring marketing, appealing to consumers who want something special that is long-lasting. Platinum is harder than gold and is said to be forever," he said. "And Japanese consumers favor jewelry that can be used in both casual and official situations, rather than stunning and dazzling pieces."

The Tokyo trader added: "Ironically, the record high price of platinum is supporting the demand for white gold alloys." Japan's platinum jewelry consumption in 2005 is estimated at 17.1 mt, down 1.7% from 2004, according to Johnson Matthey data.