Investment that People Fondle Admiringly – Part 1

Ever since the ancient time, jewelry and precious metal have been used by different people and culture as a tool to show off their wealth and social status. Despite pulling different countries together, globalization also helped to bring down the production cost of jewelry and precious metal through different business strategies, for instance, outsourcing. Being a normal good in nature, demand of jewelry grows with the income of the general public. Therefore, in general, the demand of jewelry products should have downward pressure under this economy.In stead of react to its economic nature, the growth in the jewelry industry has been incredible for the past few years. The major reasons for the growth were due to the uncertainty in economic recovery, which leads investors to go after defensive investments.

Jewelry are normally used for adornment and come in gems embedded in different kinds of precious metal, with gold, silver, and platinum being the most popular three. Gems can be divided into two major categories: natural gemstones and artificial gems. Natural gems can be separated into natural gems, natural jade, and natural organic gems; artificial gems can be separated into synthetic gemstones, mosaic stones, and reconstructed stones. Common gems would include ruby, sapphire, crystal, jade, pearl, amber, and topaz. Besides the distribution, jewelry also includes other procedures like processing and mining; therefore, there are more than one parties will be affected by the fluctuation of demand and sales of jewelry.

Additional to the demand from general users, the current economic environment has driven a high popularity of jewelry among investors. In America, the average monthly inflation rate for 2011 was 3.2%, mostly driven by the QE2 happened in fourth quarter of 2010. The unemployment rate of America remains high, above 8%, meaning that economy in the United States has not made any significant improvement yet.

The United States has imposed a loose monetary policy since the recession, which directly cause the devaluation of dollars. Even though the US Dollar Index remains strong, the US dollar has lost its purchasing power, which drives the market to value protection, hence lead to the rise of jewelry and precious metal.

Source: Netdania.com

Source: Netdania.com

After understanding the driving forces of the price and demand of the jewelry industry, we would go further into the current market environment in China, and I will discuss further on some ideas of investments basing on the current trend. The demand for jewelry in China, because  of the stable local economic growth, has remained comparatively high. From 2003-2008, the above quota wholesale and distribution sales has grown at an average annual rate of 30.4%, the number has declined in 2009 to 15.9%; due to sustainable fast growth in China’s economy after 2010, jewelry sales grew by 46% in 2010, and 42% in 2011.

Source: The World Bank and Hong Kong Trading Development Council

As for products, gold and diamond are the most popular in the China market. Because of the breakthrough in design on gold jewelry, including mix and match with other materials, it has drawn more attention from the younger generation. In 2011, the expenditure on gold experienced a increase of 33.2%, and the expenditure on gold adornment was up by 27.9%. As for import data, the increase on precious metal, clad metal, and parts was 121.9%. Even though there has been talks on the decline in demand for gold in China, the decline is predicted to be small and there will still have sustainable demand for gold in China.

Aside from gold, demand for diamond in China has increased over 10% on an annual basis, which helps China to suppress America as the highest diamond demanding country. The Shanghai Diamond Exchange had a 63% growth in trading volume, reaching 47 billions in US dollar. Diamond import data also recorded two digit growth; non-mounted diamond grew by 53.8% and non-industrial used grew by 62.6%. There data show that the demand in diamond still remain high. The 172.7% growth in other gems also worth watching.

The sales and market share trend show that branding has been a key factor in the business model. According to the estimate from Euromonitor in 2009, the top 10 market leaders in the China jewelry market is Chow Tai Fok, Chow Sang Sang, Diamend, Luk Fook, Laofengxiang, TSL Jewelry, Chow Tai Sang, Fu Hui, and 3D-Gold Jewelry. These top 10 market leaders hold 63.1% of the total market in the China jewelry industry. Because brands from Hong Kong have been famous for their unique and trending designs, customers from mainland China are willing pay for that product at a premium. However, due to the incoming of foreign brands, competition is expected to intensify in the future.

The jewelry retail and wholesale in China are carried through a few different channels, including jewelry counter, franchise stores, supermarket, corporate stores, and professional market. According to the research from the Hong Kong Trade Bureau, the sales counters at the department stores found to be the most popular, second to that would be independent and franchise stores. Other than the stores popularity, the 2nd,3rd,and 4th tier cities are looking to be the next expanding target, because of the saturation and intensive competition in the 1st tier cities. After learning about the industry background and current trend with the jewelry market in China, we will discussed further on some of the stocks that we can invest in.

Data Source: Hong Kong Trading Development Council

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