(Bloomberg) — In June, Bill Doddridge flew his single-engine Cessna 400 to Twentynine Palms Airport near California's Mojave Desert and headed for an abandoned mine, a .45-caliber pistol on his belt. He was looking for gold.
The firearm was to ward off rattlesnakes. The precious metal would be a sideline to his jewelry business. He sifted through dirt, climbed into shafts, and later bought the property, shuttered since World War II.
"If we're not making money selling gold, we might as well get into mining it," says Doddridge, 55, chief executive officer of Tustin, California-based Goldenwest Diamond Corp., a privately held company that owns 17 Jewelry Exchange stores and an online site. "It's a whacked out world."
The rising value of bullion—reaching a record $1,431.25 an ounce on Dec. 7—has upended the economics of jewelry for buyers and sellers alike, with a mix of outcomes around the world. U.S. purchases of gold jewelry have fallen 36 percent by volume in three years. Women in India, where demand is booming, are buying hollow bangles made to look like solid gold. European jewelers are mixing the metal with steel and ceramics. Turkish exporters are closing offices as orders fall.
"The jewelry business is being held hostage by something completely out of its control," says Michael Langhammer, CEO of Quality Gold, a Fairfield, Ohio, privately held wholesaler that Langhammer says is redesigning pieces to use more silver.
Customers' Buying Power
Gold's price has climbed about 200 percent since the debut in November 2004 of a bullion-backed exchange traded fund created by a World Gold Council trust, allowing the metal to be acquired on the New York Stock Exchange as easily as shares.
Global purchases of gold jewelry were $20.9 billion by value in the third quarter, 38 percent above the year-ago period, according to the London-based World Gold Council, which represents mining companies, and GFMS Ltd., a research firm in London. Demand by volume has diminished in some countries and increased in others, and the gold jewelry industry has to adjust to customers' buying power depending on where they are.
Not knowing how high the price will go makes deciding on styles and ingredients a challenge, Doddridge says. He acquired the mine, for a sum he won't disclose, as a defense. "Gold is the only thing screwing up this business," says Doddridge, who expects his total 2010 sales to be up about 7 percent and sales of gold items to be down about 25 percent.
Designers are scaling back on gold parts or relying on gold that isn't as pure. At Richline Group, a manufacturer in Mount Vernon, New York, owned by Warren Buffett's Berkshire Hathaway Inc., 40 percent of sales are in gold, compared with more than 70 percent in 2006, says Chief Marketing Officer Mark Hanna. Signet Jewelers Ltd., with more than 1,300 shops in the U.S. and about 550 in the U.K., is offering more silver, tungsten and titanium, says Ed Hrabak, senior vice president of merchandising at the world's largest jewelry retailer.
Rome-based Bulgari SpA, the world's third-largest jeweler, fine-tuned the diamond encrusted rings in its B.zero1 line, which were solid gold in 2000 and incorporate ceramics now.
"We are focusing more than in the past on the combination of different materials," says Francesco Trapani, Bulgari's CEO. "This is an interesting way to introduce something more appealing, more exciting to the final client—a way of proposing things that can be less expensive."
Tara Jewels Ltd. invented Honeydium, a mix of silver, copper, zinc and indium that the Mumbai-based company says on its website gives "the perception" of 10-karat yellow gold.
In India—both the largest consumer of bullion and biggest manufacturer of gold jewelry—the passion for gold bangles, necklaces and earrings is centuries old. Despite the price, third-quarter growth in demand for gold jewelry was 36 percent, according to the World Gold Council.
"The Indian consumer is gold-centric," says Rajeev Sheth, managing director of Tara Jewels, which supplies Wal-Mart Stores Inc. and other retailers and owns 30 domestic shops. "That won't change if it becomes $2,000 an ounce or $3,000 an ounce."
Tara Jewels plans to raise about 2 billion rupees ($44 million) in an initial share sale next year to expand its retail network in India, where the economy grew 8.9 percent in the third quarter. The company has a plant in Panyu, China, and three factories in Mumbai, including one with 1,600 workers who walk on mats with raised ridges to dislodge gold flecks that catch in their shoes.
The Real Thing
The gold products in stores change as values mount, Sheth says. The company is selling 1- and 2-gram gift coins for housewives with 5,000-rupee gold-buying budgets that put 5-gram (0.2 ounce) coins out of reach.
Gold is a requisite wedding gift in India and an investment displayed on married women's arms. Only the real thing is prized, and anything under 18 karats—75 percent pure—isn't considered real.
"Gold is a must," says Dhara Shah, a bride-to-be, as she shops with her aunt for 22-karat pieces at Dwarkadas Chandumal Jewellers, where an electronic sign displays the price of bullion in red letters.
The walls are festooned with bridal sets, necklaces and earrings that contain as much as 100 grams of the metal and command 230,000 rupees or more. Shah says her budget is about 350,000 rupees, and she's spending it now.
The price of gold "is going to go up more," Shah, 27, says. "People are going to buy, however poor they are or however rich they are. It's a good investment."
Only 60 Grams
Madhurima Vasisht, a housewife in Delhi, couldn't give her younger daughter as many pieces for her wedding this year as she did for her older daughter, who married five years ago. "My budget has just gone upside down," she says.
In Bangalore, Purushotham Hemanth, 25, says he can only afford 60 grams of gold for his February wedding, not the 80 grams he had planned on. "I always wanted to give my wife the best bangles and necklaces," says Hemanth, a real estate agent. "It is proving to be a bit difficult to raise the money."
To accommodate salaries that aren't rising as fast as gold, retailers say they have to be creative. "The budget remains the same, the income remains the same, but they want the jewelry to look big enough," says Deepak D. Tulsiani, the second-generation owner of Dwarkadas Chandumal Jewellers.
That means making light-weight pieces, and bangles that are hollow, which is more labor intensive. At the Bank brothers' one-room workshop in Mumbai, 90 grams of gold can be fashioned into six bangles, 2- to 3-centimeters wide, in about 12 hours. Using fewer grams takes hours more, says Abhijit Bank, 41, who owns the shop with his 37-year-old brother Sujit.
In the workshop, in an alley past the sari wholesalers behind Zaveri Bazar, 10 craftsmen sit at wooden benches. Watched over by posters on the green walls, including one of Lord Ganesha, remover of obstacles and bringer of good fortune and luck, they use blow torches to bend the metal, tweezers to place gems into earrings and conical rods to shape bangles.
"They need to be more careful, because light gold is very soft," Abhijit Bank says, sitting cross-legged on the floor.
At Istanbul's six-century-old Grand Bazaar, one of the world's largest covered markets, gold is so central that rents are paid in it. Around 5 kilograms covers a year in a 215- square-foot shop. There are more than 1,200 jewelry merchants in more than 60 streets and alleyways.
Locals still come seeking the bangles and coins given at weddings, births and other special occasions. Tourists who are the bazaar's mainstay are showing less interest in gold because of the price, retailers say.
"European clients aren't buying anymore," says Ismail Yilmaz, a 24-year veteran of the bazaar who works for the jeweler Sait Koc.
Domestic demand in Turkey was up 3 percent by volume in the third quarter, according to a World Gold Council report citing GFMS data. Exports have fallen 20 percent over the past three years, according to the Istanbul Mineral and Metals Exporters' Association, as production migrates to lower-wage countries.
The luxury business has been "cut like a knife," says Cihan Kamer, chairman of Atasay, which makes gold jewelry for export. Since 2008, Atasay has closed six of its nine foreign offices, including one it opened in New York 27 years ago.
The industry is squeezed by the steep price of gold and high labor costs, says Cihat Cirpici, owner of Hibas Kuyumculuk, a wholesaler that moved its operations to Dubai from Istanbul. Minimum wage in Turkey is 760.50 liras a month, or around $500.
"We can't set the price on gold, we can only put the price on labor," Cirpici says. "Before, if you had $5 million in capital, you could do a lot with gold. Now, you can't."
The slump is apparent at Kuyumcukent, or Goldsmith's City, a seven-story complex behind Ataturk Airport that was imagined by the Jewelers Cooperative of Istanbul as an integrated production, processing and retailing center.
When it opened four years ago, merchants were told rent would be free until the shops were 50 percent occupied. They still pay nothing. The cooperative is rebranding Kuyumcukent, as Wedding World.
"People who have been in this business all their lives are moving to diamonds, if they're lucky, or otherwise they're unemployed, or driving taxis," says Alaatin Kameroglu, chairman of the Istanbul Goldsmiths' Association. He estimates employment in the sector has fallen 20 percent in two years.
"If the price of gold keeps going up," he says, "worse things will happen."
In China, gold demand may double within a decade, according to the World Gold Council. In the next five years, household wealth may more than double to $35 trillion, surpassing Japan's to become the second highest, according to Credit Suisse AG analysts. Sales of gold jewelry rose 8 percent by volume and 39 percent by value in the third quarter, gold council data show.
"When the price is going up, there are still people going in," Cheng Binghai, chairman of the Shanghai Gold & Jewelry Trade Association, said in a Bloomberg Television interview.
Caishikou Department Store in Western Beijing's Xuanwu district has posted a sign at the entrance. "The Number One Gold Shop in China," it declares.
Yan Jie says he drove two hours to the store from Baoding in Hebei province with his fiancé Yang Hongwei, a 23-year-old accountant, and his parents."Although we haven't fixed a date for the wedding, we'd like to buy gold now before the price goes crazy," says Yan, a government worker who is also 23. His mother, Gao Xuemei, 46, says no other metal will do as she settles on "Rejoicing Dragon and Phoenix" rings for 3,532 yuan ($528) for the couple.
"Buying and holding gold is just an auspicious thing to do," says Gao, who runs a tea house. "Gold, as wedding gifts to children, will not only keep its value, but also give them a decent look."
Among the items at the store are 31.99-gram pendants portraying the face of Mao Zedong and bars stamped with images of the God of Fortune and Rabbit, the sign for Chinese lunar year of 2011. The bars, most of them weighing from 50 grams to 1,000 grams, are priced at 327 yuan per gram.
The Asian and U.S. markets couldn't be more different, says Sheth of Tara Jewels. Honeydium, the new alloy, is intended for Americans and others who aren't emotionally attached to gold, Sheth says.
"They would rather have a big oversized gold-plated silver ring for Christmas with diamonds in it than have a tiny thin piece of gold with diamonds in it," he says. "They are more concerned about perceived value—bang for the buck."