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Monday, July 25, 2011

Last month, when I wrote about how I was raising the prices of my jewelry because of the record-high price of gold, I promised that I would answer some frequently asked questions the next day, including the one that’s straight out of Dumbassville: “Why don’t you buy cheaper gold?” (Apparently people think I love overpaying!)

I started a new post and got as far as writing: “Gold is basically the same price everywhere in the world. Why would anyone sell it for less than they can get?” Then I thought, “Fuck it. Not only have I explained raw-material costs many times on this blog, but I’ve also patiently answered the ‘cheap gold’ question in person. Some folks just don’t want to hear what I’m saying.” Fortunately, I remembered Saturday Night Live’s Weekend Update in the ’70s, when Garrett Morris played the Headmaster of the New York School for the Hard of Hearing.

I realized that, like SNL’s Chevy Chase, I needed to call in experts to help me shout enlightenment. First, I got in touch with Juan Carlos Artigas, the investment research manager of the World Gold Council. The World Gold Council is the market development organization for the gold industry. Its 22 members include the world’s leading gold mining companies, which represent about 60% of global corporate gold production. I asked him to start with the basics and explain the “spot price” of 24K gold, which is the price people refer to when they say, “Gold is trading at $1600 an ounce.”

Artigas said, “Think of what it is not. In many commodities, sometimes people refer to the futures price … they would get delivery of a particular commodity in a future time. Spot price refers to immediate transaction, right here, right now. It’s the actual price of the transaction at that moment.” He added, “Gold is a 24/7 market. There’s no closing price. It trades all the time every day, like currency … the only thing you see are snapshots of the price at any given point in time.”

However, the spot price doesn’t include extra charges you may have to pay when you buy gold, such as broker commissions, transaction and storage fees, delivery fees, and  seller markups, so it is very likely that if you want to invest in gold, you will pay more than the spot price. I asked Artigas if there was any way to reduce those fees and, in that way, buy “cheaper” gold. “As with any market it works on an economy of scale,” he said. “When you have small quantities, the transaction fee is going to be higher. The more you buy … the markups are smaller.” In other words, it’s the same situation I described in my posts Get Smart (About Manufacturing) and Get Smart (About Quantity) — the people who can spend the most money get the best discounts.

I only make one Mia scent locket at a time, so the price is $13,000. If I could make 100,000 lockets at a time, my big savings would come from reduced labor costs. Click to read more about labor costs and economy of scale.

Okay. So the small investor is going to pay the spot price plus transaction fees. But how about going to another country and buying gold in the local currency? Every once in a while, I see people online claiming that gold can be purchased more cheaply in Sierra Leone or Saudi Arabia. “A bar of gold … will be the same in another part of the world,” Artigas said. “In terms of the base price, there shouldn’t [be a difference]. Any difference would be whatever commission or transaction fees are charged. The base price, the price per ounce, should be roughly the same.” In other words, the cost in local currency will be adjusted to equal the dollar price you’d see on Kitco.com, Bloomberg or any other source of gold spot prices.

I was relieved to know that I don’t need to go to Sierra Leone to save money. “But why is gold so high now?” I asked Artigas. (Since I spoke to him, gold hit a new high of over $1600 an ounce.) He said that though people tend to focus on what is happening in Western markets, “Gold has had a measured appreciation in part because of how emerging markets are growing. Gold performance over the past 10 years has been very linked to India and China.” He noted that in those markets, gold is often purchased in the form of 22K or 24K jewelry as an investment. “It’s worth noting in many of these regions, there’s no hard distinction between what you would buy for adornment and what you would buy to preserve capital and save.” That’s different from what we do in the U.S., where people generally buy 14K or 18K jewelry to wear and invest in 24K gold separately. The 24K gold is pure gold, which most fine jewelers here don’t work with because it is too soft to hold its shape. Customers tend to complain if their rings wind up looking square after a few wearings. Therefore, we mix the gold with other metals to make it more durable: 18K gold is 75% pure gold and 25% other metals, while 14K gold is 58.3% pure gold and and 41.7% other metals. That’s why 18K and 14K are less expensive than 24K — because you’re getting less gold. If gold is just an investment for you, you want only the gold, not a bunch of other metals.

I used to sell my 18K gold Mud Flap Jill necklace for $500. Now the chain alone is worth more than. Click to shop.

It’s not just India and China driving gold prices up. Artigas said, “The other story behind gold’s performance has been that of central banks,” which are the organizations that regulate monetary policy for specific countries or regions.  “They’ve experienced a structural shift over the past several quarters — especially since 2010. Central banks around the world were net sellers — the majority would be selling gold — for the previous 21 years till 2009. 2010 marked the first year that central banks became net buyers. Little by little, European central banks which were the primary source of gold selling started to slow down their sales. Little by little, emerging markets started to acquire gold for their foreign reserves. As emerging markets were buying and Europeans were slowing down their sales, central banks became net buyers.” We all know lots of demand drives up price. If you have something everyone wants, you can charge more, right? Like if you stand out on a street corner with a bottle of ice-cold water, and it’s 10 degrees Fahrenheit out, you might able to sell it for $1, or not at all. You might just watch people rush into Starbucks to buy hot coffee. But if you stand on the street with a bottle of ice-cold water and it’s 100 degrees Fahrenheit, like it’s been in New York City, you might be able to get $2 or even more.  That raises the question of why gold is to central banks like a bottle of ice-cold water on a hot street corner. Well, it’s similar to what gold is to individual investors: a way to diversify holdings with a universally recognized commodity. As Artigas said about individual investors, “We are in a new world order  … the economic recession marked a change in attitude among investors about the assets they’re interested in.  Risk management [is] so important in the investors’ psyche, and has made gold a main component of a portfolio.” He added, “It provides investors with an asset in their portfolio which is not going to be affected by the same thing as … equity and credit. It is valuable [in different] cultures and countries.”

The hotter it gets, the more you want these. Photo from Evian. Click for source.

Ah, yes, the individual investor. The most basic investment advice is, “Buy low, sell high.” (Please note that you don’t have to buy something at the lowest point and sell at the highest point to make money. You just have to sell at a higher price than you bought.) Therefore, it grates on my nerves when people tell me they want to buy gold the day it hits a new high, BECAUSE it hits a new high. These are always people who don’t follow the price of gold, as I do all day, every day (there’s an app for that!). They’ve just heard on the radio that gold has hit a new high and “someone” says it will go higher so they need to buy it right now.  Jebus! At least wait for a damn dip. There’s always a dip, and I always buy on a dip. For instance, maybe I couldn’t afford to load up on gold chains for my necklace designs when gold was trading at $1550 an ounce. But gold is $1618 an ounce as I’m writing this, so you better believe that if it falls into the mid-$1500s, I’ll find some money so that I can run to my wholesaler and buy a couple of chains. Hell, maybe I’ll even buy a chain when gold next dips to the $1590 range. But the day that gold hits that new high? I’m not buying THAT DAY, no matter what folks say on NPR.

I needed to find someone to explain this annoying investor behavior to me. Stephen Wood, who is chief market strategist, North America, for Russell Investments, came to my rescue. Wood is one of Russell’s experts on the economy, capital markets, portfolio strategies and behavioral finance. He said, “What behavioral finance teaches us is that it is the design of the human brain and the way it processes information and arrives at actions, can all too often be detrimental when it comes to investing.” For example, he told me that people find it reassuring to do what everyone else is doing, so that when gold (or another investment) hits a new high, they feel successful and smart if they buy into it. That’s the exact opposite of Joseph Kennedy — the super-rich dad of John, Robert and Ted Kennedy — who famously got out of the stock market when he started getting stock tips from the shoeshine boy.

One of Wood’s colleagues had mentioned that investors wanted to sell their Japanese-related investments right after Japan’s big earthquake in March, when such investments plunged. If they’d done that, they would have sold at a low and missed a recovery. Selling on the news of the quake seemed similar to buying gold on the news of a record, so I asked Wood about whether it’s smart for the individual, non-expert, non-economy-of-scale investor to transact based on the latest news. He said, bluntly, “Usually, any action in response to a cataclysmic event is not in your best interests. You are not the only person on the planet with a TV; the info is widely and instantaneously distributed to all global investors. Especially natural disasters – they tend to spike volatility and then subside. Always ask yourself, what is your investment edge? Your value add?”

Getting back to gold specifically, I asked if I was obliged to concede that someone was a smartypants if s/he bought gold on the day it hit a record as long as gold did, in fact, go higher after (as it is likely to continue to do). I was relieved when he answered, “Buying gold at $1500 and having it rise to $2000 would seem to be good. Especially if you can be disciplined enough to sell and book a profit. But ask yourself for the future, was it luck or skill? And how can you tell the difference? Is it repeatable?”

Wood said it’s all about the greater fool theory: “People who buy only rapid price momentum, suspecting or not caring that fundamentals don’t warrant that price — they are hoping that someone (some buyer) will pay an even higher price than they did in hopes of finding an even greater yet fool.” Sounds like the real-estate story, doesn’t it? Everyone thought real estate could only go higher, until it stopped going higher and the people who bought at the high were screwed.

“The gold market is a very misunderstood market,” Artigas of the World Gold Council told me. “It’s interesting how many investors and many people may have opinions … even the ones who do like it as an investment … do not necessarily understand what is behind it.” If you do think you understand it, Artigas said there are many ways to get in on the action: “Investors can buy coins, bars, buy futures and options or purchase gold-backed ETFs (exchange-traded funds), which have opened an opportunity for investors to access the market in vehicles traded on exchanges — you can see the price in the same way you can follow the price in your bonds or stocks.” But don’t come to me asking where to go to make these transactions, because I’m going to tell you to consult your investment adviser. And if you say to me you don’t have an investment adviser? Well, I’m not going to be your free investment adviser, bitches! You’re welcome to buy gold jewelry from me instead. Not only will you get the value of the gold but, as John Keats wrote, “A thing of beauty is a joy forever.” You can’t put a price on beauty.

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41 Responses to “Get Smart (About the Price of Gold)”

  1. I am also a jewelry designer, but don’t work in 18k gold very often, just because of the end price. Almost no one knows how much gold is trading for on any given day, especially our clients and/or people who buy semi-precious and not fine. My blog focuses on many topics, beauty, style, fashion, elegance, a bit of whimsy and an occasional rant, therefore, I hope I keep people interested in returning day-to-day. Your post here is extremely difficult to read and not get the feeling you are talking down to the very people who might purchase your merchandise.
    Can I be wrong? Whatever, you don’t have to publish this comment, but I feel you are coming at this very aggressively. Please understand, I don’t want to offend you…just saying. Marsha

    • WendyB
      Twitter: WendyBrandes
      says:

      I do quite a few posts explaining difficult topics. I try to break them down into the simplest language I can because I think everyone, including myself, can be educated in issues that are a little more challenging and a little less whimsical. I don’t know what your customers are like, but my customers — and readers — are damn smart and can handle concepts beyond fashion and beauty. The tone is the same as the rest of my blog, and people who don’t like that tone don’t have to read it, while others return day after day.

    • Tricia says:

      Oh, no, Marsha, you were so rolling with aggressively offending this blog, why suddenly draw back at the last minute? Weird tactic, just saying!

  2. Rosie says:

    I’m fairly sure that everything I know about investing I have learned from your blog. You explain it all so well! Thanks :)

  3. Julia, the Thanksgiving Girl
    Twitter: juliaohso
    says:

    I love your Get Smart posts!!

    It’s interesting though, I’ve actually heard that the new all time gold high was due to the current state of things in the US economy and especially the possibility of a default…

    • WendyB
      Twitter: WendyBrandes
      says:

      When Artigas mentions the recession and risk management, that speaks to the economic news. But while a particular day’s price may be based on that day’s news/worries, the other issues he mentions are part of the fundamentals underlying the overall rise.

  4. Lara says:

    Brilliant!
    My mom and I had seriously talked about investing in gold years ago when it was $500 an ounce. So wish we had because I’d be selling the hell out of it to your for way less than the market price! ;)

    Every day on the radio I hear the alarmist ads. It’s hilarious that anyone thinks that if/when all hell breaks loose in the world that we’ll remain so civilized as to use gold to get what we need. Ha! Loved your tweet a while back – learn how to grow your own food and invest in lead for bullets.

    • WendyB
      Twitter: WendyBrandes
      says:

      I’d sure love some of that $500 gold!

      Re the people who think the apocalypse is coming … one expert told me that gold is great for diversification of a portfolio. But if you put all your money in gold, as some of the zombie-fearers allege they’re doing, then you don’t have a diverse portfolio, which isn’t good no matter what asset you’re concentrating on. It’s all about balance, as some advisers told me recently.

      • Lara says:

        Totally about balance. I researched no-load mutual funds for a good year and the general consensus for any investment is to be willing to ride it out for the long haul. It’s always going through highs and lows and the diversification helps ease the lows. Right when the economy hit bottom, a friend of mine lost her entire retirement account because her father who handled it sold in a panic. She has kept track of it since (to add salt to the wound) and if he had just left it alone, she would’ve been almost back to normal by now. So sad.

      • WendyB
        Twitter: WendyBrandes
        says:

        Ack! Your poor friend. Psychology is weird. People love to sell low and buy high! I totally have the panic-selling urge too so I defer to the professionals and would never personally play the market. I only act on things that I follow closely, like gold, and, after I’d left my job at Lehman Brothers, Lehman Brothers stock. I sold that at a good time, right off the high, when friends/family were encouraging me to hold onto it because it would surely go higher. I figured even if it did go higher and I missed a new high, I had still made money. (As MrB says, you can be a bull or a bear as long as you’re not a pig.) Luckily I did what I did because Lehman never matched the original high, let alone surpassed it, and ultimately, as we all know, the company went bankrupt. (The reason I was inspired to sell when I did? I needed more money for my jewelry business because gold had gone up to what I thought was an “unbearable” $600 or 700 an ounce!)

  5. Pearl Westwood
    Twitter: pearlwestwood
    says:

    This was a great post Wendy, a lot of the time people don’t stop to think of all the economical issues which effect prices, it is hard enough getting people to appreciate craftsmanship let alone background costs.

    • WendyB
      Twitter: WendyBrandes
      says:

      Everyone is so used to WalMart and mass production. They’re very alienated from the manufacturing process until they attempt it themselves. I’m happy that there are cheap goods available, but that doesn’t mean ALL goods can or should be cheap! It’s the expectation of the latter that’s so challenging for all small businesses, no matter what industry they’re in.

  6. Lara says:

    Mr B. is a wise man! :)

  7. Eric says:

    Good advice! Sounds like you might have a disciplined contrarian bias to investments. I’m a contrarian, except when I’m not. :)

    As long as you’re right more often than wrong, things work out ok…

    • WendyB
      Twitter: WendyBrandes
      says:

      I’m a contrarian about everything … except when I’m not ;-)

      “As long as you’re right more often than wrong, things work out ok” — totally agree!

  8. Susan Tiner says:

    Excellent post. It frustrates me that this kind of information tends to mystify people as it just doesn’t seem that difficult to understand.

    Btw, your tone never seems aggressive to me at all. It’s a funny-edgy-smart tone that makes me feel my intelligence as a reader is assumed and respected. And no one else I know of fiercely defends inclusiveness and diversity as much as you do in writing about fashion and beauty!

    “As MrB says, you can be a bull or a bear as long as you’re not a pig.” So true.

  9. lisa says:

    Bravo for a brilliant post, Wendy!

    You’re right about 24K gold being both an investment and jewelry in India and China. For Chinese brides, it’s customary to receive necklaces, bangles and rings in bright yellow 24K gold as gifts when you marry. I’ve been to many a banquet where the bride is in her red qipao wearing all of her gold gifts at once. I’ve also noticed that I rarely see them wear the gold pieces afterward. It’s probably because the pieces are too soft for everyday wear, but God forbid you get a bride less than 24K as a wedding gift for fear of looking cheap!

    • WendyB
      Twitter: WendyBrandes
      says:

      Interesting! I’ve always wondered if the brides wore those pieces after the wedding. I figured if they did, there was a different cultural tolerance for wear-and-tear than we have in the U.S. People here want to wear their jewelry ALL THE TIME and never see a scratch on it, so forget 24K for most of them. The jewelry designer Gurhan does do beautiful work in 24K. I don’t envy his costs right now. Also, I’m glad that I didn’t cave to pre-2008 pressure to go from 18K to 22K, as a lot of designers were doing. I resisted partly because 22K is way too soft for mechanics.

    • Tricia says:

      I attended several weddings when I was in Asia, and I loved the gold-adorned brides! I also bought some of that soft, 24K gold, wondering if I should sell…:)

    • tiffany
      Twitter: tiffanyiamstyle-ish.com
      says:

      I was recently looking at my mom’s wedding jewelry. The gold is so beautiful but yes so soft! And yes, it just sits in her jewelry box, unworn since the day of her wedding 30+ years ago!

  10. The Preppy Princess
    Twitter: PreppyPrincess
    says:

    Wendy, this is so, so good, you put in terms everyone can understand. Your skills in explaining complex things this way continue to amaze. As someone who has followed gold prices, I continue to be staggered as it climbs ever-higher, I’m old enough to remember when it was $400.

    Sending you a smile,
    tp

  11. sunny says:

    What a fantastic post on gold investments. Your blog bar none is one of my favorite reads! (And yes, yes indeed gold prices are nutty these days. I’ve been watching as well, as my day job company, a JV firm, also invests heavily in gold mines.)

  12. Clare says:

    Great post, smart cookie!! This post is a good insight for the economically challenged to understand what drives prices up an down.

    • WendyB
      Twitter: WendyBrandes
      says:

      I think it’s fun for people to realize they can get more of a handle on intimidating topics, no?

  13. Terri says:

    I don’t think I’ve been one to ask a stupid question here…but I really liked stumbling across this explanation here. Helped me understand things besides your costs.

    • WendyB
      Twitter: WendyBrandes
      says:

      Nah, you haven’t asked a stupid question! And most questions really aren’t stupid. But please! That cheap gold question? It kills me. As if I WANT to pay more and I’m just doing it to spite the customer. Anyway, glad you found this helpful. I have to say that talking to the two guys was helpful for me too!

  14. stacy says:

    Always one of my favorites, “Buy cheaper gold.” You mean gold PLATED?? Chevy & Garrett… oh God, I miss the old SNL’s.

    By the way, you need to walk with some pep in your step these days lady. Somebody might knock you out and take some pliers to your tooth! LOL

  15. Courtney
    Twitter: thosegraces
    says:

    The ins and outs of every business is always so interesting to me. I’ll need to go back and read this entry more carefully later, but I always find the discussion about the price of gold so interesting. And even more so how closely people follow it.

    Planet Money has been doing an interesting series on gold. I’m not sure if you’ve heard any of it yet, but here’s the link: http://www.npr.org/templates/a.....=133252308

  16. NancyDaQ
    Twitter: feralitomsn.com
    says:

    This is not on you Wendy, but the commenter: It’s a commodity. Commodities have a market. The price is the price.

    Also loved your comments on buying high, seling low–or how to make a bubble.

  17. Mary Panjari says:

    Aggressive tone? What a load of fucking bullshit mate! Great post Wendy. Still baffled by why peeps don’t get it. Pack of deludinoids!

  18. Megan Mae says:

    Going against the first commenter – I love your posts like this. I have very little knowledge in such things, and am happily glad to be educated in between posting of covet-able jewelry and delicious style posts.

    These posts are bare bones facts, relatable comparisons, and yes even good advice.

    After scrolling back up, I realized you had already made the comparison I was about to make. Consumers are jaded by the Walmart standard and don’t recognize how and why gold is prized. Fine jewelry is an investment. I wear a 14K band and silver ring daily, because I understand there will be wear and tear (I’m very hard on my hands). Anything else would be an investment piece and recognized as such, like my inherited jewelry that mostly stays in storage.

  19. Hal (GT) says:

    This is one of the more cogent posts I’ve seen on the problems a lot of jewelry makers face in regard to costs of gold. I think people in the Western world have a difficulty because they don’t understand that gold is currency. Hence the 24/7 spot prices around the globe, as you note. Many in India get it. Good post.

  20. Wendy,
    This is one of your best posts ever!
    Thank for explaining what’s going on in the gold market…too many people just don’t understand.