For investors around the world, gold has been one of the shining stars in another uncertain year of investing. On Dec. 1, 2003, gold bullion broke the $400-an-ounce mark in trading for the first time since 1996. The price of gold continued to climb in 2004, exceeding $415 on the spot market in March.

While investors celebrate the rising price of gold, it’s just one more challenge in a year of challenges for those who manufacture, design, and sell gold jewelry. In addition to rising prices, those in the gold jewelry business also are dealing with the decline of the U.S. dollar against the euro as well as a nascent campaign being launched by non-governmental organizations (NGOs) against the mining of gold. Also, for manufacturers who supply product to Europe, the positive effect of the lower-dollar value has been offset by a retaliatory tariff imposed by the European Union on U.S. companies that sell product to Europe.

The price of gold. But has this affected gold jewelry sales? The short answer is, no. But the pressure is being felt in the supply chain, and it has made its way down to the consumer. Retailers and manufacturers have made price adjustments. The one positive factor in the two-year rise of gold is that it happened gradually, so everyone had a chance to make adjustments. However, during the early part of 2004, the price of gold has been more volatile: In the month of January alone, the price of gold swung from about $390 per ounce to more than $425.

For manufacturers, this means having to make the tough choice between lowering margins or raising prices—or a little of each. For suppliers and retailers, it means buying product in places where the dollar is still strong and labor is less expensive.

“The Italians have certainly been pinched,” says Rick Bannerot, World Gold Council vice president, advertising. “There haven’t been gigantic price spikes at retail, but margins have been touched a little bit. We have had extraordinarily small inflation. It’s gone up over the course of the year, but most everybody’s got hedges and long-term contracts. It has not thrown the gigantic supply chain into panic. It just reiterates that gold is a precious metal. It helps drive demand and interest in the product: ‘My gold is more valuable than it was when I purchased it.’ “

The value of gold. Linda Abell of Sarah Leonard Fine Jewelry, Los Angeles, confirms the view that increased value can mean increased sales. “Of course it increases the cost [of stocking gold jewelry], and it increases the retail price. But it doesn’t affect the consumer,” she says. “I approach it as, ‘You should buy now because if it continues to rise, it will be more valuable.’ This tends to make gold more valuable in their eyes.”

Also, she notes, “I’m quick to remind people who are old enough to remember that at one time gold was $800 an ounce, so it’s still a bargain.”

For Susan B. Eisen of Eisen Fine Jewelry, El Paso, Texas, demand for gold remains strong. “I have noticed that there’s still a continued desire for yellow gold,” she says. “And white gold is still well received. That’s a positive. … Two-tone is very popular in my area for wedding rings and watches.”

“We’re selling a lot more white gold,” Abell adds. “People who were buying platinum are buying white gold. White metals are still very hot, mostly white gold and platinum two-tone wedding bands. … Necklaces, chains, or bracelets—more yellow than white. The white gold chains we sell the most of are used for pendants, not worn by themselves.”

Eisen did note that the drop in the value of the dollar against the euro has increased the cost of product from Europe by about 25%. “The decrease of the dollar has hurt a lot of things we buy from Italy and Europe in general,” she says. “We pretty much stopped buying [from Europe] to see what happens.”

Jewelry retail chains have been better able to manage the price changes because they are able to lock in prices and negotiate better deals based on volume.

Marvin Beasley, president and CEO of Helzberg Diamonds, North Kansas City, Mo., says that the company—which has 230 stores in 35 states—was able to hold off increasing the price of its gold products until after the holidays.

“We held off as long as we could,” he says. “It hasn’t made a great deal of difference. It’s negligible. If we sell a few less units, the higher selling price will make up the difference.”

For Zale Corp., North America’s largest specialty retailer of fine jewelry, gold jewelry amounts to 15% of its overall business, and the majority of that business is done through its Piercing Pagoda subsidiary. Even though David Sternblitz, senior director of investor and public relations, acknowledges that the climate for gold “has been a little bit challenging over the past year,” the Dallas-based company was able to reduce the impact by “locking in the majority of our gold prices early in the year. And where we couldn’t lock in, we purchased forward contracts, so we hedged our exposure that way.”

In addition, he says, the company has been trying to source more of its product directly. By doing this, the company has still been able to buy product from Italy and the rest of Europe as well as develop new buying opportunities in Asia.

All of this has helped the company maintain its prices, Sternblitz says.

“We’ve done a pretty good job of managing,” he says. “We haven’t really raised prices. Maybe on an item or two, but in general, no.”

Manufacturers manage. For manufacturers that either purchase their gold through arrangements with banks or who sell product to retailers by locking into quarterly deals, the cost of gold has adversely affected their margins. And this means that at some point they will have to raise the price of their product, if they haven’t done so already.

Joe Sisto, chief operating officer of Leach & Garner-General Findings, North Attleboro, Conn., a company that provides raw materials and findings to manufacturers and wholesalers around the world, says his challenge is twofold.

First, the rise in the value of gold has meant that they’re paying more interest on the credit line the company uses to purchase gold for their product. That interest often cannot be included in the price they charge manufacturers and wholesalers, and that affects the company’s margins.

“It goes against your credit line, and in most cases you can’t pass that along to your customers,” Sisto says. “If you are not reflecting the current market, you have margin erosion.”

The second challenge is a tariff that has been imposed on several U.S. industries by the EU. The tariff took effect at 5% on March 1 and will increase by 1% each month until it reaches 13%.

The tariff is in response to the U.S. “Foreign Sales Corporations” (FSC) and “Extraterritorial Income” (ETI) programs. The FSC program, which provided tax relief to U.S. companies to offset foreign taxation, was challenged by the EU a few years ago as a violation of World Trade Organization rules against illegal subsidies. The WTO agreed in 1999. In 2000, Congress passed the ETI program to achieve the same ends without violating WTO rules, but the EU challenged that, too. The WTO agreed this also was an illegal subsidy and authorized the EU to impose up to $4 billion annually in trade sanctions on the United States until the programs are repealed. The EU gave the Untied States until the end of 2003 to act. The Manufacturing Jewelers and Suppliers of America (MJSA) is urging the U.S. Congress to quickly repeal the tax breaks so that the tariff will be lifted.

Sisto says the tariff has “dramatically impacted” its business in Europe. “The tax is not only on our value added, but on the gold,” he says. “If they don’t solve this problem, we may have to remove our office in Pforzheim, Germany.”

Ofer Azrielant, chairman and CEO of Andin International, says the strength of the euro and the recent volatility of gold prices “has been a nightmare.”

“It puts pressure on our margins [because] we have deals with the retailers where we lock in the price of gold months in advance,” Azrielant says. “Sometimes the price is established a few months in advance to be kept the whole quarter. We usually can hedge ourselves, but in this day and age if we can’t come up with good projections, we can get caught.”

‘Dirty gold’ campaign. To add to the challenges, there is an effort—still largely below the radar at this time—by the NGOs Earthworks/Mineral Policy Center and Oxfam America to target gold in a new consumer campaign on the environmental and social impact of mining. The NGOs say they have planned “No dirty gold!” demonstrations in New York, Boston, and Washington, D.C., at Cartier or Piaget stores. At press time, however, there had been no sign of any demonstrations.

Points the NGOs raise, such as the use of cyanide to extract metals, are general mining issues—not solely gold issues—and many already are being addressed.

The World Gold Council issued the following formal statement in response to the NGO allegations: “The World Gold Council and its members are conscious of their obligations and responsibilities towards the maintenance of the environment. The Council’s primary members are actively involved in the Industrial Council of Mining and Metals, which supports programs for mining, minerals, and sustainable development.”

Jewelers of America also issued a statement responding to the NGOs: “Jewelers of America … strongly supports the responsible mining of minerals and metals. The long-term objectives articulated in the recently published report by Earthworks and Oxfam America are consistent with the Jewelers of America mission statement and with our own ongoing commitment to social, ethical, and environmental responsibility.”

But other than the NGOs’ press release, there has been little known activity against gold. “It appears to have just gone away,” says Michael Barlerin, managing director of the World Gold Council in the Americas.

Gold jewelry still sells. Despite all of the pressures placed on gold, gold jewelry continues to sell. Sales of the precious metal grew by 2.5% over 2002 figures to $16.3 billion. This marks the 13th consecutive year of growth in retail sales and the first time sales have surpassed the $16 billion mark, the WGC reports. All retail segments reported growth in 2003.

In addition, more than 214.3 million pieces of gold jewelry were sold in 2003, an increase of nearly 4% compared with 2002 figures, while the average cost of a piece of jewelry actually fell by just over 1%, says the WGC.

According to Bannerot, the strength of gold lies in the fact that it is something consumers buy year-round. In addition, it is a strong self-purchase item, particularly among women (65% of gold is bought as a self-purchase item by women).

“Gold jewelry is the norm,” he says. “It’s a $16 billion industry in the U.S.”

And it has proven its resiliency.

Hedda T. Schupak, JCK editor-in-chief, and William George Shuster, JCK senior editor, contributed to this story.