High-price gold is here to stay for awhile, and jewelry retailers, manufacturers, and consumers are coping in various ways, despite the recession.

Last year, the trade struggled with zig-zagging gold prices. Gold ended 2008 at $874 per ounce (average price) and briefly topped $1,000 last year (the high was $1,002, according to a chart on Kitco.com). In January it topped $900. Many analysts expect its average to pass $900 this year and hit $1,000 in 2010, boosted by institutional and individual investments (up 20 percent in 2008) seeking to preserve wealth and find refuge from bank failures, a U.S. dollar made volatile by recession and inflation, a weak world economy, and global politics.

Meanwhile, worldwide gold jewelry demand, dampened by growing global recession, fell 11 percent in 2008, the lowest since 1989. The United States accounted for one-third of that decline. The 2008 Gold Survey of GFMS Ltd., a leading international precious metals consulting firm, says the sharp drop in U.S. jewelry consumption not only affected U.S. jewelry manufacturers but also contributed to 2008’s drop in Italian jewelry exports, down 18 percent. Another 11 percent decline worldwide is expected in 2009’s first half, says GFMS, as “economic sluggishness and the gold price strength hit all areas [of jewelry demand] except gold coins [up 40 percent in 2008].”

HERE’S A LOOK AT THE U.S. GOLD JEWELRY MARKET IN 2009.

Consumers

Expect a slight downturn in U.S. jewelry demand, not a significant one, says John Calnon, managing director, World Gold Council USA. Other analysts agree and predict that the first eight or nine months of this year will be slow. Various reports support that. For example, consumers were less likely to buy jewelry for Valentine’s Day 2009, said a National Retail Federation study (16 percent vs. 16.6 in 2008). A 2009 national survey of affluent consumers by luxury market analyst Unity Marketing found they’re spending less on luxuries like fashion accessories (down 6.4 percent in 2008’s fourth quarter), shopping less frequently, “holding off on discretionary purchases, [and] showing a new frugality that may become a habit once this recession ends.”

Popular-price gold jewelry has been affected. “The reality is, we’re now dealing in a much higher-priced gold market, and so low-priced entry-level gold jewelry—like $30 earrings or $40 chains—is gone for the foreseeable future,” says Calnon.

That doesn’t mean gold jewelry is dead. “The desire for gold jewelry isn’t going away,” says Michael Pace, vice president of marketing, WGC USA. A 2008 WGC survey of U.S. consumers found they prefer higher karat gold (14k and 18k) even when prices rise. “They want the best gold jewelry they can buy and will wait until they can,” says Pace. “People are only putting off purchasing it until there’s an upturn in this economy late this year or in 2010.”

Manufacturers

“The U.S. jewelry manufacturing industry is weathering an almost perfect storm,” says David Cochran, president and chief executive officer of Manufacturing Jewelers and Suppliers of America. “Gold’s high price, lack of credit from banks, the economy, and downward demand is putting a lot of pressure on manufacturers.”

Another big issue is the rising cost to rent gold from banks. “If you can’t lease it, you must buy it on the market, and either way, manufacturers’ production and carrying costs go up,” Cochran notes.

Manufacturers are coping, Cochran says, by reducing margins rather than raising prices; introducing more sterling silver and gold combinations (some even promoting sterling silver as the “new gold”); reducing inventory and carrying costs to improve supply chain efficiency; managing business and expenses more carefully; and seeking new revenue opportunities, like line extensions.

Cochran says there’s more focus on customer service as manufacturers help clients with merchandising assistance, product development, and design services. They’re also promising quick turnarounds and offering exchange privileges—services unavailable from offshore suppliers.

“It’s a very difficult business environment now, but the strengths of U.S. jewelry manufacturing are its resilience, resourcefulness, innovation, and ability to reinvent itself,” says Cochran. “Those willing to change with the times will survive.”

Retail

“Jewelry retailers, after a very tough holiday season, have reduced purchases,” says Calnon. “They’re buying cautiously, buying more promotional product, selling down current jewelry inventory—and not much more.” That was evident at recent trade shows. Attendance at the JA winter show was down, fewer Americans attended Italy’s Vicenza jewelry show, and attendance by top retailers at the SIHH luxury watch fair in Switzerland fell 20 percent—mainly because of fewer U.S. and Japanese retailers.

“The fashionability of gold and designs that push sales are still in the media, and there’s more branded gold jewelry,” notes Calnon. But he says that independents, unlike retail chains, aren’t buying new styles and new products. “‘Risk averse’ is the industry mantra now,” he says.

David Peters, Jewelers of America’s director of membership services, says jewelers are less daring and more selective, and they’re leaning toward lighter pieces and pieces that resemble higher-end items. “They’re avoiding riskier high-end fashion pieces and staying closer to traditional looks, buying things with less market resistance and more acceptability, like more 14k and less 18k, or more standard nonbranded jewelry than branded high-end lines,” Peters notes.

There’s also a substantial increase in alternative metals jewelry. Peters adds: “Sterling with gold accents, stainless steel, and other alternatives, some combined with precious metals for the profit margin.”

But if jewelers are buying less gold jewelry, it’s also because many had too much in stock for too long. “They must replace that, making smart buying decisions based on the store’s profile and customers,” Peters says.

They also must closely follow precious metal commodities and react and reprice quickly, says Peters, who warns against promoting gold jewelry as an investment: “Stress its value as a piece—in design, quality, and store support—and not an investment.”

Calnon says independent jewelers have opportunities in this market because their relationships with gold jewelry customers are stronger than the chains’ relationships, and they can react faster to customer requirements.

Many jewelers have found another opportunity in this market. Peters says there has been “a significant increase” in jewelers buying gold jewelry from the public, either to resell as estate jewelry or, more likely, to sell to refiners as scrap. “This customer service has become an alternate revenue source for them,” he says. “Even after things calm down in a few months, jewelers have discovered this is a profitable revenue stream and will continue doing it.”