Jewellers go slow on bullion sales

Churn out business portfolio for 10 times higher returns in jewellery than bullion with same investment

With the government curbing gold imports, jewellers have started focusing on making ornaments to increase their income without adding any working capital.

Jewellers have started gradually phasing out sales of coins and bars, owing to the low margins for investment products. They have, instead, intensified their focus on ornaments, which have much higher margins. Against an average conversion charge of just one per cent for coins and bars, organised jewellery retailers such as Tribhovandas Bhimji Zaveri (TBZ), Gitanjali Gems, Shree Ganesh Jewellery House and PC Jeweller charge 10-15 per cent as making charge for ornaments. Tanishq has up to 20 per cent making charge on gold and diamond jewellery.

Making charges on gold coins vary depending on their denominations; the average making charge across jewellers stands at just one per cent.

“Typically, customers have been under the impression the jewellers would make available both coins and ornaments. But with the entry of banks in bullion-selling, this has changed. Therefore, jewellers are now focusing on their core activity — selling ornaments,” said Umesh Parekh, managing director of Kolkata-based Shree Ganesh Jewellery House. The company has reduced its bullion sales to one per cent and 0.25 per cent for exports and the domestic market, respectively, from a staggering five to seven per cent a few years ago.

Now, the sale of investment products is largely confined to banks; jewellers provide bullion to specific customers with large purchasing orders and with whom they have long-term relations. “We have reduced our bullion stocks on display in our showrooms. We sell bullion only to customers with specific demand, so as not to lose them for the next purchase,” said Shrikant Zaveri, managing director of TBZ.

Reflecting the trend, global investment demand for gold declined 10 per cent to 1,534.6 tonnes last year, compared with a staggering 1,700.4 tonnes in the previous year. Gold jewellery demand saw a three per cent fall — from 1,972.1 tonnes in 2011 to 1,908.1 tonnes last year.

While the investment in bullion and ornaments is equal, returns from the sale of jewellery is much higher. Also, jewellers require very high levels of inventory for coins.

Neil Meader, head of precious metals research & forecasts at Thomson Reuters GFMS, says he is hopeful investment demand would see a rise in the coming years. “Losses in physical bar investment drove a drop in World Investment (GFMS’ measure of total investment); still, it rose to a fresh record, in approximate value terms. Factors contributing to the slightly more restrained investment environment last year included the relatively strong dollar and the loss of upward momentum in gold prices,” Meader said.

Last year, the fall in consumer demand for gold in the investment segment in India was sharper than in the jewellery sector — while the jewellery sector recorded a fall of 6.83 per cent (565.9 tonnes), demand in the investment segment fell 16.30 per cent.

The government has tried to reduce foreign currency outgo in gold imports by increasing import duty up to six per cent and urging customers to abstain from physical gold-buying. The huge outgo in gold imports had led to a burgeoning current account deficit.