Is gold jewelry an adornment or investment?
The answer to that question is two-fold: it depends on where you are and your mindset.
Essentially, gold jewelry in Europe and North America is for adornment; once we are in the Middle East or Asia, however, it is very largely investment with of course the added advantage of adornment. There is a subtle change developing in China on this issue, but overall the bifurcation holds true.
This is the second in a series of pieces about the gold market. Recently we published a high-level review of the past 50 years in the market, noting that in 1970 jewelry fabrication was 75 percent of global gold fabrication, although in 2016 it stood at only 53 percent of total.
As we will discuss in a future piece, gold’s history goes back thousands of years and its beauty, malleability and the fact that it is a noble metal (which includes resistance to chemical action) have been fundamental in its role in society. And jewelry is obviously a vital part of gold’s world.
Much of the contained value of the gold in North American or European jewelry is lost because of dilution in purity, as well as taxation and logistics. Pieces are generally sold by “sticker prices,” while in the east, pieces are sold by weight and the prevailing price (previous day’s London LBMA p.m. price) with a fixed fabrication charge, which means the value of the gold is not lost to anything like the same extent.
Caratage is measured in parts per 24, so that 24-carat gold is the purest jewelry fineness, at 99.99%, known in the trade as “four nines” or 4 9’s.
The caratage term came about because gold used to be weighed against the seeds of the carob bean from the carob tree.
The caratage term came about because gold used to be weighed against the seeds of the carob bean from the carob tree, which some centuries ago were believed to be the only seeds that are nearly identical in size and so traders and merchants started using the carob seed as a weighing mechanism, with a seed theoretically equivalent to one carat. It derives from a mediaeval coin known as the mark, which weighed 24 carats (nowadays a carat is a unit of purity for gold, but of weight for a diamond; in those days it was a unit of weight).
So why the difference between the two hemispheres?
Gold is a soft metal and high purity has historically been regarded as too soft for jewelry in North America and in Europe. Hence the practice of alloying gold with other metals, frequently but not exclusively copper, to harden it and ease fabrication. The minimum acceptable caratage in the UK is 9-carat, which is essentially 63% copper. In the United States, the minimum acceptable is 10-carat although 14-carat is the most popular, and 14 is also dominant in Europe. Eighteen-carat is gaining market share, though, and 18-carat white gold is alloyed largely with silver and nickel, occasionally with a rhodium flash to enhance its lustre.
What this means is a 9-carat plain gold piece is only 37.5% pure gold. Furthermore, by the time we have added in manufacturing costs, wholesale mark-up, distribution, retail mark-up, VAT and any other taxes, it is possible for a purchaser to pay more than four times the value of the gold in the piece. This explains why, if you ever want to sell it back, you won’t get anything like what you paid for it because a jeweler will only pay you for the gold content.
A different story further east…
In the Middle East and Asia, by contrast, gold jewelry is of much higher purity with much of the Middle East favoring 21 or 22-carat, India essentially similar but a good proportion of East Asia preferring 4 9s. Techniques have now been developed that have added to the robustness of 4 9’s pieces although the clasps, while strong in terms of keep a piece secure, must be treated with care as they are also 4 9’s gold, and they can break if not used properly – as I can attest.
Buying high purity gold jewelry in this way can mean that the overall cost can be as low as just 10% over the fine gold content and this low dilution means that the jewelry market in the east is much more two-way than anywhere else. And this ease of mobilization is a contributory factor behind gold’s comparatively low volatility among a range of asset classes. In addition, the fact that sales are made on the basis of weight means that the process of resale is transparent.
On a recent trip to Hong Kong, I needed to replace a link in a 4 9s bracelet, so I went to the chain of jewelers that had fabricated it (they won’t repair pieces from competitors). They weighed the piece, replaced the link, weighed the new piece (the weights in this instance were identical) and because it was a simple replacement, there was no fabrication charge and I came away with a repaired bracelet at no cost. Took five minutes. Easy!
So the higher the caratage, the greater the investment value, and vice versa. And high purity gold jewelry is one of the easiest, attractive and most self-satisfying ways of transporting wealth.
Check out the first of our Answers On gold series to learn how the gold market has changed over the past half century.
For more information, anecdotes and statistics on the gold market, past and present, you can also download a complimentary copy of the 50th Anniversary GFMS Gold Survey.