Gold Once More Above $1,100

The Wall Street Journal

LONDON--Spot gold climbed back above $1,100 a troy ounce on the last trading day of the year Thursday, getting help from a weaker dollar and rising crude oil prices.

Gold will finish the year on a steadier footing after its steep tumble earlier in December, having bounced 5% since bottoming at a seven-week low Dec. 22. Its recovery will bring gold to a gain of 26% for all of 2009.

Spot gold was trading at $1,103.95 an ounce, up 1% on the day. Gold's recent recovery since tumbling over 12% in the first weeks of December has been accompanied by a modest rebound in the euro against the dollar, and a steep rally in crude oil prices.

Its recovery will bring gold to a gain of 26% for all of 2009.

"I think the story of instability in the Middle East has pushed the price of oil higher, which translates to higher gold prices," said Afshin Nabavi, head of trading and physical sales at Swiss bullion trader MKS Finance.

While gold has regained a steadier footing, its direction at the start of 2010 will largely depend on whether or not the dollar will further strengthen.

But for the last trading day of the year, volumes will likely remain thin and volatility low.

"It's the last day of the year, I don't think a lot of people want to get fresh involvement," said Nabavi. At such a high price, now may actually be the time to trade gold for cash, rather than seeking gold as an investment.

In other precious metals, spot silver was 1.5% higher at $17.037 an ounce, spot platinum rose 0.6% to $1,460 an ounce and spot palladium was up 3% at $402 an ounce.

Palladium will end the year with the most upwards momentum. The metal has gained 15% since bottoming at a five-week low Dec. 22, the same day gold hit its bottom.

Diamond Miners Band Together To Lower Prices Of Rough-Cut Stones

Wall Street Journal

ANTWERP, Belgium— The world's top diamond miners plan to slowly increase output to tamp down prices of the rough gemstones. The cautious move aims to appease customers who have been squeezed by flat retail prices.

The delicate choreography comes even as the top four diamond producers fret that demographic and other changes threaten to permanently sap demand for the gems and create a long-term crisis for the industry.

Prices for rough, uncut rocks have risen more than 40% since February. Meanwhile, retail sales are falling, to $65 billion this year from $74 billion in 2008, RBC said.

"A lot of companies are going to be out" of business because of higher rough prices, said Eyal Atzmon, whose Antwerp-based company El-Ran polishes and trades diamonds.

As the financial crisis crushed the luxury-goods market, De Beers Group, Rio Tinto, BHP Billiton and Alrosa Co. slashed production this year. The four diamond miners control 90% of global production and influence prices through a Byzantine yet legal system of closed sales, secret long-term contracts and a few auctions.

De Beers, for example, slashed output by more than 90% in the first quarter.

And Alrosa sold all its production to the Russian state in the first half, rather then sell rough diamonds to its regular customers who cut and polish the stones for sale to consumers.

Global diamond-mine production is forecast to fall to $8 billion this year from $13.1 billion last year, according to Toronto-based RBC Capital Markets.

With manufacturers and polishers complaining of vanishing profit margins, the big four miners pledged Monday to ease their pain.

"We had to avoid a large-scale and catastrophic collapse of our industry," Sergey Oulin, vice president of Alrosa, said Monday at an industry conference in this port city, the center of the world diamond trade.

While the miners are loath to see prices for uncut diamonds drop too sharply, they are also worried that they might put some of their customers out of business if prices stay high.

"There is a consensus that rough prices have gone too high," said Des Kilalea, an RBC analyst. "But what everybody craves in this business is stability."

The miners plan to increase production gradually to avoid destabilizing the market. Alrosa holds more than $1 billion of diamonds, but won't sell it all at once, Mr. Oulin said.

Production "all depends on what demand will look like in the future," said Tim Dabson, a De Beers executive director.

Any increase poses risks for the miners. Short-term retail demand was hit by the global recession. But even as economic growth resumes, the industry faces other longer-term challenges, particularly in the U.S., which accounts for 40% of retail sales.

"We know people over 55 treasure diamonds…but that's not so clear for the iPod generation," Mr. Dabson said. "We need to tap into that market."Other risks include the tendency of consumers in the growing economies of India and China to favor less-expensive gems than what sell elsewhere.

The industry also is contending with what Mr. Dabson called "ethical consumerism," the linking of diamonds to war, corruption and environmental degradation. The industry participates in the Kimberley Process, an effort to ensure that diamonds traded internationally aren't used to finance rebel groups.

The industry needs protection for "when we're hit by a crisis like the 'Blood Diamond' movie," said BHP Billiton marketing director Chris Ryder, referring to the 2006 Leonardo Di Caprio film about diamond mining in war-torn Sierre Leone.

He also said the industry needs to mount general "demand defense." De Beers, the biggest diamond producer, has said it would reduce its advertising budget, worrying executives throughout the industry. The big miners have discussed a collaborative $200 million ad campaign, but have yet to commit.

Mr. Dabson drew applause, however, by playing a De Beers TV commercial for the U.S. that features a couple ice-skating on a frozen pond.

Retailers are worried as well. Zale Corp., which operates 1,930 retail jewelry locations across the U.S., Canada and Puerto Rico, reported a net loss of $189.5 million for the fiscal year ending July 31 and a 16.8% drop in revenue. "Diamond fashion has been extremely hard hit," David Sternblitz, vice president and treasurer of Zale, said, adding that demand for diamonds has decreased commensurate with overall jewelry demand on account of the recession.

But while most diamond retailers face what Zale CEO Neal Goldberg has called "the most difficult year in retailing in memory," other diamond sellers are doing well. Blue Nile Inc., one of the U.S.'s largest online diamond retailers, has remained profitable and gained market share at an accelerated pace in the recession, as customers turned to the Web for discounts, said CEO Diane Irvine.

The recession has also been advantageous for diamond sellers in the very upper echelons, where customers are investing in million-dollar diamonds as safe investment alternatives. "It's a refuge for your money if you have the cash available," Henri Barguirdjian, CEO of Graff USA, said, adding that his company, where the average sale is $150,000, was 20% ahead of last year's retail sales in the U.S. market.

Despite such exceptions, most diamond retailers are suffering, with some of the larger U.S. jewelers – such as Fortunoff and Finlay Enterprises Inc. – filing for bankruptcy this year. Even if economic growth resumes, other longer-term challenges face the diamond industry, executives in Antwerp said.

Gold Price Skirts $1,100

Wall Street Journal

Gold prices neared $1,100 in after-hours trading after the Federal Reserve's post-meeting statement suggested that U.S. interest rates won't be going up soon which keeps potential longer-term inflation a worry among traders.

The statement came out after the end of pit trading on the Comex division of the New York Mercantile Exchange, where the settlement price is set.

In pit trading, the nearby but lightly traded November futures firmed $2.40, or 0.2%, to settle at $1,086.70, a record settlement for a front-month contract. December gold rose $2.40 to $1,087.30 an ounce, a record settlement for the most-active month contract.

Then, about an hour after the Fed statement, in electronic trading after hours, gold for December delivery traded as high as $1,098.50 an ounce.

"The fact that everything remains the status quo is a positive environment for gold," said Dave Meger, director of metals trading at Vision Financial Markets.

There had been some worries that the Fed might change its rhetoric enough to be seen as signaling a hint of possibly tightening interest rates down the road.

"Any type of tilt to that effect could have supported the dollar and hence dented the gold price," Mr. Meger said. "Obviously that didn't happen. So any expectations to that effect are no longer a concern and that obviously gives a green light to the gold market to continue forward."

The Fed said conditions "are likely to warrant exceptionally low levels of the federal-funds rate for an extended period."

Continued low interest-rates mean further pressure on the dollar, especially since some nations have started raising rates, said Joe Foster, portfolio manager with Van Eck International Investors Gold Fund.

"Anything that is negative for the dollar is good for gold," he said. "Then there are the inflationary implications. The longer they maintain these historically easy monetary policies, the more that stokes potential for inflation somewhere down the road."

Gold had gained before the Fed statement on a second day of buying in the wake of news that the Reserve Bank of India has bought 200 metric tons of the metal from the International Monetary Fund who obviously know how to sell gold.

The news of the Indian purchases from the International Monetary Fund supported the market since it was seen as both reflecting strong central-bank demand and alleviating worries that the IMF's planned sale of 403.3 metric tons would hurt the market.

Central banks collectively had been net sellers of gold for more than a decade, said Fred Jheon, managing director of U.S. product development for ETF Securities.

Outlook Not Shining For Jewelers Anymore

Wall Street Journal

Foss Jewelry was honored by the Maine Legislature in September for reaching its 90th year in business. But like many jewelry retailers across the country, the family-owned store may have just celebrated its last birthday.

"We've talked to an accountant and we've decided to try to get through Christmas," says Anne Winter, manager of daily operations at the store, located in Livermore Falls, Maine. "At that point, we'll see if we will liquidate and close down."

The store only sold one diamond ring last holiday season, relying on sales of cheaper, sterling-silver pieces and other gift items to bolster profits. Then one of the town's paper mills shut down, laying off hundreds and crimping the town's economy. Some days, Ms. Winter says, she is lucky to make $20 selling watch batteries.

As younger generations become less interested in jewelry and as Americans gravitate to online shopping for convenience and bargains, Main Street jewelers and jewelry retailers are struggling to attract customers. The recession, which has spurred many consumers to think twice before making a luxury purchase, has added an extra burden, pushing many to shutter their doors.

According to a census by the Jewelers Board of Trade, the number of jewelry retail firms has declined more than 5% since September 2007, when the credit crunch started to take a firm hold on the economy. That's a net loss of 1,210 stores, primarily made up of mom-and-pop shops because the census tallies retailers by name, not by each store or kiosk location. This means that Foss Jewelry, as a standalone jewelry store, is counted the same as chains such as Zale Corp. and Kay Jewelers.

In 2007, sales for private jewelers were up more than 4%, according to Sageworks Inc., an economic-research firm in Raleigh, N.C. But in the last year, sales at those establishments are now registering a 4% decline. By comparison, sales dropped 2.3% at clothing stores and 3.3% at florists in the same period. Furniture stores, hard hit by the housing market, are enduring a 6% drop in sales.

"It's discretionary items that people stop buying when they are feeling insecure," says expert Drew White, chief financial officer at Sageworks and a credit analyst who researches market potential. "And there is lack of capital to finance inventory, which is another thing that is hitting private retailers."

Wise Jewelers, of Mount Vernon, Ohio, was shut down last February after 183 years in business. "It was difficult to compete with the chain stores and the Internet," says Brian McNamara, who owned the business for three years before closing it down. "For the most part, the service and repairs side of the business kept us going, but in the end, the economy did us in."

Some jewelers are staving off liquidation by implementing new business models. Carol Lipper, president of Designer Jewelry and Handbags, shut down her shop on the main thoroughfare of Millburn, N.J., in June because she couldn't afford rent. She laid off two employees, reduced her inventory and relocated to Livingston, N.J., where she is renting a small space inside Handcrafters, a store specializing in handmade gifts.

"I've seen downturns that affected expensive merchandise," says Ms. Lipper, whose products sell for $20 to $250. "But I've never seen anything like this, where the moderately expensive stuff is getting hit, too."

While it's been tough building a new clientele, Ms. Lipper thinks the model has potential. She is in negotiations to rent counter space at other stores and spas in the area to expand through satellite locations. She will also give the storefront presence another try: Just this week, Ms. Lipper signed a lease to rent a small boutique in Denville, N.J.—for 78% less than she was paying for her store in Millburn—and has hopes of opening by Thanksgiving.

In Ann Arbor, Mich., Craig Warburton also made a big change. His business, Austin and Warburton, hit $1 million in revenues in the mid-1990s and was growing steadily. His wife, Brenda Warburton, designed and created all the jewelry in the display cases, which attracted pedestrians in the downtown area. In 2008, seeing the consumer shift to online purchasing for engagement jewelry, the Warburtons launched AustinAndWarburton.com, a Web portal that allows customers to design and order custom jewelry, from birthstone necklaces to wedding rings and hibiscus jewelry.

The site took off and the couple decided to shut down the storefront last May—shedding several highly-compensated employees in the process—and move to a nearby office. For added convenience, the couple installed a video-conferencing system that allows customers to discuss and see 3-D models without leaving home. This year, Austin and Warburton should post record sales, Mr. Warburton says.

"We changed the size of the business to suit the size of the customer base," Mr. Warburton explains. "And we got a chance to rewrite the rules at a time when a lot of people are going out of business."