Last year's rebound in jewelry demand was welcomed by gold bugs as a sign that underlying support for the metal was growing, but an expected rise in gold prices this year may nip 2010's tentative recovery in the bud.
Price-sensitive buyers in India, the United States and Western Europe are expected to shy away from fresh purchases as prices climb, adding to a relatively steady decline in jewelry buying that has been seen since gold's bull run began in 2000.
Higher prices tend to mean less jewelry demand, said Mitsubishi precious metals analyst Matthew Turner. People buy less because the price has gone up, and they tend to sell more back as scrap. There is a double effect.
One market is expected to be an exception -- China. Last year China's jewelry demand rose by 14 percent, a healthy gain that was still outstripped by Chinese buying of investment products such as bars, which leapt 88 percent.
Philip Klapwijk, chairman of metals consultancy GFMS, said the jewelry chiefly being bought in China is top-quality 24-carat merchandise, much more than 18-carat.
That suggests the driver may be investment rather than the traditional use of jewelry as adornment.
This year inflation is becoming a very serious concern, aid Shi Heqing, an analyst at state-backed research firm Antaike in Beijing.
The enthusiasm in gold investment as a hedge against inflation is spilling over from bars and coins to jewelry. We've heard anecdotes that due to shortage of gold bars, desperate investors turn to gold jewelry.
Klapwijk said while he expected to see Chinese buying continuing to rise next year, global jewelry demand may dip 3-4 percent as Indian and western market demand softens.
We think price rises this year will tend to dampen down demand, he said. There is going to be a bit of resistance to higher prices in India.
Indian jewelry demand rebounded by two-thirds last year, the WGC figures showed. While the Asian giant is seen remaining thirsty for the metal in 2011, its love of gold is not unconditional, and Indian demand remains hostage to price moves.
India is a much more mature gold market than China, in that you can have really high gold demand in one year and relatively low demand in the next, said Bank of America-Merrill Lynch analyst Michael Widmer.
It is a question of (buyers) believing that you are not buying into a market where the price will go against you.
WESTERN MARKETS LAG
In key Western markets, the WGC data showed another fall last year in jewelry consumption, outlining a 14 percent decline in U.S. and UK demand and a 16 percent drop in Italian consumption.
Stefano de Pascale, director of Italian goldsmiths' federation Federorafi, told Reuters this week he hoped Italian output would steady this year.
But analysts are less convinced that mature Western markets will see a recovery.
Consumer confidence remains shaky, while soaring prices have led to a proliferation of dealers such as Cash4Gold, which have helped bring a wave of gold scrap back to the market.
Helena Krodel, spokeswoman of Jewelers of America, the industry's largest trade group, said U.S. consumers, unlike their Chinese or Indian counterparts, do not tend to view jewelry in terms of its investment value.
Clearly, one is not buying a piece of jewelry in order to turn it around like real estate, she said.
Given that jewelry is still the biggest global segment of gold demand, a dip might be expected to curb prices. But growth in investment demand has made up for it in recent years.
The proportion of total gold demand accounted for by jewelry fell to just over 50 percent in 2009 from 75 percent in 2004. In the same period investment demand nearly tripled.
But jewelry buyers still have a key role to play in the gold market, which they are likely to keep despite any slight fall-off in demand.
When investment-driven price rallies have lost steam in recent months, these price-sensitive buyers have gone in to buy on the dips, helping avert sharper corrections.
Jewelry can and does act as a sort of short-term price floor, and in that sense, that price floor has been creeping up, said Klapwijk. The level at which price-sensitive markets spring into action and help defend the price has moved up quite considerably over recent years. That is a positive.