Metals Drop May Crush Jewelry Sellers, Gold and Silver Exchanges

June 20, 2013 by Jon C. Ogg

Gold and Silver
Source: Thinkstock
If you think it is painful to watch the decline (or plummet) in the price of gold and silver as a financial buyer, imagine participating in this decline as a jewelry retailer or as a local retail gold and silver exchange that see in big cities. This is a scenario where hedging has to be an integral part of a business. The problem is that it seems that the hedging is either not being done properly. Buying silver or gold at the retail level is just not getting that much cheaper even as the price of gold and silver are hitting skid row.

Owning jewelry to sell on a showroom floor can be a tough game if the price of metals keeps dropping. All of the gold you bought a few months ago is literally $200 or $300 per ounce cheaper now. So all the jewelry in the cases trying to be sold is priced based upon higher gold prices.

Now pretend you are a gold and silver exchange in a retail store in any major city. You buy and sell golf regardless of the daily markets, but gold and silver had risen for so long that hedging might have become less important as it was in the past. After calling one such local exchange just today the premium over the spot price of silver is $3.00 per ounce. That premium was $3.00 two weeks ago too, but it used to be only $1.50 when prices were higher.

And gold for a premium is steep too. A local quote to buy a Krugerrand or Canadian Maple Leaf was $75 over the spot price of gold. The same was true two weeks ago as well. The problem as a buyer of spot metal is that the premium was bumped up after the prices started to fall and it is now remaining static. That means that you are paying a higher and higher relative price for what silver and gold are worth even as prices continue to fall.

What is surprising is that Tiffany & Co. (NYSE: TIF) stock has not sold off even more than they have. After a near-4% drop to $72.11 on Thursday, the stock’s 52-week range is $49.72 to $81.25. The question that we want to know is how Tiffany’s bean¬†counting team did to hedge their exposure to the price of gold. If they missed the boat, then anyone buying their jewelry today is paying up for much higher gold prices and the premium due to the brand.

For a gold or silver exchange to easily hedge, they can simply buy put options on the iShares Silver Trust (NYSEMKT: SLV) for silver or the SPDR Gold Shares (NYSEMKT: GLD) for gold. For industry insiders, that is not even the cheapest way to hedge as hedging on the metals exchanges can be cheaper than hedging off of a derivative product that trades like an equity.

We are not trying to point anyone or any single company out here. The problem is that the drop in the prices comes with unintended consequences. Some of those gold and silver exchanges will get wiped out on the downside if they are not hedging. If they charge too much of a premium, physical buyers will just refuse to buy and perhaps will just opt for ETF purchasing to get exposure (if they want it).

Many investors and weak longs have sold out of their silver and gold in recent days, weeks, or months, some at deep losses and some at big gains. Many physical gold and silver buyers are still out there, but it is becoming too expensive to buy on the spot market.