The jewelry industry is big, but what does the sale of gold and diamonds really tell us about the health of the economy? First, it provides a snapshot of the spending habits of the wealthy. When the wealthy stop spending on discretionary items like jewelry, that is cause for concern. Second, with gold acting as much like a currency as a precious metal, the metal's price action provides a picture of the stability of the global economy.
TUTORIAL: Stock Basics
Both of these factors have proven that the jewelry market is a strong indicator for the overall economy. What has the action of the jewelry companies told us about the overall market and what we can expect to see in 2012?
Tiffany & Co.
Tiffany may be the most well-known jewelry brand in the world, and, as jewelry stocks go, it's where investors look to gauge the strength of the retail, high-end jewelry market. Tiffany's third quarter sales were better than expected, but their fourth quarter outlook disappointed investors. As a result, Tiffany shares lost 10% of their value the day after they announced earnings. (For related reading, see The 4 R's Of Investing In Retail.)
Blue Nile was one of the first jewelry stores that offered high end jewelry without a physical storefront, but much like Tiffany, better than expected revenue of $75 million didn't help to keep the stock from plunging 18% on the back of disappointing profits.
Zales, a brick and mortar jewelry store chain often found in malls and geared more towards the middle income consumer, has seen its stock plunge 24% in the last four months. What does this say about the spending power of the middle income jewelry buyer?
What's Wrong with Jewelry?
Investment markets are great at crowning winners at the cost of somebody else and that may be the problem with the jewelry market. Even those with little investing knowledge know of the epic run of gold. With prices hovering around $1,730 per troy ounce, anything made with gold costs jewelry dealers more.
Bloomberg reported that the Rapaport Diamond Trade Index, which measures the price of the top 25, 1 carat, high-quality diamonds, rose to $9,874, marking a 23% increase in diamond prices year over year.
Gold and diamond investors have seen big paydays, but the surge in raw material prices, as well as weakness in the dollar, have forced jewelry retailers to pass the increased prices along to consumers and in the jewelry market. Consumers don't like to pay more - they'll just buy less bling.
Is the Economy Broken?
If we look at the lackluster guidance from the jewelry market, it's easy to believe that significant problems may be on the horizon, but when we look at other luxury brands like Coach, Macy's, Estee Lauder and Nordstrom, which have seen significant gains in the past six months, the luxury sector of the economy doesn't appear to be broken at all. Perhaps the jewelry market has just run into hard times.
The Bottom Line
The jewelry market certainly looks broken, but the luxury high-end retail market does not. While the latter part of 2011 may not be the best time to buy jewelry stocks for short term gains, those who are looking for longer term positions may find these stocks to be an investor's best friend going forward. (For related reading, see How Gold Performed In 2011.)