The soaring gold price is far from good news for gold retailers

The red-hot gold price has continued surging higher this summer.

But is there an accompanying gold rush happening in retail stores?

While the market seems to be expecting retailers to benefit from the price rally, analysts say in reality quite the opposite is happening.

Gold has soared 28 per cent in value so far this year, touching US$1,357 a troy ounce on Monday.

Since the beginning of June, the yellow metal has risen approximately 12 per cent, and excited by the performance, mainland and Hong Kong investors have also been scooping up shares in gold jewellery retailers.

Investors in the biggest listed names have been making a mint.

Gold retailers including Lao Feng Xiang, Shanghai Yuyuan Tourist Mart, Chow Sang Sang, Chow Tai Fook, Luk Fook, and Guangdong CHJ Industry have surged in value by between 8 and 22 per cent since the start of June, according to data compiled by Macquarie.

During the same period, Hong Kong’s benchmark Hang Seng Index remained virtually flat, and mainland China’s benchmark Shanghai Composite Index only rose more than 2 per cent.

So why is there no such demand for gold products, such as jewellery?

“To the surprise of many, retail sales of gold have been in sharp decline this year,” said Hong Tao, a China retail analyst at GF Securities.

“Sales of gold jewellery across the sector have slumped 20-40 per cent, and there was little improvement in June.”

The message is the same from analysts at Macquarie.

“The gold rush did not appear [for retailers],” according to the Australian investment bank’s analysts, Linda Huang and Ricky Lam.

There has been no rush by customers to snap up gold, they wrote in a recent note, after consulting store managers with five listed gold retailers.

Why?

The consensus is, the price rally might help with gold retailers’ margins.

But the rapid rise in the price of gold itself appears to be deterring buyers, and sales volumes are being hit hard short term.

“Store managers explained the rise in gold price was too steep and quick for customers to react,” the Macquarie analysts said.

Moreover, “customers have stayed away from gold products, given the high prices”, and some have even sold gold products to retailers, they added.

According to Hong Tao from GF Securities, a number of factors are driving gold prices and gold retail sales in opposite directions.

“Domestic consumption demand is faltering due to the economic slowdown, while a rapid increase in house prices and a plunge in domestic stock markets have made people less willing, and less capable, of buying the gold jewellery, ” Hong said.

He added the gold price has risen so fast, that many consumers are sitting on the sidelines for more clues in market direction, before making any move.

Retail sales of gold bullion bars and coins are also sluggish, possibly due to the alternative options of buying gold-related investment products at banks.

“Investment demand for gold is robust, but people don’t have to go to stores to buy gold bars and coins, as they have an increasing number of other options, such as gold exchange traded funds,” Hong said.

The Macquarie analysts added that for Hong Kong-based gold retailers, a declining number of mainland tourists and weakening local consumer sentiment have also cast a shadow over the recovery of the city’s retail sector.

“Jewellery sales continue to be highly reliant on promotions, which adversely affect margins,” they said.

Macquarie is maintaining its “neutral” rating on the gold retailer sector.

“We believe the market has falsely interpreted the gold price rally and thus, the potential positives to the gold retailers. We maintain our cautious view on the sector,” they said.

Hong from GF Securities also warned there is a decoupling going on between the rally in the gold price and the rise in gold retailers’ shares.

“It’s a misinterpretation that gold retailer stocks are the mirror of gold prices.

“We are longing gold prices,” Hong said, “but advise caution on the retail sector at this point and will closely watch their future sales.”