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RETAIL GOLD MARKET LOSES LUSTER
BY ABDEL AZIZ NOSSEIR
Gold has always caught the eyes of Egyptians, whether
worn around the necks and wrists of women, detailing an exquisite
watch or pen, or appearing in homes as gilt Louis Farouk furniture.
But the recent surge in world gold prices is changing the nature
of the local gold market as cash-strapped consumers are searching
for cheaper alternatives.
International gold prices have increased dramatically in the last
eight years, climbing from $200 per ounce in late 1999 to over $670
per ounce today. Local incomes have failed to keep pace. “The
same amount of money that used to buy three grams of gold can now
only buy one gram,” says Rafik Al-Abbasy, head of the gold
division at the Federation of Egyptian Industries. “Meanwhile,
the savings of individuals have decreased due to the general increase
in all prices.”
Falling consumer spending power has cut into the biggest share of
the retail gold business – wedding clientele. “Buying
gold for new marriages is deeply rooted in Egyptian custom because
the amount of money invested in that gold is considered as insurance
for the new family in case of financial crises,” explains
Al-Abbasy. But with gold prices over 300 percent higher than a decade
ago, young couples are finding it increasingly difficult to purchase
gold. “Unfortunately, those who used to invest LE 100 in gold
have become unable to buy anything for that amount because of the
prices.”
Nadia Othman, a 56-year-old housewife, says mounting living costs
have discouraged her family from investing in gold jewelry. “Even
if we have some extra cash we won’t use it to buy gold because
this extra money will be needed soon, maybe in a year’s time.
That means we would lose the amount we pay for shaping the jewelry,”
she says. In the past, Othman relates, when families went with the
bride to have gold jewelry made, the goldsmith would often give
the family a few flakes of gold as a gift. “Now, no trader
will do that because by today’s prices this could cost him
LE 300.”
Betrothed couples are having to decide between investing in gold,
or furnishing their apartment. “Buying gold for marriage was
always a must, but now a young man who wants to get married prefers
to buy a refrigerator or a washing machine,” says Ihab Maamoon,
a jeweler in the Khan Al Khalili district of Cairo. He says couples
that do purchase gold rings and jewelry often return them after
the wedding and use the money to buy appliances.
Others are lowering their standards, downgrading from 18- and 21-karat
gold jewelry to plated gold, which is a thin veneer of gold electroplated
on a copper base. “Those people unable to afford real gold
have found an alternative, but this is only for wearing, [not investing],
says Maamoon.
With gold demand drying up, gold traders are finding that the metal
loses its luster when priced out of reach. Al-Abbasy reports that
demand has fallen over the years as the metal’s prices soared.
“In our factory, we used to produce 100 kilograms [per year],
now we only produce 30 kilograms,” he says. “Similarly,
I had 300 workers, now I need only 100.”
He points out that margins on gold are based on the cost of labor,
not the value of the metal. “Deals between the workshops and
retailers are based on the cost of shaping the gold pieces, not
the price of the gold itself, because gold prices are set and not
negotiable. This is also the case between the retailer and the individual
customer,” he explains. “Accordingly, the less the demand,
the less the profit.”
Even outside of marriage, gold was always considered a preferred
form of savings for Egyptians, who distrusted banks and viewed gold
as a secure, liquid investment. In recent years, however, gold has
also lost much of its investment appeal to the stock market, which
has offered attractive rates of returns. “For a while, people
stopped investing in gold and went to the stock exchange, which
pulled a huge amount of money,” explains Maamoon. Only people
averse to risk, or with sentimental attachments to their jewelry,
continued to keep their savings in gold.
Heba Hamdy, a 29-year-old housewife, is happy she did. “I
was really happy when I found out that the value of the gold I got
for my marriage had quadrupled after six years,” she says.
But the high price of gold had her thinking it might be time to
sell. “I would rather have a car than some jewelry, so...
I sold some of my gold to buy a car, which is more practical.”
Many consumers are following suit. Gold traders report that the
retail market has moved into a sell mode. “In the past, consumers
used to buy more gold jewelry than they sold, and traders used to
have to import gold [to meet demand],” says Al-Abbasy. “But
now, unfortunately, our gold stock exceeds the local demand and
we are now exporting to the international market.”
FOOL’S GOLD
In 2004, the government abolished all customs tariffs on
imported gold, which helped reduce the gap between local and
international gold prices, and diminished the incentive for
smugglers. But as gold demand has dropped off in recent years,
it has become increasingly difficult for goldsmiths to turn
a profit, and some have resorted to counterfeiting the hallmark
stamp to evade taxation.
According to Rafik Al-Abbasy, head of the gold division at
the Federation of Egyptian Industries, gold traders face two
obligations when dealing with gold: the stamp duty, which
is 22 piastres per gram; and the sales tax, which is 170 piastres
for a 21-carat gram, and 250 piastres for an 18-carat gram.
As the margin on popular pieces of jewelry can be as little
as 50 piastres per gram, he says, those who manage to avoid
these taxes can increase their profit four-fold, or more.
According to Al-Abbasy, government control over the hallmark
process leaves many gaps that can be exploited by counterfeiters.
“The official stamps use very old technology and are
easily faked because they are made by private organizations,
not government agencies,” he says. In other cases, goldsmiths
have been known to bribe officials at the Stamping Authority
to stamp the gold without charging the accompanying fees or
taxes.
The average consumer shows surprisingly little concern about
the authenticity of the hallmark on their gold jewelry, probably
because they generally buy and sell their gold from the same
shop and hold the merchant accountable. “Some people
do not use the bank to save their money, and they don’t
care whether the stamp is fake or not,” says Al-Abbasy.
“They simply buy a commodity and whenever they need
their money, they go to the trader who sold them the gold,
hand him the gold and get their money back.” |
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