Gold peaks due to Trump's trade threats. Why is this bad for luxury brands?

The sharp rise in the cost of gold is negatively affecting the margins of leading jewelry manufacturers, including LVMH, the owner of the Tiffany brand, analysts said. The increase in quotations was another negative factor for the market in addition to U.S. trade duties and the weakening dollar. Gold prices at the trading on October 13 updated the record, for the first time exceeding $4100 per ounce.

Each of the factors - rising gold prices, the negative impact of duties and the dollar exchange rate - individually could be offset by luxury jewelry and watch makers, but collectively they are making it "seriously difficult" to maintain sales margins, John Cox, head of Swiss equities at Kepler Cheuvreux, told Reuters. "The pressure on margins cannot help but show up here," Cox noted.

Despite the sharp rise in prices for the precious metal, luxury jewelry brands' expenditures on it are low - their jewelry sells for an average of 10 times the cost of the gold from which it is made, contradicts Manuel Lang, an analyst for consumer stocks at Vontobel. For designer brands in the highest price segment, the figure is even lower at 5-8%, says Bernstein analyst Luca Solka. In their case, "even a modest increase in retail prices" would help to cope with a significant rise in gold prices, he states.

However, it is not easy to simply shift margin damage to customers: luxury jewelry manufacturers have to do this carefully so as not to undermine demand, Reuters writes, citing analysts. For example, in the case of Swiss company Richemont (which owns Cartier and Van Cleef & Arpels brands), which has a higher share of jewelry business than its competitors, stronger operating performance did not lead to an improvement in the profit forecast, the agency noted. This is due to factors such as currency exchange rates and gold prices, which are "completely outside the control" of the company, said UBS analyst Zuzanna Pusch.

Global luxury market leader LVMH will report third-quarter earnings on Tuesday, October 14. The VisibleAlpha consensus forecast suggests that the leading luxury goods maker will report revenues for July-September at last year's level, but will reveal a 4% decline in sales in the fashion and leather goods segment, although the watches and jewelry segment will record a 1% increase.

Jewelry brands, including Tiffany and Bulgari(LVMH), Cartier and Van Cleef & Arpels(Richemont), and Boucheron(Kering), have recently performed better than their fashion-focused competitors, Reuters notes. But for LVMH, by comparison, watches and jewelry bring in only 12% of revenue, while the fashion segment accounts for about half of total sales.

According to MarketScreener, Wall Street analysts ahead of the LVMH report are mostly advising to buy its shares - with a consensus rating of "above market" (Outperform). Richemont securities have the same consensus rating. Analysts are generally neutral on Kering shares (Hold rating).

LVMH shares fell by 1% at the end of trading in Paris on October 13. Kering shares fell more strongly - by 1.7%. Richemont shares in Switzerland, on the contrary, rose by 0.5%.

This article was AI-translated and verified by a human editor