Counting on gold

Sarah Elhosary , Tuesday 13 Feb 2024

Rising prices are steering investors towards gold as a safe haven and away from its traditional use in jewellery.

Gold
photo: AFP

 

Gold has long been a common element in many Egyptian households, regardless of its form or quantity. It has long been deeply ingrained in the country’s culture and customs, serving purposes such as adornment, investment, and as a source of gifts for many people. However, recent increases in the price of gold have changed many people’s attitudes towards it.

Sarah Samir, 35, said that “my family and I are accustomed to acquiring and exchanging gold ornaments. My mother received a pair of gold earrings and three gold necklaces when I was born, for example, and my father gifted me gold items during various educational milestones and birthdays.

“Until last year, I used to exchange small pieces of gold with my friends. I brought a gold gift for my friend on her daughter’s birthday, for example. However, today, exchanging such gifts has become more challenging due to the rise in the price of gold,” Samir said.

 Gold now costs some LE4,114 per g for 24-carat gold, LE3,600 per g for 21-carat gold, and LE3,086 per g for 18-carat gold in the Egyptian market.

Adel Shokri, the owner of a jewellery store in the Al-Sagha area of the Gammaliya district of Cairo, said that “the increase in the price of gold has led to a transformation in the designs of gold ornaments, many of which now feature hollow and lightweight structures. There are now relatively large pieces, such as chains, crafted with a minimal amount of gold, starting from just one g and designed for individuals to give as gifts without incurring significant costs.”

Working in gold for 52 years, Shokri has long experienced periods of prosperity and downturns. “Throughout my career in selling gold, we have faced challenging times during periods of war in 1967 and 1973, as well as in 2011 when we completely halted operations due to the 25 January Revolution, as well as later during the Covid-19 pandemic.

“However, this year presents a different scenario. While the sales of gold jewellery have declined by approximately 70 per cent, there has been an increase in the demand for gold bars and coins. Most buyers no longer view gold solely as a means of adornment, but rather as a tool for savings,” he said.

“Even the traditional shabka [a gold or occasionally diamond gift that the groom presents to the bride on the wedding day] is no longer being purchased. Only one out of every 30 grooms who enter my shop buys a shabka. It has become common for them to visit my store alone before bringing their brides with them, asking me to show them engagement rings based on their budget without presenting additional ornaments.”

“Buying a gold shabka has become almost impossible,” said Mervat Abul-Arab, the owner of a group selling used gold. “One of my employees showed me the shabka that her fiancé gave her. At first glance, I thought it must have been worth at least LE200,000, but then she told me that it was not gold but ‘Chinese gold’ [a mixture of various metals] and only cost LE600.

 “She bought the ‘Chinese gold’ shabka so that her fiancé could present it to her during the wedding ceremony instead of the real gold shabka he couldn’t afford,” Abul-Arab said.

“Alongside the increase in gold prices, the manufacturing fees charged by jewellers have also risen. I remember the first ring I bought when I was young. The fee then was only LE10 to have it made, whereas there are pieces now with fees reaching up to LE1,000 per g,” she added.

“I thought about creating a Facebook group where participants could sell gold without incurring the significant fees imposed by traditional gold vendors or at lower fees. Purchasing a piece of gold through online groups instead of physical stores saves approximately 75 per cent of the manufacturing fee,” Abul-Arab said.

Rising gold prices and manufacturing fees have contributed to the popularity of online groups selling used gold with lower fees, as Abul-Arab says.

“My group started with only 30 individuals consisting of family members, but today it has more than 82,000 members. Not only individuals who trade in gold are in the group, but there are also stores offering new pieces at reduced manufacturing fees, especially those displaying clearance items or changing their business activities,” she added.

“Individuals sometimes engage in continuous buying and selling to make a profit. For instance, a homemaker in the group purchases gold from Al-Sagha and then sells it online to make a modest profit from the rises in the price of gold. But despite the better buying and selling opportunities through these groups, there is a significant risk of deception. I always advise buyers to check the carat and weight of the gold they purchase, asking for a receipt from a trusted dealer before making a purchase.”

 

VIGILANCE: Instances of fraud in gold sales are not limited to online transactions, as they can also affect other buyers and sellers, however.

Mohamed Yehia, the owner of a jewellery store in Sharqiya governorate, said that “I’ve encountered numerous instances of gold jewellery with incorrect carat measurements, resulting in substantial losses. In one year alone, I suffered losses of up to 500 g of gold. As a retail trader, my business includes obtaining pre-owned gold jewellery from customers.

“The process involves melting the acquired jewellery in workshops to create gold bars, assessing its carat value through a gold assayer, and then swapping it with wholesalers for new gold jewellery. I pay an extra amount for the manufacturing. After purchasing used jewellery, melting it down, and determining its carat value, I might discover that the gold content is lower than I expected, and in such cases I have to bear the loss,” Yehia said.

“In the past, occasional inaccuracies were manageable and could be compensated for when the gold price was low. However, in today’s market, with the price of gold hovering around LE4,000 per g, discrepancies in carats can lead to significant financial losses. At the same time, the surge in the gold price has compelled workshops to be more precise. If the Assay and Weights Administration rejects the carat of any workshop-manufactured pieces, the owner must restart the process to make them more accurate. This can cost the manufacturer double the labour and manufacturing costs,” he added.

“The precise determination of the carats in any gold piece is carried out by an assayer, also known as a sheshnagi in Egypt. His role is to use either traditional or modern methods, now often executed through machines, to identify accurately the carat of gold in each piece or alloy.

“However, as a trader, I rely on my experience to assess the quality of used gold jewellery before purchasing it. Unfortunately, customers never agree to provide the piece before the sale for me to verify it with the assayer. Sometimes, acquiring pieces with inaccurate carats is an inevitable aspect of the trade, but the gains usually compensate for any losses.”

According to Hatem Essam, a sheshnagi in Al-Sagha, “gold jewellery comes in various carats by blending gold with copper and silver to make it more durable and suitable for diverse designs. Workshops typically manufacture gold at a purity of 99.9 per cent gold for a 24-carat rating. For 21-carat gold, a higher ratio of silver or copper makes the gold content 87.5 per cent. Similarly, 18-carat gold has a content of 75 per cent gold.

“However, some lesser-known workshops may produce gold jewellery with slightly lower carat content, either intentionally or mistakenly due to errors by workers. The significant and continuous rise in gold prices may distract the sellers of inaccurately rated pieces, as the profit from the high gold prices may overshadow any losses,” Essam said, adding that gold should be purchased from a reputable dealer, even if it is slightly more expensive to do so.

“The sale of gold ornaments has declined compared to the increasing interest in investing in alloys and coins,” said Remon Nagi, the administrator of a jewellery Facebook group. “Due to the rise in the price of gold and the manufacturing costs of gold ornaments, people are turning to alloys and coins, which are more reasonable for savers and investors as they have a fixed cost per unit.

“Meanwhile, the cost of making gold ornaments is increasing owing to more advanced manufacturing techniques and as it is calculated per g. As a result, I formed a group to market the ornaments of a gold shop in conjunction with my own business. I display various offers and designs, allowing browsers to contact us, visit the shop, and make purchases.

“We have also introduced the sale of gold through agreements with companies that provide credit to individuals unable to afford the cash price. These companies give loans to purchase gold at a specified interest rate, encouraging people to buy gold ornaments even after the price hikes.”

 

Increasing sales: “The number of people investing in gold is increasing due to local gold prices soaring above international ones,” Abul-Arab said.

“The growing gap in the exchange rate between the dollar and the Egyptian pound has also prompted many members of my group to purchase gold from neighbouring countries like Saudi Arabia and the UAE and then to resell it in Egypt to capitalise on the price difference. Several members who received their returns from investments in bank certificates last week also found that the returns did not match the inflation rate, and this has also encouraged them to invest in gold.”

In addition to the recent surge in gold prices, the past few days have witnessed turmoil within the market. Shokri said. “Gold sales have faced volatility after substantial increases in price. Moreover, some stores have recently experienced security raids on their workshops, and sales are currently restricted to covering weights at the latest price.

“Gold merchants are safeguarding their capital by holding onto gold. After selling jewellery, alloys, or gold coins to customers, the merchant must repurchase an equivalent amount of gold immediately, even at a loss, to avoid buying it later at a higher price,” he said.

The disruption has prompted a statement from the Gold, Jewellery, and Precious Metals Division of the Chamber of Mineral Industries of the Federation of Egyptian Industries that said that the current gold prices are inaccurate owing to speculative activities that depart from market rules and increased demand.

“The recent surge in the interest to buy gold stems from individuals attempting to safeguard their savings. They are doing so to hedge against high inflation rates and the depreciation of the value of the pound against the dollar. They are aiming to hedge against the risk of the pound’s declining purchasing power by transferring their funds to a secure asset like gold,” said Ashraf Ibrahim, manager of the Mokhbir Eqtisadi (Economic Detective) channel that presents economic and financial content on YouTube.

“Gold is one of the most challenging assets to predict its direction or movement. This is because the gold market is characterised by significant complexity and is not influenced by the same factors that control other markets. Gold is both a commodity and a financial asset, and it is also an investment tool. Despite the local rise in gold prices driven by the depreciation of the pound against the dollar, the increased demand for gold has also contributed to the price surge,” Ibrahim said.

“There are two factors that determine gold prices in Egypt. The first is the global price, and the second is the local economic situation. Regarding the first factor, one of the significant influences in determining its direction is the policy of the US central bank the Federal Reserve. Gold prices are expected to go up globally in the near future due to the stabilisation and then reduction of US interest rates.

“Investors worldwide will begin to divest from interest rate-dependent assets such as US bonds and shift towards gold. Locally, we hope the Egyptian economy will overcome its current crisis and enter a phase of stability; otherwise, inflationary pressures will continue to drive gold prices up in line with possible global trends of rising prices.”


Challenges for the gold market

“IN 2023, Egyptian people bought around 57 tons of gold, over 30 tons being purchased purely for investment in coins and bars as opposed to about 27 tons of jewellery,” Ehab Wassef, head of the Gold, Precious Metals, and Mining Industry Division at the Federation of Industries told Sarah Elhosary.

He added that “although these figures are closer to indicative numbers, they have indeed translated into reality with an increase in gold supply and demand leading to an exaggerated rise in its price over recent days.”

“The rush to buy, accompanied by speculation on social media predicting further increases in gold prices, has led to a surge in purchases, especially of gold bars and coins, driven by the intention to save. As a result, the Gold, Precious Metals, and Mining Industry Division has issued a statement warning that prices are unrealistic. A significant reason is the rush to buy, fuelled by fears of the pound’s loss of purchasing power or for speculative purposes,” Wassef said.

“The herd mentality in buying gold, especially in the form of bars rather than jewellery, poses a danger to the jewellery industry and is not in line with the traditional Egyptian habit of buying gold for adornment rather than solely for savings. Purchasing gold at the present unrealistic price is an economic risk for individuals, as was evidenced when the gold price dropped to LE3,350 after rising to LE4,100 per g. Those who bought at the inflated price incurred losses, as we warned earlier.”

Despite the recent drop in prices, Wassef said that the “price still remains higher than its fair value. We have reached an exaggerated price ceiling, so some buyers are now selling, causing a partial decline in prices. Fears of further price drops will motivate hesitant gold holders to sell as well, resulting in more sales and another price decline. Even though prices may now be falling, now is still not the best time to buy. The gold price remains above normal levels, and I may issue another statement when the price stabilises.”

Alongside internal market regulation, the division also aims to increase exports of gold and silver jewellery. It seeks to organise small workshops to mimic the working environment of European jewellery markets. These workshops specialise in specific aspects of product manufacturing to achieve higher efficiency. The division also seeks to obtain an extension of the grace period for registering export proceeds to 180 days, which is similar to Turkey, which ranks seventh globally in the industry with export revenues for gold and silver jewellery exceeding LE6 billion.

“We have an industry in Egypt that can thrive and bring in hard currency, as exports to Dubai and Saudi Arabia last year showed in substantial quantities,” Wassef said. “However, we still need to take decisions that serve and facilitate the manufacturing and export process. We are capable of supporting the wider economy and employing a significant workforce, but we need the greater involvement of gold industry specialists in making decisions to support the industry.”

* A version of this article appears in print in the 15 February, 2024 edition of Al-Ahram Weekly

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