Demand for jewellery dries up as people become sellers of gold rather than buyers

With its genteel Georgian square and cobbled pavements, Birmingham's 250-year-old jewellery quarter is a world away from the high-octane trading desks of the Square Mile in London.

But investors in the City and elsewhere are playing God with the district's 400 manufacturers and goldsmiths, whose livelihoods are threatened by the unprecedented march of the gold price, which has surged nearly 500% in the last decade and touched a record high of $1,911 (£1,176) this month.

This dramatic rise has not gone unnoticed by the general public, who have been shrewdly digging out their jewellery boxes. The handwritten sign outside one store promises "£12 per gram" for nine-carat gold rings and chains, while nearby windows scream "we buy gold, best prices paid". The people peering in the windows are now as likely to be selling family heirlooms as shopping for them.

Pulling out a cushioned tray from one of the display cases, Stephen Bickerton, who has run a shop in the area for 25 years, says the high price of gold is worrying. "If it keeps going up at this rate, demand will be much less." He gently plucks an 18ct gold wedding band from one of the rows. The price tag reads £330; two years ago that would have been £165, he says.

Last year, twice as much jewellery was scrapped in Britain as carried home in plush velvet boxes, and the change has seen many local jewellers recast themselves as buyers rather than sellers of gold – a roaring trade that has also seen large pawnbrokers such as H&T open "gold bar" kiosks and even Tesco pilot a cash-for-gold service in some of its stores.

Bickerton, a goldsmith apprenticed by his father, has not gone down that road; his trade remains firm thanks to the patronage of his long-established customer base, who he admits are "older people with money".

"I do one-offs like bracelets and rings," he says. "I look after my customers and they like our designs; they come back, so I am not suffering as much. Young people don't seem to have the money they were spending a few years ago."

With its famous anchor mark stamped on its grand facade, the nearby Birmingham assay office, where new jewellery and other finery is brought to be hallmarked, is having a lean time.

Bonkers

It is the UK's biggest office but Michael Allchin, the chief executive and assay master, says demand for its services has actually fallen sharply owing to the "bonkers" gold price: "In unit terms it [the decline] has been catastrophic." Last year Birmingham's assay officers hallmarked 5.8m gold pieces, almost half the number tested two years ago, and a fraction of the 27.1m items processed a decade ago.

There have been two rounds of redundancies at the assay office and the most recent figures suggest no let-up in the decline, with hallmarking volumes down another 30% in the second quarter – the equivalent of 950,000 fewer pieces than a year ago.

"I've have been in the business for 40 years and I never seen anything like this," adds Allchin. "In 1979, when we had the oil shock, prices went up overnight, but that only lasted for a few months."

Investors may be enjoying their longest winning streak since 1920, with gold, which was £188 an ounce in 2001, finishing the week at around $1,780, but the high price does not reflect rocketing demand for bling. Demand for jewellery from India – the biggest buyer of gold – and China is strong, but in the US and mainland Europe, people are selling their gold.

This burst of recycling has not been good news for Birmingham's manufacturers. The companies produce 40% of the jewellery made in Britain but Mike Hughes, chairman of the British Jewellers' Association (BJA), says they have seen a sharp fall in orders: "They have nobody to manufacture for, because nobody is buying."

The industry's business model was already in flux, as in recent years the mass production that used to take place in the UK has been moved to cheaper production centres in the Far East; the manufacturers that remain are now smaller outfits with high design credentials who can still reel in shoppers.

Goldsmiths are also cutting their cloth to fit, working with nine- rather than 18-carat gold or making lighter "hollowed out" designs that are more affordable, says Hughes.

Some analysts think there is still more mileage in the gold price because the metal is still worth less than it was at its 1980 peak, which, if adjusted for inflation, was $2,400 an ounce in today's money.

There was a distinct wobble this week as the price tumbled more than $200 in several volatile trading sessions; Simon Derrick, chief currency strategist at Bank of New York Mellon, described it as "genuinely dramatic price activity".

"One of the hallmarks of the deepest crises of the past 40 years has been a short, sharp retrenchment in the gold price as investors liquidated investments en masse to cover losses in other markets," said Derrick. "We have struggled with the recent extraordinary rally in the gold price, attributing it to concerns about both the euro and dollar. We therefore found the price movements seen in gold over the past 48 hours telling."

Hughes says the retail landscape has changed dramatically on the back of the gold shock but says feedback from the BJA's members suggests the cycle of selling has started to slow.

"I'm not writing the jewellery industry off; this is an evolution," he says. "The volumes may have gone but there are still thriving, viable businesses with fantastic designers."

India

"I got quite a lot," confesses Naznin Mahmood of the wedding tradition that sees Asian brides showered with gold, with the Birmingham-based lab technician reeling off a list that runs to nine bangles, a necklace, hairpiece, nosepiece and 10 rings.

India is the world's biggest jewellery market and the wedding season, which has started in Britain, is another factor fuelling the heady gold price. And only the best will do. "It has to be 22 carat, it's tradition; we never have nine or 14," says her colleague Harbinder Sisodia.

With some Asian weddings lasting days, a celebration can cost up to £60,000. The occasion calls for serious bling and from the jewel-encrusted tikka adorning her forehead to the rings on her hennaed fingers and toes, bridal jewellery can account for £20,000, say the women.

With many families feeling the pinch as a result of the recession, Harbinder says parents will have been preparing for the big day for years, squirrelling gold away when it's cheap and, if times are hard, the mother may sell some of her finery: "We started saving the moment our daughter was born," she adds.