You've seen that precious metal prices have skyrocketed over the last few years, right? Gold, for example, has risen from less than $260 an ounce in 2002 to more than $435 at yesterday's close. Certainly a rise in price of the "barbarous relic" is going to help gold miners and gold bugs, but who's it going to hurt?

Well, jewelers, for one, if they cannot pass their increased raw material costs on to customers. And judging from its most recent quarter, it's safe to say that Tiffany & Co. (NYSE:TIF), the world's leading luxury jeweler, could not. Let's leave the ever-so-easy quips about Tiffany losing its shine, sparkle, or whatever else to other media outlets. It comes down to this: Tiffany, like most companies that produce something, is dependent in no small degree on raw material costs. In this case, those raw materials happen to be diamonds, silver, gold, platinum, and other precious stones, all of which have risen dramatically in price. You can see this impact directly on Tiffany's inventory lines, which rose 26%, though much of that is due to increased cost, not poor inventory management.

For the most recent quarter, Tiffany turned in sales of $461 million, a rise of 7% over the same quarter a year ago. Unfortunately, that rise in sales was not matched by a rise in profits, as the bottom line declined 26% to $20.8 million, down from $28 million. Take a look at the amount the company lost in terms of gross margin, from 55.3% down to 53.4%, and you'll see exactly where much of that difference falls -- the company's gross receipts were down about $8 million.

Naturally, it's not that easy since we're talking $8 million pre-tax versus post-tax, but it does make the point: Tiffany was harmed by increasing raw material costs. But that wasn't all. Once again, weakness in Japan, the company's second-largest market, dragged results down worse than the company had anticipated. Frankly, the problems in Japan are a much larger long-term concern for shareholders than raw material prices. The former is a sign of a market where Tiffany has made enormous investments -- including three new stores in the past year -- that has become more and more competitive with luxury rivals staking claims. Also, Tiffany has had difficulty finding the right balance for pricing on its silver jewelry in Japan. Tiffany never discounts, and a price too low could actually harm the company's high-end image. In a market as brand-conscious as Japan, this is a critical consideration. At the same time, pricing that is too high, particularly for silver jewelry, has the effect of keeping it on the shelves.

This comes at a time when Tiffany is seeking to expand its store network, having opened six stores internationally thus far in 2004. Additionally, the company opened its first IRIDESSE format store this past month in Virginia's Tyson's Corner Galleria Mall, with a second opening today in Short Hills, N.J. Tiffany is somewhat insulated from raw material costs given its partial ownership of the Aber (NASDAQ:ABER) diamond mine at Diavik, but it still must buy most of its materials on the open market. Should gold and other metal prices continue to rise, this dependence could continue to affect the company's bottom line. Fortunately, though, Tiffany has that name brand to fall back on. People have shown a dramatic willingness to spend more for a Tiffany product than a comparable one elsewhere. But will they be willing to spend even more?

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Bill Mann owns none of the companies mentioned in this story.