RAPAPORT...Oil bubbling to $90; gold to $790; U.S. dollar plummeting to record lows; rock-and-roll stock markets; secondary mortgage crisis; skyrocketing prices for large, fine-quality diamonds. What’s happening? Is there a connection? What does it mean for the diamond and jewelry industry?
For many years, the world focused on the globalization of supply. China, factory of the world; India, outsourcing capital, everyone working for America and Europe at low prices. The poor working for the rich.
But there is a flip side to this story. The globalization of supply has evolved into the globalization of wealth and demand. The poor workers have become relatively rich workers and newly empowered consumers. While China may still be the factory of the world, it is also becoming the world’s greatest shopping center. Buying from China and India is old hat; selling to them is the new game.
The expansion of supply globalization into wealth and demand globalization is creating new socioeconomic political realities that are rapidly transforming the global economy. Trade imbalances are forcing the revaluation of currencies. Global competition for scarce natural resources is pushing up commodity prices. Wealth is not just growing, it is moving. While Chinese and Indian workers enjoy the social justice benefits of globalization, oil producers and mining companies enjoy windfall profits.
Over the past five years, the U.S. trade deficit reached $2.8 trillion. China and India alone enjoyed a trade surplus of $1 trillion. The Indian rupee surged 12 percent this year and China’s RMB is up 5 percent, even while being artificially restrained by the Chinese government. The free-trading euro is up 11 percent against the dollar for the year.
The dollar is not dead, yet. But the king is losing his crown. The era of the dollar as the world’s primary store of value and premier basis for international trade may be ending. Such dislocation of its primary position will, in and of itself, result in a devaluation of the dollar and its purchasing power. Confidence in the dollar as a store of value is plummeting. Economic uncertainty is the order of the day.
While some may argue that too many countries have too many dollars to allow dollar dumping, government ability to control the situation will be limited by market forces and the political priorities of resource-rich countries. The premier position of the U.S. dollar as the global store of value is under political attack. At $90 oil, Russia, Venezuela and others can afford to alter the global economic balance by destabilizing the dollar for political purposes. Oil-hungry China, Japan, Europe, India and others will seek new alliances and stronger currency purchasing power to reduce the impact of higher-dollar oil prices. Some oil producers will move away from the dollar, encouraging other currencies to dominate the global economic landscape. The great wars of the future will be economic, fought over natural resources, with currencies as the weapon of choice.
The globalization of demand will continue to drive higher commodity prices as hundreds of millions of new consumers in China and India demand a better life. Encompassing all income levels, these eager first-time buyers with new wealth in strong currencies will drive unprecedented demand for limited natural resources, driving dollar-denominated commodity prices through the roof. The combination of higher international commodity prices and a declining dollar is setting the stage for an unprecedented inflationary cycle. Double-digit dollar inflation is inevitable over the medium term.
By now it should be clear that the U.S. market will not be able to continue supporting 50 percent of global diamond jewelry demand. While America is and will always be an important market, there is now great and urgent need for the diamond trade to develop, expand and promote increased diamond consumption in foreign markets. Fortunately, the international nature of the diamond business has enabled the development of significant foreign market share by large global players. However, on balance, the diamond industry is still too reliant on a relatively weak and troublesome U.S. market. Furthermore, small to medium-size dealers must expand beyond their local markets and become more export oriented.
While the decline of the dollar and increasing foreign demand will drive dollar prices higher for many diamond categories, the industry is ill-prepared to handle the significantly increasing risk of doing business in what will certainly be a highly volatile global environment. The industry will have to develop alternative marketing strategies with much tighter controls over credit and memo if it is to survive the turbulent times ahead. U.S. dealers and retailers should consider that competition will not just come from the store across the street but rather from companies across the globe.
Consider the probable. China, the new America. Bangalore/Goa, the new California. Euro, the new dollar.
Article from the Rapaport Magazine - December 2007. To subscribe click here.