RAPAPORT... After months of denial by Ben Bernanke, head of the U.S. Federal Reserve, that the U.S. is in a recession, the global economy barely missed a general meltdown that threatened a worldwide depression rivaling that of the 1930s.
Although individual markets had been sliding gradually, it was not until October 7 that the markets globally took a tumble. The fall came despite the $700 billion bailout in the U.S. and an equivalent amount being pumped into banks in the European Community (EC). Markets worldwide have continued on their downward spiral ever since, as the realization sets in that the underlying problems are bigger than reported.
Diamond as a Haven?One thing that is certain is that consumers have had the scare of their lives as they have watched $10 trillion in wealth evaporate before their eyes and at a speed that defies explanation. Their immediate reaction was to stop spending, in anticipation of harder times on the horizon. First to feel the instant freeze will be luxury items.
So how do we categorize diamonds? As a reward for the quick wealth made during the booming years we have just experienced? As an investment that has gone up in value on a par with the soaring equity markets — and sometimes showing even better returns? As a store of wealth — a hedge — during hard times? Or as a traditional gift given as an expression of love?
If diamonds are defined in the first two categories, then it is inevitable that they will succumb to the force of gravity and follow what has happened to equities. But what if they are placed in the third category — regarded as compressed wealth and something to be held on to when everything else is falling in value?
The effect will depend on the trade itself and what it does.
If there is no panic and no loss of confidence from the people in the trade, then there will be no reason for the prices of diamonds to go down. They will weaken somewhat, as they already have, but they will not crash.
The industry has always attributed price increases to supply and demand, so the obvious solution is that, in order to maintain prices, the supply must decrease to offset the slumping demand for the next couple of months. And that couple of months may run well into the end of 2009. Look at what is happening in other industries. The production of Porsche sports cars is down and OPEC is reducing its daily output of oil.
The resulting shortage will not only stabilize the market but will also allow the diamonds that are stuck in the pipeline to be digested, allowing the trade to recapitalize itself and to lower its banking obligations.
Consumers have become increasingly difficult to satisfy, demanding only certain categories of diamonds, but in a market where the choices are narrowed, they just might decide to buy what is available. If we define diamonds in the fourth category — as a traditional gift and expression of love — then the gift is valued for the underlying emotion rather than the cost or quality of the diamond.
Reality CheckWhat is evident at the moment is that while there are some diamond manufacturers who are being forced to sell at give-away prices, they are a minority. The majority are not in a rush and are willing to wait to see how the present economic situation plays itself out.
Buying has come to a standstill, as most retailers, including the big jewelry chains, have stopped all purchases. It has become almost impossible to get buyers to even look at goods and many will only take merchandise on memo to meet inquiries from consumers for diamonds they don’t have in inventory.
It is inevitable that the present situation will have its casualties and some smaller dealers and retailers might not be able to weather the storm. Hong Kong will not be spared from the economic tsunami that will eventually reach the Asian nations. However, it still basks in the shadow of Mainland China, which is in a better financial situation than most of its Western counterparts.
Asian economies have been in the midst of economic upheavals before and have managed to not only survive, but to come out of the downturns stronger than before.
The Chinese government is striving to maintain consumer spending to see it through the present economic crisis and if it succeeds, then luxuries will continue to be popular and, hopefully, diamonds will continue to find favor with consumers.
The Marketplace • Stones larger than 5 carats in high colors and top quality still find buyers who want to invest large amounts of cash.
• All other goods are in limbo, except for sporadic demand.
• Demand is steady for H-I colors in better clarities from 0.50 up to 2 carats.
Article from the Rapaport Magazine - November 2008. To subscribe click here.