RAPAPORT... Diamond prices reflect market sentiment — the emotional mood and feeling of the market as to future price movements. Simply put, if dealers think that prices are going to go up, they buy at higher prices. If they think prices are going to go down, they sell at lower prices or hold. Sometimes, as in inventory purchases, the entire decision is based on market sentiment. Other times, as in an engagement ring sale, the transaction is ensured but the price level is based on the market sentiment of the seller.
Economic bubbles are periods of time when market sentiment and expectations drive transaction prices to unsustainable levels. Consider the situation one year ago. Surging stock and commodity markets created extreme inflationary expectations and an unprecedented wealth effect. Diamond market sentiment was extremely positive, resulting in booming prices for large stones that traded at huge premiums to the Rapaport Price List. Today, we have the reverse. Market sentiment has crashed, along with prices.
An obvious question is whether diamond prices are the result or cause of market sentiment. Do lower prices destroy market sentiment, thereby causing prices to fall even further? Is there some point at which dealers say — “Wow, those are really low prices, let’s buy”? Or is everyone so afraid of catching a falling knife that no one buys until some powerful external force changes market conditions? Do our markets suffer from a “dealers are sheep” effect, whereby everybody is afraid to buy because everybody else is afraid to buy? Is our trade having psychological mood problems? How can we escape a negative bubble?
Many industry leaders believe that if they could somehow lift the mood of the market by creating positive feelings, confidence would be restored and all would be well. While I agree that market confidence is a vital factor, I do not believe that confidence can be artificially created.
The thing about bubbles and market sentiment is that they are real. While greed and fear create swings of irrational exuberance and depression, the fundamental factors that move market sentiment are based on the hard reality of the marketplace. Over the past few months, millions of people have lost their jobs and $30 trillion of global wealth has been destroyed. The problems in our diamond markets are not psychological.
The idea that all would be well if our industry could somehow be made to feel good as we head over the financial cliff is absurd. Industry leaders who believe it is their mission to create an artificial sense of false confidence may be well intentioned, but their actions may do great damage to those they are trying to help. There are times and market conditions when industry survival requires dealers to be afraid. Industry leaders must not sacrifice the financial survival of the diamond industry on the altar of artificially high diamond prices.
Are bubbles and negative sentiment bad for the diamond industry? We must recognize that successful diamond dealers are among the smartest and most savvy traders in the world. They are not sheep — they are wolves. Negative market sentiment is a welcome, powerful, positive force that protects and corrects our diamond markets from abusive artificial pricing by rough suppliers and the speculative greed of manipulative dealers. If manipulators and speculators are punished for their greed — so be it. Next time, if they are still around, they will practice greater restraint
The bottom line is that the fundamental basis of fair, honest and competitive markets is survival of the fittest. Those who make good decisions are rewarded and those who make bad decisions go out of business. Attempts to alter or misrepresent reality should not be tolerated.
Bubbles represent an opportunity for smart dealers to make windfall profits by trading off the excesses of less intelligent traders. Essentially, wolves eat sheep. I, for one, believe in the great power of free markets and in the great intelligence and capability of diamond dealers
Market sentiment and confidence are based on real market conditions. When people pay real cash for real diamonds, market confidence improves. When people don’t get paid, market confidence deteriorates. When people sell diamonds on memo and long-term credit at unrealistic, unsustainable prices, bubbles are created. The further our markets move away from cash prices, the greater the bubbles we create. The more we fool ourselves into believing that we can sell diamonds without getting paid, the greater fools we are.
It has been said that the greatest fear is fear of the unknown. It has also been said that fear is the greatest motivator of all. As our diamond industry confronts the great uncertainties, challenges and opportunities brought about by the global economic crisis, let us not be afraid to be afraid. Let us use our fear to create the necessary changes that will build the strong foundations necessary for our future growth.
Article from the Rapaport Magazine - March 2009. To subscribe click here.