If any reminder was required that all is not well with the global economy, the triple whammy of Congress’ last-minute resolution of the debt-level crisis, the downgrading by Standard & Poor’s of the United States’ sovereign long-term credit rating from AAA to AA+, and the plunge in stock market prices led by Wall Street provided every one with a cold dose of reality. After several months of generally good news, the specter of a double-dip recession was rising once again.
The diamond and jewelry industries were not spared the maelstrom, as shares in diamond producing companies and jewelry retailers took hard hits in the sell-off. One of the more dramatic falls was seen at Zale Corp., which saw its share price slump by 16.2 percent. Shares in Signet Jewelers fell by 11.7 percent, and at Harry Winston Diamond Corp., both a miner and a jewelry retailer, the share price fell by 10.6 percent. Tiffany’s share price was down 9.9 percent.
With the share of exclusive diamond mining companies like De Beers and Alrosa not listed, analysts were left looking at junior producers. They did see fallout, but not as dramatically as in the jewelry sector. The shares in Petra Diamonds fell 5.7 percent in London, while Gem Diamonds’ share price was down 2.7 percent. Rockwell Diamonds slipped just 0.63 percent.
The inevitable question on many industry members’ minds is to what degree will the tumultuous events of the past week impact on the diamond business? And the truth is that any definite answer would be primarily speculative. This clearly is not a repeat of September 2008, when the very foundations of the American economy appeared to be crumbling before our eyes. It is more a case of a continuing malaise – compounded by a measure of political brinkmanship. More upbeat sales data in recent months led some to believe that economic downturn was behind us, but that clearly was not the case.
To no small degree, even the improved sales figures in the diamond sector were somewhat of an optical illusion, in that they had a good deal more to do with prices, rather than with actual sales. The volume of business being done in carat terms did not really indicate a strong market recovery, even though the amount of cash being moved was increasing considerably. Diamond prices were rising in leaps and bounds, mainly on brisk demand in countries like China and India, and at the top end of the U.S. market.
On July 15 CNBC reported today that wealthy Americans are expected to increase their spending on luxury items by 8 percent, bringing the market to a total of $359 billion in 2011. Speaking to the network, David Arnold, publisher of Luxury Magazine, said that the wealthy no longer feel stigmatized by flaunting their money, even when the majority of the country is struggling. “The number of people with $30 million or more in investable assets grew by 10 percent last year. This group accounts for 36 percent of wealth globally. That’s a lot of wealth held by a small number of people…They continue to spend money, travel, buy planes, cars and jewelry. There certainly doesn’t seem to be any slowdown in their attitude or appetite for consumption,” he said.
But while the wealthy may be spending, sentiment is different in the lower income percentiles. The monthly index measuring overall consumer sentiment, which was published in August by the Consumer Reports National Research Center, was at its worst level since December 2009. Feeling the crunch most acutely were members of households earning less than $50,000 a year.
And one should not underestimate the important of consumer sentiment, for consumer spending makes up about 70 percent of the U.S. economy. Thus, with grass roots sentiment unlikely to improve dramatically over the foreseeable future, jewelry sales in the United States by volume are likely to remain sluggish through 2013, and could fall off in terms of value if the upper end of the market begins feeling the crunch more keenly.
A more immediate effect of Wall Street’s downward plunge on the jewelry industry involves the gold price, which soared to a record $1,700 an ounce on Monday. Gold has risen 30 percent this year, and purchases skyrocketed to more than 18 million ounces over the past month, from 8.4 million for the entire year up to July, according to data from the Commodity Futures Trading Commission.
What does a high gold price mean for diamonds? In a depressed jewelry market, retailers will fight hard to protect price points, and that often means reducing gold and diamond content. At the end of 2010, purchases of gold jewelry by American manufacturers were estimated to have fallen by around a third by volume, and in Europe manufacturers are mixing gold with steel and ceramics to reduce the gold content and keep prices down. In India, where gold jewelry traditionally has served as marriage dowry and has been a must-buy for centuries, hollow bangles were being made to look like solid gold.
A longer term but more fundamental effect may come about not as a direct result of Wall Street’s tumble, but more as a result of the U.S. Federal Reserve bank’s reaction to it. The Fed’s announcement that it will hold short-term interest rates near zero through at least the middle of 2013 means that the U.S. dollar will likely maintain its weak position against other currencies. This, in turn, could reignite calls that the euro, the Swiss franc or even a basket of currencies come to replace the greenback the means by diamond transactions are managed.
The pressure to swap the dollar for another currency is coming from predominantly non-American companies. Belgian firms, for example, saw the euro launched on January 1, 1999, at parity to the dollar. Indeed, for a couple of years, until mid-2002, the dollar bought from 1.00 to 1.20 euros. But from May 2002 the dollar has been on a long slide and today buys just 0.73 of a euro. In other words, a diamond sold for $1,000 in 2002 raised around 1,200 euros, but today brings in just 730 euros. Taken together with rising wages and standards of living, the falling dollar means financial problems for Belgian diamantaires, as it does for their counterparts in other diamond centers.
Over the past several years, a number of prominent diamond industry leaders have raised the possibility of benchmarking diamonds with a different currency. These included former Alrosa President Sergei Vybornov, who in 2009 said: "The average life of a mine is 30 years, so you have to plan to the horizon, but you can't with all this uncertainty going on. We just don't know what will happen with the dollar tomorrow."
Prophetic words indeed, given the events of the past week.
PHOTO CREDIT: worradmu @ freedigitalphotos.net