Global macroeconomic indicators and primary consumption of gem-quality diamonds are diverging to an ominous extent. All the market sources of diamond information – the Antwerp World Diamond Centre, BHP Billiton, De Beers, GJEPC, IDEX Online, Israel Diamond Institute, PolishedPrices, RAPAPORT, RBC Capital Markets, Rio Tinto – are releasing unanimous and concordant reports about positive trends in the major segments of the world rough and polished market.
One obvious display of this tendency was the high business activity at the jewelry shows in Hong Kong, Basel and Shanghai. On April 12, the United Selling Organization of ALROSA registered a high rise in demand for rough diamonds: the auction held in April, 2010 to sell diamonds of extra sizes (+10.8 carats) generated prices comparable to the level reached in the spring of 2008.
At the same time, news and reports on how the countries of the “golden billion” are weathering out the global economic crisis are close to panic. The “green sprouts” appear to be only the way of pumping unsecured dollars into Western consumers.
Here’s a joke on the subject: A student was taking a class taught by Nobel Prize winner Milton Friedman at the University of Chicago. After a late night cramming, he fell asleep in class. This sent Friedman into a tizzy, and he pounded on the table demanding an answer to a question he had just posed. The abashed student, now awake, said, “I'm sorry, Professor. I missed the question, but the answer is increase the money supply.”
The wonderful “recovery” is caused by free dollars issued by the FRS to elite banks of the United States, and nothing else.
On April 6, speaking at the Higher School of Economics Russian Finance Minister Alexey Kudrin made an express warning that risks of another recession remain. It was not the first such warning on the part of the minister. In the end of last March Kudrin pointed to the growing number of economists who do not exclude the probability of a second wave of world recession.
The Minister of Finance of the Russian Federation stressed it was still not clear how the economy would develop in the next year or two as the countries would be leaving the crisis behind. “The first sprouts of growth which are visible in the world and in this country are still very unstable,” he added.
Kudrin reminded that economic growth in the world is very closely linked with the fiscal measures taken in many countries and the actions by their central banks to maintain liquidity. “It is illustrated by very low refinancing rates set by central banks. So far the world’s major central banks preserve very low lending rates. It is obvious that these rates will move upwards in case of inflationary risks,” he said.
Independent economic analysts as, for example, Dmitry Golubovsky (http://www.argumenti.ru/toptheme/2010/04/56119/), say that the real sector of the economy in the United States, which is the main consumer of gem-quality diamonds, has long been stagnant. It is non-competitive at the current dollar exchange rate in comparison with the new industrial nations of Asia.
But even if for the sake of staying competitive at least on the domestic market the Americans will fence off imports by introducing high tariffs, it will be of no use, although, as it appears, it is going to happen judging by the U.S. actions in relation to China. The American consumer is so overburdened with credits that he or she is not any more capable to increase consumption.
So it is reasonable to put a question: Are diamonds forever? Yes, they are. The absurd - from the point of view of classical economics - misbalance between the real state of economy in the Western countries (noted for decline) and wholesale demand for rough diamonds (noted for growth) points to a mass hoarding drive among the population which is not wasting time to turn the free or cheap credits nominated in virtual dollars on credit cards into gold and diamonds, the centuries-tried “real currency” in periods of social vicissitude. Ben Bernanke, the FRS head, even promised some time ago “to use a helicopter to dispense dollars.” It seems that the “process is under way” as one our common acquaintance used to say.
Diamond marketing experts know it very well that retail consumption is correlated with incomes of the population, but not directly. The diamond analysis takes into account discretionary money generated in households after deduction of a) current expenses for housing, food, clothes, education and transport; b) savings made to offset a possible loss of job or inflation. And even these discretionary means represent a field for competition for other luxury and leisure goods. However, on a global scale all this is averaged out and so far the level of global retail sales of diamond jewelry has been well correlated with the gross world product.
The uniqueness of the global financial and economic environment appears to be in infringement of many of the established economic laws. In a situation of macroeconomic instability across the globe and many microeconomic risks there is no room for healthy, natural and stable consumption of gem-quality diamonds.
Vladimir Teslenko for Rough&Polished
