The financial reform in the United States introduced as the Dodd-Frank Act to reform Wall Street is, in fact, a sort of general cleaning for the financial system intended, according to its developers, to clear the dark corners and put everything in its place so as to prevent another financial crisis similar to that of 2008 followed by economic recession. As with any large-scale modernization, this reform has its advantages and disadvantages. But what is most important, the totality of its "cons" should not outweigh its "pros." So, what kind of possible repercussions will the Dodd-Frank Act have for the jewelry business?
1. Expensive pleasure
According to a recent General Accountability Office (GAO) report, the agencies primarily responsible for implementing Dodd-Frank will require 2,849 additional federal employees through 2012, at a cost to taxpayers of more than $1.2 billion. The GAO also cautioned that these estimates do not include the costs to the businesses covered by the legislation.
This law applies not only to American companies but to all the other firms whose shares are traded on U.S. stock exchanges. For example, Chinese company Kingold, a leading manufacturer of jewelry made from 24-karat gold in China, is traded on Nasdaq (ticker KGJI), as well as LJ International (ticker: JADE) based in Hong Kong which has developed a network of over 150 stores under its own jewelry brand, ENZO, in China. Both fall under the Dodd-Frank Act, as well as many others. It is not the case that if the law was passed in the U.S. so the associated problems will face only the Americans.
Using official estimates from The Federal Register, the Daily Caller news agency tallied that the law has already imposed more than 19.6 million paperwork burden hours on U.S. businesses. According to the National Association of Manufacturers, the true industry costs related to the new law on conflict minerals (Section 1502 (b) of the Dodd-Frank Act) will reach as much as $16 billion. This will affect companies engaged in the diamond and jewelry business in one way or another.
2. Consumers’ exodus from Africa
Gold, tantalum, tin, and tungsten are the four major metals covered by the law. The Democratic Republic of the Congo and the adjacent countries do not happen to be the main or most cost-effective suppliers of these raw materials, so for large-scale manufacturers that use these metals in their products it will be much easier just to exclude these African countries from their commodity chains, than to understand the intricacies of the law spending money on additional staff and hundreds of working hours.
Mining Weekly reported that companies like Intel, Apple, Motorola and others are already mulling alternative gold supplies. Who will suffer in this case? Quite right, the first to face the thrust will be the Congo itself and its neighbors, whose people are to a great extent dependant on employment in the mining industry.
The government of Congo is concerned about the turn of events and has taken steps to attract (or rather, retain) major consumers of African mineral resources. Katanga, one of Congo’s provinces, has launched a campaign to promote itself as a source of conflict-free minerals for American manufacturers. “In Katanga there is no war and there are no military in our mines,” Moise Katumbi, the province’s governor, told Bloomberg in an interview.
3. Restriction of operations with precious metals in the OTC market - gold and silver illegal
Forex.com has reportedly notified its customers that due to the new regulations starting from July 15 U.S. residents are prohibited from trading in precious metals, including gold and silver. According to Wall Street Journal, the new rules for the over-the-counter derivatives market won't just hit big banks and firms, but also retail investors who buy short-term derivatives contracts to bet on the price movements of gold and silver. And it is a fresh memory that last July gold prices used set records almost every week.
In light of the unstable economic situation, as investors looked for alternatives to the stock market, gold and silver derivatives became more popular investments, National Futures Association spokesman Larry Dyekman said.
As a result, some companies have ceased operations with certain contracts, which were based on gold and silver, to comply with the new law enforced on July 15, 2011. Of course, some part of retail investors will migrate to trading in precious metals on regulated exchanges (for instance, NYSE Liffe offers mini-contracts for gold affordable to small investors). However, given the general complexity of the process, it is unlikely that they will be a majority. This can lead to a drop in demand for gold and its products, which previously could be seen as an investment asset.
While Dodd-Frank leaves a lot of questions and ambiguities, it is clear at least that life is going to be harder for anyone who is working with gold in one way or another: public companies are puzzled over how to deal with the disclosure requirements throughout the gold supply chain, while the small business and private sector have now more limited opportunities for trade in gold and silver, whereas Africa may lose its earnings from mining. It is rumored that the Dodd-Frank Act may be 1) withdrawn, 2) substantially revised, or 3) postponed. Interested parties "keep their fingers crossed" in a hope that at least it will be amended in terms of gold.
Olga Patseva, Editor in Chief of the American Bureau, Rough&Polished
