The phenomenon of pawnshops is going out of control in many crisis-struck countries in Europe and could threaten the stability of the jewellery industry.
In Italy, the largest economy of Southern Europe, almost one in three households has sold family jewels to pawnshops or gold buyers, in exchange for cash to balance a declining purchasing power. Most of them preferred to sell their belongings directly, rather than pawning them and hope to be able to redeem them in the future.
The number of pawnshops and buy-gold shops is expected to grow by 20% in 2013, after rising from 8,000 in 2010 to 25,000 in 2012, according to the Federorafi, the Italian federation of goldsmiths.
Recent statistics cast a light on the astonishing extension of this sector. According to the Eurispes monitoring service, around 400 tonnes of precious metal are traded in Italy every year, a business estimated at no less than 10 billion Euro.
In terms of absolute figures, other European countries face an even more dramatic situation. In Greece the number of pawn shops increased tenfold in a couple of years. The Omonoia area in the heart of Athens has become a main pawning centre. Spain has also seen an important rise in this kind of business, and the central Puerta del Sol in Madrid is invaded by “compro oro” (I buy gold) advertisements. With many business activities shutting down for good, pawnbrokers can easily take over shoplots in strategic areas at knockdown price.
A great share of the metal is melted in bars and sold to emerging markets, where jewellery crafting is on the rise and demand for gold, platinum and silver is always high. Yet some pieces are simply polished and resold, often in foreign countries. Second-hand jewellery should be offered at a substantial discount price, but not rarely it is fraudulently sold as new.
National authorities are struggling to cope with a situation in which shops are springing up like mushrooms. Lack of precise laws regulating the matter allowed all sorts of infiltration from criminal organisations. Jewellery associations lamented unfair competition against syndicates which are involved with crimes that range from tax evasion to gold smuggling. In 2012, the Greek police intercepted a cargo bound to Germany carrying around 150 kilograms of gold, worth €6.5 million. The problem reached a pan-European scale, and even countries whose economic fundamentals are strong, such as France and the United Kingdom are interrogating themselves on how to regulate this growing business.
...and Diamonds?
Gold jewellery accounts for the greatest share of precious items sold, due to the fact that it is traditionally present in many families, and gold is easy to sell everywhere. But today traders are turning their attention also to other materials, particularly diamonds.
Just a few years ago, diamonds were not well accepted by pawnshops. Due to their heterogeneity and lack of liquidity, diamonds are traditionally harder to sell than gold. This condition, which caused resale prices to be well below market level, has been for years a deterrent for diamond owners who tried to get rid of their diamonds. But now, due to lack of jobs and galloping inflation people are less reluctant to pawn or sell diamond jewellery.
Lack of instruments and expertise also made it very difficult for improvised traders to evaluate the price of precious stones, and resale of diamonds was often left to specialised jewellery shops. In time, though, pawnshops have begun to sign agreements or hire licensed gemmologists, who help them in evaluating all sorts of precious stones.
As this trend is very recent, it is still too early to obtain precise data on the volume of second-hand diamond trade. Yet, some indirect indicators, like the number of internet searches for “selling diamonds” in different countries of Southern Europe can give us a good indicator (+35% compared to two years ago) of how more and more people are considering this option in exchange for cash.
Even though at the present time the impact of diamond resale on global price is rather marginal, this does not mean that it will not pose a threat in the medium-to-long term.
Several diamond analysts have indicated a sudden increase of diamond supply as one of the potential disruptive factors in the stability of the industry. While the term “supply” is typically used as a synonym for “production”, it would be better to start considering a possible surge on the other side of the pipeline, due to a reflux of diamonds from consumers. The threat resides not much in the discovery of large mining sites or the acceptation of synthetics by large segments of the population –two very remote eventualities– but rather in the sudden reinsertion of second-hand diamonds.
Until now this reflux is too small and disorganised to compete with traditional channels. But if in the future people desperate for cash will begin to provide a steady supply of diamond upstream, then we could witness the rise of a parallel market providing all sorts of second-hand diamonds to jewellery producer. Harsh competition with the traditional pipeline would be inevitable, leading to price instability and threatening the forecasted growth of the industry.
Matteo Butera - Rough&Polished
