RAPAPORT... There was a noticeable improvement in demand in November after a very somber October — perhaps due to the fact that the stock and property markets in Hong Kong and the Mainland continued to test new highs.
The unprecedented levels were the result of the large amounts of funds coming into the economy from overseas. Most of these funds are from carry trades, where investors borrow from a country with low interest and a declining currency and invest in another country’s rising stock and property markets. The approach is used by investors who are looking for higher returns and at the same time hedging that the currency will appreciate, producing a double-barreled profit.
The Hong Kong and Chinese markets provide the perfect combination for this investment scenario but it is considered a volatile situation because both markets are reaching a point when properties and equities are dangerously overvalued.
Bursting PointThe Hong Kong government has issued statements to this effect and has even warned investors to be careful as the asset bubble is reaching a bursting point. The danger is that the steep V recovery recently experienced can very quickly turn into a W with a very steep correction.
Most of the easy credit that governments injected to avert a depression in the early part of this year was used to stoke the stock and property markets and the resultant rise in these areas was instrumental in reliquifying the economies to a great extent.
However, the Chinese government has already started to deflate the economy and is now severely cutting back on the lavish credits that were being pumped into the economy early this year. As evidence, the level of loans in October was down by 51 percent from September. This government approach is expected to continue and become even more stringent moving into 2010. Similar cutbacks are being made by the government in India.
The impact of these actions will undoubtedly be felt soon in the diamond trade of these two markets, which have been pillars of strength for the industry during the economic crisis in this part of the world.
Tangible AssetsPerhaps the deflationary efforts are one reason the industry is seeing a move by investors toward diamonds, especially large stones. It could be that some investors feel the time has come to turn some of their paper profits into something more tangible. Much of the demand originates from China, where investors are in the market for stones of the highest qualities, the bigger the better. There is also a noticeable increase in demand for large diamonds from some Asian neighbors — maybe not in the very best grades, but still in relatively high qualities.
Rumors also were circulating that the Rapaport price list would be going up in the coming weeks, which created a spurt in the demand for diamonds. Still, prices, although a bit higher now, are not yet in line with prices achieved in the producing centers. Dealers from overseas are having great difficulty commanding higher prices. Local merchants are prepared to buy in larger quantities, but still try to keep prices in check.
Demand also filters down to the more mundane ranges, as the appetite for diamonds remains strong in China. Although the Chinese market is slowly moving into SIs, despite its preference for VVS goods, the Chinese aversion to black inclusions — in which the China market follows the Hong Kong market’s tastes — means that only a smaller proportion of SIs can be sold in China.
Gold, increasing in price almost on a daily basis, is now at its highest and some speculate that it will go higher still, based on fears that the U.S. dollar will continue to weaken.
The dollar’s weakness is causing all commodities to rise and is impacting productivity in market economies such as China. Although recent indications are that general exports are improving in anticipation of better year-end demand, unfortunately this view is not shared by the Hong Kong jewelry manufacturing industry, which is still struggling with declining demand.
The Marketplace- Demand is strong for D, IF-FL in 1-carat and larger stones, with 3 carats up to 10 carats being sought — but they must be at least triple EX and without fluorescence.
- By contrast, stones in better colors in VVS grades or even IFs with lower gradings in cut, symmetry or polish are very slow movers.
- SIs in D-F colors are very much in demand, with stones over 3 carats particularly strong.
- VVS stones — mostly in colors below G-K in all sizes — are moving well, with more market tolerance in the make of this range.
- Highly discounted stones, even with fluorescence, are also seeing more demand as consumers look for lower price ranges.
- Demand for setting stones is still weak, which is exacerbated by the high price of gold and slowed diamond jewelry sales.
Article from the Rapaport Magazine - December 2009. To subscribe click here.