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Gold and Diamond Risk

Editorial

Apr 19, 2013 5:00 AM   By Avi Krawitz
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RAPAPORT... The recent slump in gold prices has not impacted the diamond market. Having enjoyed a ‎stable and positive first quarter, diamond trading was steady this week while gold markets ‎were in panic. However, the dramatic selloff does offer a stern warning for the trade not ‎to be complacent in the current economic climate. ‎

Gold dropped sharply on Friday through Monday (April 12-15), slumping to two-year lows ‎and breaching the $1,350 an ounce barrier along the way. Technically speaking, the ‎yellow metal moved to a bear market along with other commodities such as silver and ‎platinum. Analysts weighed in with the expected superlatives: ‘Nasty,’ ‘Massacre,’ ‘Once ‎in a Generation,’ ‘End of the World,’ ran some of the research headlines. At times, they ‎tend to be as sensational as journalists. ‎

This time, their descriptions may be forgiven. Many haven’t experienced such a strong, ‎independent selloff in the commodities space, especially one so difficult to explain. ‎Conversely, stock markets largely held their positions, after an initial reaction on Friday, ‎with the Dow Jones Industrial Index down 1.5 percent for the week on Thursday, but is ‎still up 10 percent from the beginning of the year.‎

Analysts reasoned that a combination of factors contributed to gold’s slump. These ‎included claims of hedge funds liquidating their positions, ETF selling, talk of Cyprus ‎being forced to sell its gold reserves, and hints at a possible end of U.S. quantitative ‎easing. The strong dollar may also be in play.  ‎

These factors all reflect falling investment and central bank demand, which combined ‎accounted for about 47 percent of total gold demand in 2012, according to the World ‎Gold Council (WGC). However, they do not signal a significant decline in jewelry ‎demand, which accounted for around 43 percent of the total last year.   ‎

If anything, the recent slump in gold prices has spurred greater consumer demand for ‎gold jewelry, especially in India and China, the two largest gold consumer markets. Not ‎that a softer gold price translates to cheaper jewelry as retailers are unlikely to adjust ‎prices down on existing inventory. They’re also not likely to compromise on improved ‎margins in the current volatile environment when inventory manufactured with gold ‎bought at the new rate is brought into store. ‎

Rather, consumers in India and China will see a jewelry buying opportunity during their ‎respective wedding seasons in April and May. In both markets, consumers are naturally ‎bullish about gold and tend to factor the investment potential into their jewelry purchasing ‎decisions. They will be lured by the headlines of cheaper gold even as analysts expect ‎that gold hasn’t yet bottomed out. ‎

Indian wholesalers who spoke with Rapaport News say they’re waiting for some price ‎stability before jumping in and they expect consumers to do the same. They’re ‎encouraged by the level held in the latter half of the week. Reports in China indicate ‎surging demand which has created a shortage of jewelry ahead of the May Day holiday.‎


Still, any increase in consumer demand at this stage will not sufficiently compensate for ‎the decline in investor demand. The prospective rise in gold jewelry demand is not ‎expected to influence gold prices to upswing in the short-term and the bearish investment ‎market is expected to prevail. ‎

That represents a change in character for gold. In the past, while the outlook on gold ‎jewelry consumption was a function of global economic activity, it was offset by the ‎metal’s reputation as a risk-free store of wealth. ‎

Gold’s reputation as a safe haven asset therefore fell into doubt this week. Analysts at ‎Liberum Capital noted that gold has no longer been responding to bad news in the first ‎quarter such as North Korea, the Cyprus default and the massive quantitative easing in ‎Japan. “Risk assets had rallied leaving safe haven low yield assets looking unattractive,” ‎Liberum wrote. ‎

Certainly there is plenty of risk to go around, which would normally spur demand for safe ‎haven gold buying. Rather, the selloff may indicate that gold investors are signaling a ‎weak economic outlook that gold jewelry consumers are not seeing. As author and ‎commodities consultant Tom Lines wrote in a blog on The Guardian website, “As ‎commodities are physically traded products, they are a better indicator of the real state of ‎‎the economy than this year's stock market bubble.‎"‎

When it comes to diamonds, the market is overwhelmingly dominated by consumer ‎demand, despite the growing interest in diamonds as an investment tool. Meanwhile, ‎demand in the largest markets for diamond jewelry, consisting of U.S., China and Japan, ‎is stable at best. ‎

Therefore, diamond price trends have shown little resemblance to those exhibited for ‎gold in the past few years as they lack the investment influence for now. Instead, they ‎tend to more closely mirror financial markets in waiting for assurances of economic ‎improvement to boost consumer sentiment. If, as Lines suggests, commodities are a ‎better indicator of the real economy, diamonds are currently looking in the wrong space. ‎

Investors may have got ahead of themselves in 2013, as buoyant diamond traders may ‎have. Relieved to see the end of 2012, diamond markets stabilized in the first quarter ‎leading to improved sentiment. However, polished trading remains restrained and ‎manufacturing cautious, while rough supply has been controlled and speculative trading ‎has driven recent price increases. Rough trading may have calmed in the past weeks ‎after De Beers and ALROSA increased rough supply at their April sights, but dealers and ‎manufacturers still see little connection between rough and polished prices.  ‎

For diamonds, polished demand is a better indicator of the real state of the market than ‎this year's rough bubble. While one does not expect a slump in diamonds akin to this ‎week's slide in gold, one does expect the market to reflect a cautious reality. If gold has ‎served a warning of further risk in overall market fundamentals, the diamond trade ‎should apply the same message to its own dynamic. There are certainly latent risks there ‎too.‎

The writer can be contacted at avi@diamonds.net.

Follow Avi on Twitter: @AviKrawitz

This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office.


Copyright © 2013 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.

Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
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Tags: Alrosa, Avi Krawitz, De Beers, diamonds, gold, Rapaport
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