Rapaport Magazine

Hot Money Fuels Investment

Hong Kong December Market Report

By Gaston D’Aquino
It is much like a recurring dream. If you cannot fix the problem, just keep pumping more money and hope that the problem will go away. The $600-billion second quantitative easing (QE2), the latest economic stimulus package from the U.S. Federal Reserve, is likely to ensure a peaceful Christmas this year and, most probably, the feel-good effect will last well into the first half of 2011. The initiative, which calls for buying up long-term treasury bonds before next June, is designed to lower the value of the U.S. dollar, making U.S. exports cheaper in the world market.

Undoubtedly, QE2 will inflate asset bubbles to the bursting point as investors and companies with good credit lines borrow cheaply and move the money to countries where there are prospects of quick profits.

In Hong Kong, it is expected that this hot money from overseas will boost both the domestic property and equity markets, meaning that investors, or rather, speculators, will once again be raking in profits. The U.S. dollar will most probably be further devalued and commodities prices are expected to reach new heights in the near future. 

Inflation has been climbing in double digits over the past year and everyone is looking for ways to protect their wealth. Gold has taken the lead and is now hovering between $1,350 and $1,400 an ounce. Diamonds have followed gold’s lead and prices have been increasing in both rough and polished. The recent official increase in rough prices and the premiums that are still being paid mean that rough continues to outstrip the price of polished. Manufacturers complain that they cannot come out ahead with the present pricing imbalance.

When Will The List Go Up?

The discounts have come down dramatically and, in some cases, premiums are the norm, yet the Rapaport list has not moved for months. “When will it go up?” seems to be the question everyone in the trade is asking.

The trade’s concern is understandable. They need the list to go up so that they can justify their higher prices to their clients. Without a list increase, buyers down the line have been reluctant to pay more, because demand is normal and there is no frenzy as there was two years ago.

At the same time as industry players are crying for the list to go up, if the present economic situation does change for the worse, the same people will all be up in arms if the list goes down. It is more acceptable for the list to go up, but there is a problem with public confidence if it moves in the opposite direction.

Lower Price Points

Hong Kong has been through a period of relative prosperity, and property and equity markets have recovered sharply from the economic tsunami. In some instances, especially in the property sector, the markets are currently at levels not seen before. Many Hong Kong people, in a situation such as this, can be expected to put any spare cash they have into the markets to make more profit, rather than spending it on luxury items. 

In response, retailers have been shifting more and more to goods with larger discounts in order to attract consumers. They are hoping that these investors will cash in some of their investments and spend during the Christmas season. So far, the reports are that sales have been above average. 

While the general trend has been toward lower price points, there are still calls for large diamonds in very high qualities. To some extent, those calls come from people who want to hedge against devaluing currencies. 

China Market Recovers

Mainland buyers have become more knowledgeable about diamonds and are willing to invest in the best of the best. They normally come to Hong Kong for their diamond purchases, as there is a wider choice available for them in the shops here.

The larger retailers keep an inventory of large stones especially for the China market, while the smaller retailers rely on taking goods on memo from local diamond wholesalers.

When Mainland customers do visit Hong Kong, they balk at the higher prices but, in the end, they leave after paying more for their diamonds. Since they keep coming back, it is obvious they are able to pass on the higher prices.

The Marketplace

•     Demand is strong for stones of 10 carats and larger in high qualities and colors.

•     While prices for these large stones are astronomical, due to their scarcity, it is believed that stones in this grade will eventually find a buyer. 

•     Stones below E are slower moving and interest starts up again in lower colors.

•     30-pointers to 50-pointers are doing well. As demand shifts to VS and SI in H color and lower, goods are being sold uncertified, as cost for certification adds unnecessarily to the price.

•     Demand is very strong for 3-carat stones. However, stones from 5 carats up to

10 carats get only sporadic inquiries, but again, carrying these in inventory usually pays off, as buyers might choose them if larger stones are beyond their budget.

•     Demand is steady for carat sizes but it is mostly concentrated in lower colors, or goods with lower grades in cut, polish, symmetry, or with fluorescence, providing these are offered with larger discounts.

•     Demand is good for stones below 1 carat, especially one-half carat and one-third carat, and uncertified stones are moving well.

•     In colors, demand is mostly for high colors in VS-SI. H color down to M color is enjoying strong, steady demand.


Article from the Rapaport Magazine - December 2010. To subscribe click here.

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