Even though the Hong Kong diamond market usually goes into low gear for the summer, this has been
one of the slowest in recent memory. Demand usually starts to pick up toward
the end of August, but as of press time, there were no signs of this happening.
Consumers everywhere were less prone to spend, with the news
of the August 2 deadline to raise the U.S. debt limit to avoid a catastrophic
default making everyone nervous. There was a mad scramble among investors and
investment firms looking for safe havens, which pushed the price of gold to an
all-time high. Diamonds, however, did not do as well cashing in on safe-haven
money, because the recent sharp increases in diamond prices created a wall between
buyers and sellers and reduced diamonds’ investment appeal.
The 11th-hour agreement between the Democrats and Republicans
to increase the $14.3 trillion debt ceiling in staggered stages did not stop
Standard & Poor’s (S&P)from downgrading the AAA credit rating of the
U.S. a few days later. The AAA rating, a position held for more than 70 years,
was reduced to AA+. What followed was a bloodbath in all the global equity
markets, reminiscent of the 2008 crash.
What the experience showed is the vulnerability of the
world’s economies to each other and their interdependence because countries are
invested with and indebted to each other.
Where are the Diamonds?
In the aftermath of this turmoil, what is happening to
diamonds in Hong Kong? Hong Kong dealers, especially those who have strong finances, usually tend to try to
buy a bit cheaper by making lower-than-usual offers in August. Just a month earlier, their offers were being refused,
because sellers were betting on prices going up after the summer, especially
since the September show in Hong Kong is one of the busiest of the year.
But, with the new economic uncertainty, some Indian manufacturers felt that perhaps
the prices being offered were high enough and decided to reconsider and accept
the lower offers. Then, buyers became spooked by how easily they could buy, and
some actually stopped buying because their inventory was swelling while their
clients were still sluggish. They could not pass on the cheaper prices as they
still had inventory at higher prices.
There have been reports that the premiums for diamond rough
also softened significantly from the high teens to close to list or to very
small premiums. This raises hope that the days of heady prices might now
stabilize and match supply to demand in an orderly fashion. Diamonds will still
sell, but at prices that are comfortable for both the buyers and the sellers.
What is the Real Price?
One of the main problems in diamond trading right now is the
confusion that exists on what is the true level of prices. In June, the market
had a false perception that everything was going up, buoyed by rising prices of
stocks, property and, of course, diamonds. Today, the market has a different
perspective, after the latest debacle exposed the fragility of the global economies
and widespread problems in once-revered financial giants.
By no means is the world economy and, by extension, the
diamond industry out of the woods. The problems that were present a few weeks
ago have not gone away and are still there festering. After all, the economic
crisis that started in October 2008 did not reach its nadir until March 2009.
The full impact of this most recent crisis may not reveal itself until the
closing months of 2011.
Certification Backlog
In the midst of so much turmoil, one of the blessings the
diamond trade might be thankful for is the huge backlog of goods awaiting
certification by the Gemological Institute of America (GIA). The long lag in
the turnaround time for getting goods certified — from two weeks previously to
five weeks and up currently — has created an artificial shortage of
diamonds in the market, which means that dealers who are lucky enough to have
the inventory to meet the sporadic demand can easily score sales.
This, however, puts a big strain on the diamond manufacturers
and dealers who have millions of dollars tied up in inventory awaiting
certificates. They can’t sell these diamonds until they get the certificates
because buyers are not willing to buy and then wait for the certificates.
The Marketplace
- Cheap is king. Anything with a large discount is in
demand. Fluorescence is now the lesser of evils, and is more acceptable to
buyers. Color determines the price level and
clarity is an acceptable place to compromise. Cut grades of “good” are
tolerated, providing the stone is not terrible.
- Demand for fancy color diamonds is improving because they
are not tied to any price list, so dealers have more pricing flexibility.
- The demand for large
stones has softened, but there are still calls for specific goods for
individual customers. Goods below 2 carats are more in demand, but still
subject to price limitations. There is big resistance to premiums in prices for
these sizes.
- The very high prices for very small diamonds might meet
resistance at the September show. Consumer demand for luxury diamond-set watches and high-end jewelry is expected to
soften because of the record-high prices of diamonds, gold and platinum.
Jewelry buyers at the September show are expected to be very cautious with
their ordering for this Christmas season.