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Gold and Diamond Risk


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

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 or contact your local Rapaport office.

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Tags: Alrosa, Avi Krawitz, De Beers, diamonds, gold, Rapaport
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