Hong Kong Market Report

RAPAPORT… Both media and government announcements in Hong Kong seem to be conveying the message that the “Great Recession” is over and that we are well on the way to recovery. Equity, commodity and property markets in both Hong Kong and China have taken this message literally and the resulting increased prices in October, exactly one year after the big fallout, are at levels that are even higher than they were at the start of the economic tsunami.

While economists and well-known financial gurus pronounce that the worst is over, they do stress that the recovery will be a slow one. A year ago, the prognosis was for a very wide “U” recovery, but we have seen in recent months an acute “V” that defies logic and common sense. Such optimism fails to take into account the widespread fear that the U.S. dollar will continue to lose value — at the moment, it has depreciated by 20 to 30 percent in comparison to other major currencies.

This currency imbalance could play a crucial role in the diamond industry in the coming years. Both market demand and the inclination to sell off diamonds will be affected by any changes in exchange rates. In fact, in a country such as India, with its strong currency and booming stock and property markets, domestic demand is so strong that diamond manufacturers prefer to sell within India rather than export.

Adjustments
Rough and polished prices in other diamond manufacturing centers also are running ahead of most consuming markets, which will need to adjust. But time is running short as the industry is entering a period when companies have to prepare for the important year-end business.

Overall, there are shortages of certain fast-moving items, and prices are definitely firmer. Demand for large diamonds of 3 carats and up is particularly strong and this is reflected in the higher prices being charged for these goods. On the other hand, retailers and dealers are not so keen on buying these goods outright, preferring to work on memo. The memory of the big drop in the prices of these goods is fresh in their minds, and they are still hurting at their losses.

Generally, there has been a downgrading of qualities in order to reach lower price points. Lower clarities in high colors and better clarities in low colors seem to be the target of most retailers because colors and clarities in between are just not moving. In 2008, everyone was hungry for high colors in VVS grades. Now these are being passed over by buyers concentrating only on lower price points.

Economic Fix
China celebrated with great pomp the sixtieth anniversary of the establishment of the People’s Republic of China in October. As with the Olympics, every effort and a limitless budget assured that the show was perfect, even to the point of spending huge amounts of money seeding the clouds around Beijing the day before so that it would not rain during the military parade.

Great effort was expended to show the world a strong and prosperous China. Months before the celebration, trillions of yuan were injected into the economy to stimulate consumer spending. One way was to relax bank credits. But, while the intention was to stimulate exports, this free-flowing money found its way into stock and property markets, further inflating prices.

Dollars or Not?
Some of this hot money also found its way across the border into Hong Kong, and fed that city’s stock markets and skyrocketing property prices. Today, Hong Kong boasts some of the most expensive real estate in the world. Recently, an apartment sold for $11,350 per square foot, an extreme example, of course, but such price records do serve to bolster the price levels of more mundane properties.

Amid all this financial speculating, the question remains: Why is there not a mad rush into diamonds? Certainly, there is enough money looking for a solid investment. Also, diamonds are still priced in dollars and even if the prices are now higher, they have depreciated to some extent against other currencies.

Many of the world commodity producers are debating the prospect of pricing their products against a basket of currencies or even against gold, excluding the dollar. It should be remembered that diamonds previously were priced in other currencies. Rough was based on the pound, which was underpinned by silver and gold reserves. In Belgium, the price of diamonds was based on the old Dutch Guilden, which used to be linked to the price of gold.

All this changed when the U.S. dollar broke away from the gold standard and over the years became the dominant instrument of debt. Perhaps due to the fact that the U.S. was and still is the largest consumer of diamonds, diamond prices are fixed in U.S. dollars. Maybe the industry’s future will require diamond to reinvent itself as a depository of value.

The Marketplace

• Large diamonds over 3 carats in D-F colors in VS-SI are moving well. Market resistance to prices is balanced by shortages of these goods.
• Carat-size demand is steady. Retailers are looking to replace inventory — especially D-E, VS-SI and G-J, VVS-SI — in the aftermath of good sales during October’s Golden Week.
• Dossiers of 50-pointers and larger are moving well. Demand is sluggish for thirds but strong for quarters down to 10-pointers in H-J, VVS-VS in the China market.
• Very small setting sizes are still moving relatively well, despite slow demand for jewelry. Hopefully, last-minute orders will revive year-end sales.