Is it just me, or have you noticed that diamond prices have really started to climb this year? And, surprisingly, gold prices have moved in the opposite direction! Unless you are in the jewelry business (or thought about buying a diamond last year and put it off until now) this really isn’t of much interest to you. But I was in New York City last weekend having lunch with some friends in the industry at a diner off 47th street, and that was about all we could talk about. I tried to point out the exorbitantly high price of a corned beef sandwich, but this being New York City, nobody else seemed to notice.
“On average,” began one of my friends, oblivious to the fact that $22 is a lot of money for a corned beef sandwich, “rough diamond prices are up 7-10% so far this year. As that works its way through the chain to the wholesaler, to the retailer, and then finally to the consumer, it means consumers are facing prices of about 15% higher this year over last year for diamonds.”
“Why should that be?” I asked, still wondering why corned beef was so much more expensive in New York than at home. “It’s not like things are flying off the shelves like in the old days.”
“Two main reasons,” my friend answered. “First, there hasn’t been a major new diamond lode discovered for almost twenty years. And, the diamond mines that are currently productive are located in places like Zimbabwe and Botswana. Not places that are politically stable, easy to get to, or all that inviting for serious investment. Secondly, diamonds are now part of the marriage process in China, India, and Japan. The middle and upper classes are growing rapidly in those places, and they feel as if they have lots of catching up to do with their jewelry needs.”
“OK, I get it,” I said, thinking that this may be the best corned beef sandwich I’ve ever had. “Diamond prices are rising and probably will continue to do so. But, then why shouldn’t gold be going up as well? Especially with all of the turmoil in the world right now? Gold was close to $1400 last year at this time.”
At this point, my other lunch companion put down his pastrami sandwich and chimed in: “Gold is falling for the simple reason that people are expecting higher interest rates down the road. As the economy picks up steam, it has bolstered the case for tighter monetary policy. As you’ll remember, gold hit a record high in 2011 when investors thought that the government’s attempts to pull us out of the recession by lowering interest rates to near zero would trigger inflation. And, inflation is always good for gold. But, the economy seemed to improve without any inflation, so there was no longer any demand for gold as an inflation hedge. And, if the government starts to raise interest rates, that would further dampen the case for owning gold.”
That’s why I eat lunch with these guys whenever I am in New York. You couldn’t ask for a simpler, more concise explanation for why diamond prices are climbing and gold prices are falling. So, what is a jeweler to do? Since, after all, the business is built around gold and diamonds. How does one plan, budget, and buy in the face of falling gold prices and rising diamond prices? How do you cost and price your inventory when the diamond and gold piece you assembled just six months ago now has completely different component costs? For these questions, my knowledgeable friends had no answers, and I was beginning to think about that $16 New York style cheesecake slice rotating in the case up front.
If you are wrestling with questions like these, an accounting or management course or two at the local college would probably be invaluable. The 24 Karat Club offers a variety of scholarships each year, and while most of the recipients use them to sharpen their jewelry or technical skills, there’s no reason why you couldn’t use one to improve your business skills. If you, or someone you know could use a little help with their accounting or budgeting expertise, The 24 Karat Club may offer the money to help. Scholarship applicants are nominated by 24 Karat Club members, and the applications are on our web site, www.The24KaratClub.org. We encourage you to ask your favorite 24 Karat Club member for more information.
I passed on the $16 cheesecake slice. I couldn’t afford the calories...