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Diamonds, Jewelry, the economy and goldAn article in
Mineweb earlier this month said that the International Diamond Exchange
(IDEX) reported diamond prices are softening. I have not seen any hard
data for a long time, but I do recall seeing a study about ten years ago
that indicated a very high correlation between higher-end diamond prices
and stock market indices. Diamonds are the ultimate luxury item and
during times of prosperity (usually when stock prices are rising),
demand for diamonds is strong. Conversely, when times are tough, less
people buy expensive diamonds.
According
to IDEX, the prices of 1.5 and 2 carat diamonds fell below their prices
of a year ago for the first time in recent history. In my way of
thinking that is probably because the bull market in stocks, bonds and
real estate that started in 1982 might finally be coming to an end. IDEX
apparently found that US jewelers are concerned that softening jewelry
demand is a leading indicator for I
would not hang my hat on diamond prices as a leading economic indicator
but in conjunction with everything else that’s going on I would look
at it as confirmation that US economic woes are deepening. Last
week I reported on the Federal Reserve Bank of The
Conference Board, a nonprofit business research group, issued a separate
report of composite leading economic indicators that also signaled
weakness ahead. Their index of leading indicators has declined for five
out of the eight most recent months. The biggest contributors to the
decline were waning consumer expectations and declining building
permits. During
the past month, short selling on the New York Stock Exchange hit a new
record -- a clear indication that there is a strong belief out there
that the current rally in stocks is not going to last. Not
surprisingly the Federal Open Market Committee decided to leave US
interest rates unchanged this week for the second month in a row. In the
accompanying statement the Fed said: “ The moderation in economic
growth appears to be continuing, partly reflecting a cooling of the
housing market.” The Fed continues to talk about the threat of
inflation but weakness in the economy is, thus far, prohibiting them
from raising interest rates. The
dollar softened up this week due to all this talk about negative
economic conditions and that gave a boost to both gold and base metals
prices. As the Unlike
base metals, Gold is purely a monetary asset. So while falling economic
activity will have a negative impact on base metals demand and,
consequently, base metals prices, the same is not true for gold. Falling
economic activity has no impact on the gold price. Because gold is a
monetary asset the gold price is determined predominantly by the
inflation rates of fiat paper money and currency exchange rates.
Therefore, a slowdown in US economic growth coupled with a declining US
dollar exchange will have a positive impact on the gold price even if
base metals prices fall. A
large amount of capital was invested in metals during the past year as
investors looking for a hedge against the US dollar bought all sorts of
“hard assets”, including base metals, precious metals and gold.
Those investors did not differentiate between base metals, which are
commodities, and gold, which is money. So while declining economic
activity should not have a negative impact on the gold price, falling
base metals prices might cause those same investors, who
indiscriminately bought gold and base metals, to sell those assets,
including gold. This could cause the gold price to fall in sympathy with
base metals in the short term; however, any such decline in the gold
price should be viewed as an opportunity. At some point the gold price
will decouple from base metals and rise due to rising fiat currency
inflation and a falling US dollar exchange rate. My own target for the gold price remains somewhere between $900 and $1,300 an ounce so with gold now under $600 an ounce I am once again a buyer. I don’t buy physical gold; instead I invest in mineral exploration companies. I sold aggressively during May and have been waiting for good buying opportunities to arise. Now I am starting to see some attractive stock prices once again. If you are interested in what I buy and sell with my own money you could subscribe to my paid weekly newsletter, in which I discuss the stocks I buy and sell. For more information please visit www.paulvaneeden.com/publications.php. |
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