What Diamond Producers Are Saying About The Market

| July 29, 2009 | 0 Comments

I found myself in a little strip mall in the Phoenix area.  I sat down right in front of the glass countertop.  Across the counter was Scott.  I noticed the big gold rings on his fingers.  Stretching out his hand, he gave me a neatly folded piece of paper.

My stomach jumped right into my throat.  I carefully unfolded the white, crinkly paper.

Before long, five little crystals were sparkling in my hand… each stone is worth more than $10,000.  I’m holding more than $50,000 worth of diamonds in my hand.

I’d never held something so valuable in my hands before.  I’m nervous just looking at the diamonds.  After all, I’m buying an engagement ring.

Scott’s our family jeweler.  Need to resize a ring… go to Scott. Need an anniversary gift… go to Scott.  Dad buys all of mom’s jewelry from Scott.  And, all of my brothers’ engagement and wedding rings were made by Scott.

He must have spent more than two hours going through the details.  He showed me example after example of diamonds… loose stones only.  He walked me through diamond grading, color, cut, and clarity.  He took his time explaining the differences between the stones.

He told me what mattered and, most importantly, what didn’t.

That was more than a decade ago.  I bought the biggest diamond I could and designed a special ring.  As the famous saying goes, “A diamond is forever”… unfortunately the marriage wasn’t (but that’s another story).

I learned something valuable from that life experience.  The value of a diamond is in the eye of the beholder.

De Beers is the world’s top diamond producer.  Four out of every ten diamonds come from De Beers.  They’re an industry giant. That’s why a recent announcement was so shocking.  But more on that in a moment.

De Beers owns 14 mines in Canada, South Africa, Botswana and Namibia.  The mines produce a huge number of uncut and unpolished diamonds every year.  These diamonds are then sold to “sightholders” (as De Beers calls them) who cut and polish them.

The polished diamonds are sold to retail stores around the world.

Just a few days ago, De Beers announced results for the first half of the year.  Sales of diamonds fell by a staggering 57%.  And earnings fell by 99%.  That hurts!

It’s amazing what a global recession will do to spending on non-essential items.

Almost any reader of the financial press knows how difficult the economy is.  Clearly, spending on luxury items went overboard long before this financial ship set sail.

However, that wasn’t the most shocking part of the story.

It was comments from the De Beers management that really caught my eye.

“We’re on the way back.”

“The story is looking considerably better than it was three or four months ago.”

Those are quotes from executive director Stephen Lussier.

This is a huge turnaround from the first quarter when the company cut production at the mines.  Output for 2009 is expected to be half of 2008.

So, what does all this mean?

Basically, we’re seeing a revival in the high-end consumer portion of the market.  I take this to be a very early sign the rich are growing tired of belt tightening… and they’re starting to spend.

Catching a trend like this early could result in some huge gains.

I see jumping diamond sales as a big indicator high end spending is resuming.  Who will benefit from this revival of spending habits? The high end retail stores of course.  Take a look at companies like Tiffany (TIF), Saks (SKS), Williams Sonoma (WSM), Sotheby’s (BID), and Luxottica Group (LUX).

All of them should see improving sales numbers, and that news should push their stock price even higher.

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Category: Commodities

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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