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September 1998

A few years ago, we were on a United Airlines flight from Chicago to New York. About an hour into the flight, the pilot calmly announced “there is no need for concern. We have four jet engines but I am not too happy with the roar from one of them, so we are returning to O’Hare.” No one panicked, but some of us took out prayer books, while others plotted exit strategies. No one disagreed with an elderly passenger who exclaimed: “The lesson we learn — Never fly a single engine.”

For the past 50 years, the global diamond market has grown and thrived along with the American economy. And while the supporting engines have changed from time to time, the U.S. remains the driving force behind the prosperity of the diamond industry—especially now.

We remember, in the 1960’s, the Europeans, the French and Italians were buying up all the fine quality diamonds. In the 1970’s, the so-called “investment brokers” advertising in the Wall Street Journal and employing high-pressure sales tactics purchased most of the finer diamonds. After the collapse of investment market in the 1980s, Japan become the second largest market, recently the equal of the United States.

For a while, the arrangement worked perfectly well. While the U.S. consumer was buying the medium and lower qualities in the 90’s, the South East Asian market—especially Taiwan, Hong Kong, Singapore, Thailand, the Philippines and Korea—absorbed the finer goods. But now these markets, after years of growth, are in a deep crisis.

Consumers in these countries have less to spend and their currency buys less diamonds. No improvement is likely in the near future, and some are worried the economic chaos could spread to Russia and even China. Right now, the U.S. economy can make or break the world diamond industry.

While the U.S. economy is still booming and diamond consumption has grown by at least 7% for the first half of the year, there is no guarantee that the turbulence in Asia will not hurt the American economy and/or stock market. The industry’s dependence on the U.S. market is dangerous. The U.S. market has become full of Israeli, Belgian and even Far Eastern sales executives who moved from Hong Kong to the U.S. to sell.

But relying on one market is like flying a one engine plane—risky. The diamond industry has to diversify. We can only hope there will be new markets in Latin America and the Middle East. The European market is also improving and is expected to grow when the “Euro” becomes official in 1999—making it easier to trade with a common currency, and hopefully establishing standardized business procedures. A new market is sorely needed, if the diamond business is to stay on course.

Forecast

Despite all the clouds surrounding the world economies, the American holiday season is expected to be better than ever, though the outlook for 1999 is still a question mark. We differ from those who warn of an impending increase in prices. With most of the world currencies sharply devalued, diamonds, which are quoted in dollars, are already too expensive. There is no way that an increase can be justified in 1998.

Our recommendation is to go slow in buying inventory, and only buy what you expect to sell by the end of the year.

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