The Recessionary Economics of Gemstones

by Lapigems Gem Company 16. November 2010 05:39
A cursory look at the economics of precious stones, with particular regard to inflationary economic environments

There are not many people who would argue that the present economic situation and outlook for the future seems very confusing. On the one hand, there are proponents of the view that economic recovery is well underway and the good times are just around the corner. On the other, there are an equal number who subscribe to the more pessimistic view that a “double-dip” recession is inevitable and that inflation and hyperinflation are looming on the horizon. Certainly, the speed with which many of the developed world’s central banks are printing money does give pause for thought. We had the much vaunted Quantitative Easing program which dumped billions into banks round the world and now QE2 looks set to launch too. There seems to be a very concerted push to force money through the system by whatever means necessary.

Now, depending on which school of economic theory you come from, the general rule of thumb is that a massive increase in supply, without a corresponding increase in demand, causes value to drop. Hence, in the case of money, the value of money drops when banks print money in this fashion. The textbook case is, of course, Zimbabwe, where the policies of Robert Mugabe caused the most severe case of hyperinflation on record. The Zimbabwe Central Bank printed a One Hundred Trillion Zimbabwe Dollar note by the time it effectively scrapped its currency in April 2009 and allowed foreign currencies to be used instead. This is all fairly logical as "easy money" should lead to inflation. However, in the case of the US economy, the broadest measure of money, M3, is declining at a rate not seen since the Great Depression. There is no money velocity (speed with which money moves through the economy) and deflation appears to be a more looming threat than inflation at present. Indeed, this is reflected in the fact that Consumer Price Indexes are declining, not increasing. This is the basis behind a new round of Quantitative Easing – a further attempt to increase money velocity by pushing money out of the banks and through the economy.

Why is Gold Outperfoming Most Asset Classes?

However, if we are in a deflationary environment, why is gold outperforming most assets? Gold prices are headed for record highs. Traditionally, gold values increase with inflation. The last great run up in gold occurred during the inflationary 1970's, when stagflation in the USA caused massive inflation. Mortgage rates headed for the 20% mark and even gasoline was scarce. This does not seem to have any resemblance to the economic situation today. During that period, there was a direct correlation between precious metals and diamond and colored gemstone prices. As gold increased, so did tangible assets. The answer to this anomaly could be that gold is also regarded as a “safe haven” or crisis hedge. In times of uncertainty and/or national crisis, people fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset which will always buy food or transportation. Thus, in times of great uncertainty, the demand for gold rises. The stock markets function upon confidence and when confidence disappears, markets collapse. Recent crashes like the one on 6th May 2010 where the Dow crashed over 900 points in a matter of hours create a feeling of instability and people lose confidence in the system. This, coupled with declining real estate markets, has influenced many to invest a small portion of their wealth in something portable, private and rare.

Gemstones as a Tangible Asset Class

Certainly, gold has been a huge beneficiary of the current sentiment, however a certain smaller percentage of people are also buying gemstones as a hedge. Collecting fine gems is a relatively new phenomenon in the USA. However, throughout history, examples abound of instances where gems have saved people in times of political and economic crises. Some notable examples are Nazi Germany, Vietnam, Iran, and Hong Kong and even when Imperialist Russia collapsed, gemstones carried by escaping imperialists enabled them to start a new life in other countries. Political instability, high taxation and currency devaluation, have meant that may people in parts of Asia, South America and even Europe, have long been aware of the significant role that gemstones play in conserving capital. Fine quality diamonds and colored stones have long shown themselves to be excellent long-term hedges against economic uncertainty and currency depreciation. Rare, fine gemstones represent an excellent and highly portable repository of value. Certainly, this concept seems to be bearing itself out in the market - international collectors and investors have pushed colored diamonds and colored gemstones to record highs during this economic climate at each major auction. In view of the state of affairs and uncertainty of our times, it seems wise to research other areas in which to invest capital. Most financial advisors will suggest that a percentage of one’s portfolio be in hard assets, you could do worse than consider colored gemstones.  

Lapigems Gem Company

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TanzaniteOne begins Mining of Tsavorite

by Lapigems Gem Company 20. September 2010 03:21
The largest Tanzanite miner TanzaniteOne has begun mining Tsavorite. Could this mean a market rennaissance for the green gem?

 

Tsavorite has always mesmerized its beholder, ever since it was discovered in the late 1960’s. It holds all the attributes of a world class gemstone and gemologically it compares very favorably to its green counterpart, Emerald. It is brighter, due to a high Refractive Index (1.74) in contrast to Emerald’s relatively sleepy appearance as a result of a lower RI (1.58). It has double the dispersion of Emerald and is rarer.

However, it has not had the meteoric rise in the marketplace’s affections that Tanzanite has. Principally, this is due to the fact that Tsavorite is rarely found in fine qualities, especially in larger sizes. Even fine 2 carat pieces are difficult to get. This has made it a difficult gemstone to promote in the market. Jewelers want to be able to source a stone for a client if they suggest it. Hence, Emerald, being more available and plentiful in the market has always been a better choice as a green gemstone for a jeweler trying to make a sale.

The price of fine Tsavorite is approximately a quarter of fine Emerald. This premium is mostly as a result of Emerald’s cache – the fact that it has been known to man for hundreds of years and its name evokes certain preconceived values. Tsavorite, being rarer was only discovered less than half a century ago and doesn’t have this advantage. Similarly, its penetration into the marketplace was severely hampered by the very rarity that makes it so desireable as it was little known to the public. Obviously, this situation has changed much over the years and Tsavorite is much better recognized now, but its rarity is still holding it back in terms of achieving its full potential.

 

The above graph, sourced from JCK Magazine illustrates the situation. On all counts, except public awareness and current price, Tsavorite outdoes Emerald. As anyone conversant with basic economic theory will attest, public awareness affects demand which directly affects price. Hence, Tsavorite’s price point could be very positively affected by an increase in public awareness.

This may be about to happen. TanzaniteOne – the largest Tanzanite Miner and marketer has recently begun a large Tsavorite mining project in Tanzania. Under the name TsavoriteOne Mining Ltd, they have bought up mining concessions from Kirkwood Resources and Green Hill Mining Ltd and combined them to make the largest Tsavorite mine, with a licence area covering 100 square kilometers. With plans to invest heavily in the mining and marketing of the gemstone, TsavoriteOne has the ability to remove this last impediment to Tsavorite’s accession in the marketplace and make the gem more available. Public exposure to Tsavorite is about to increase hugely. With public exposure comes an increase in demand which could lead to an increase in price. Tsavorite lovers and investors may want to watch this development with interest.

How does this affect Lapigems?

Tanzanite One has clearly followed the established De Beers business model to date and there is no reason to suggest that their foray into Tsavorite mining and marketing will be any different. This model is a classic "pull marketing" approach where demand is created in the consumer market by huge publicity and promotion and the creation of a cache for the gem. The "Be Born to Tanzanite" campaign that sought to make Tanzanite the gem to buy at the birth of your first child is a classic duplication of De Beers' very successful drive to make Diamonds synonymous with engagements, hence creating an enduring and profoundly deep market for the gem. A similar approach can be expected for Tsavorite, thus creating the cache that Tsavorite lacks in the marketplace and removing Emerald's last trump card over it.

For a specialist company like Lapigems, this is an exciting development. We are uniquely positioned to take advantage of this for the benefit of our worldwide clientele. Tsavorite One only controls a very small proportion of the total Tsavorite mining area, and Lapigems has close relationships with the other small scale miners in the region, meaning our ability to source the very finest Tsavorites will remain unhampered but the stone's overall popularity is set to soar. Additionally, the Tanzanian deposits generally produce a lighter color with a strong yellow modifer, whereas the original Kenyan deposits in Tsavo produce a more pure green, meaning a higher percentage of the very finest stones will still remain on this side of the border. 


Further Reading on this Topic

Mining Weekly Article
Tsavorite One Press Release   

Lapigems Gem Company

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Tanzania Bans Export of Rough Tanzanite

by Lapigems Gem Company 22. August 2010 12:49
The Tanzanian Government recently passed a law, as an extension of the Mining Act, banning the export of rough Tanzanite. The government hopes this will increase investment at home in cutting and polishing and bring back more revenue to the gemstone's home country.

The Tanzanian Government recently passed a law, as an extension of the Mining Act, banning the export of rough Tanzanite. The government hopes this will increase investment at home in cutting and polishing and bring back more revenue to the gemstone's home country.
 
Until the law was passed, the vast majority of Tanzanite was exported rough to countries such as India, where the processing was done. These processing countries earned most of the revenue from the sale of Tanzanite, whilst Tanzania earned only a small percentage. The government hopes the ban will encourage the growth of processing facilites in East Africa and also give a boost to miners. Mining provides direct employment for around 14,000 workers in Tanzania at present.
 

How does this affect you and your Tanzanite collection?

We realize that many of our clients have invested carefully and at length in their Tanzanite collections and some are concerned as to how this ban may affect their value.
 
It is difficult to predict exactly how the ban may play out in the market. What is certain is that the supply side of the economic equation will be affected. Tanzania does not have the ability to process anywhere near the volume of Tanzanite that was previously being processed abroad in the past few years. Hence, the likelihood of a substantial decrease of supply to the world market is high. If we are to follow traditional economic theory, when there is a significant decrease in supply and demand levels remain the same, price increases. Hence, there is a distinct possibility of an imminent price hike in the near future if these fundamentals prove to hold true.
 
However, an examination of the current state of the Tanzanite market as it stands now, throws up some curveballs for consideration. The above will only hold true if demand levels remain the same or even increase. In the current uncertainty gripping the world, there is no guarantee of that. Certainly in 2009, at the height of the "Great Recession," prices of medium grade Tanzanites almost halved as supply far outstripped demand. However, interestingly, prices of the finest 1% remained solid. The reason for this was simple, the supply of these very rare pieces was rock bottom - there are very few being produced. Hence a drop in demand did not affect the price as supply was so low and demand in the past few years has far outsripped supply. Secondly, more and more people, worried about the effects of inflation and large national fiscal deficits on their currencies, opted to buy tangible investments. Gold was the biggest beneficiary (the gold price is the highest it has been in decades). Tanzanite in the finest grades was another beneficiary. Many savvy investors chose to put a portion of their investable capital into carefully selected, very fine Tanzanites. This increase in specialist demand also had an impact on price.
 
The lesson from the last few years is clear and is applicable to this latest development. The ban on rough export will likely only really affect the price of the finest goods. Stocks of medium grades are still very high in India and other cutting centres and the ban will likely only marginally affect these goods. The rarest 1% however, will become even harder to find as the old channels of distribution close up. This will likely affect the price upwards, despite the prevailing soft market conditions.
 
How does this development affect Lapigems?
 
We have received many queries as to how a ban on Tanzanite rough will affect our operations, seeing as we are based in neighbouring Kenya. The answer is, to our advantage, We are not directly affected by the ban as Kenya is a member of the EAC - the East African Community which is much like the EU - free movement of goods, labor and capital. However, it does mean that competition at the mine level has decreased so we are better placed than ever to cherry pick the finest pieces from all Tanzanite production for the benefit of our worldwide cllentele.  

 
Further Reading on this Topic

Bloomberg Report on the Ban

News Service Report on the Ban
 

Lapigems Gem Company

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