I re-watched this week, a fairly recent
interview with the diamond expert Chaim Even-Zohar, covering his
thoughts on what the future could hold for De Beers in the hands of
its new majority shareholder - Anglo American Group - and in the
absence of people like Nicky Oppenheimer and Varda Shine. One of the
things he said as an incidental aside, was that 'big corporations and
big groups like to sit on a lot of money so that they can do the
things they like best – which is to use the money to give them
opportunities to buy things.'
Now that is an interesting remark, and
it's certainly true about what companies like to do, but it is a
standard strategy that applies only when the circumstances are
standard also. Which they are not now.
The opportunity for profit, say in the
trading of diamonds for example, where the average price per carat is
arguably a structured one (let's not go into it too deeply right now)
- that opportunity is a highly privileged one that is not necessarily
going to be able to function in most economies over the history of
Mankind. Government direct increases to Money Supply, and the effects
of past eras of inflation, allow for much more simplistic attitudes
to profit opportunity than is often credited by those looking at
'success stories' such as the De Beers' one. For instance, in
hindsight, is it really the brilliance of De Beers original marketing
campaigns – as economic folklore credits – that created demand at
such elevated prices; or, is it more likely to have been the fact
that there has been so much money surplus in the hands of high end
consumers due to high circulation velocities, and vast increases in
Money Supply throughout the period.
So let's go back: 20th century
'standard' profit opportunities are based around the idea that
premiums can deliver you profits. You pay a premium to secure a
position in the beneficial outcome of a market transaction (and scale
it up to maximize the results, of course), and because everyone has
easy access to vast amounts of money, whether as debt (velocity and
inflation effects), or as reserve funds (during this period largely a
Money Supply-side factor), if you buy 'right,' almost regardless of
the premium, there is simply guaranteed to be a way up or out.
It's easy to look like a product development, or a sales, or
marketing genius.
But in this century, last
century's standard approach cannot be applied wholesale and be made
to function successfully. Money velocity and fiscal policy conditions
are very different.
Velocity is catastrophically low - so
buying a diamond, for example, might as well indeed be 'forever' that
is if you ever intended to sell it again for cash at some point...!
All of this is not to say that the
perceived value of diamonds is actually misplaced in principle –
and many people want to say this kind of thing about diamonds
although I personally do not. Diamonds can physically last a
very long time requiring very little or no maintenance, and they hold
a certain amount of liquid value over that very long time, and
therefore they do represent a reasonable means of establishing a
family legacy that can run over at least more than one or two
generations. As a commercial business though, they rely on the
availability of consumers with cash to spend.
Rubellite ring from Hardy Brothers Jewellers |
Yet if I were to consider some form of
legacy creation that was meant to run over the whole of two or more
generations, personally I would be acquiring rubellite gemstones
rather than too many diamonds. Rubellite, even by today's low money
velocity standards, is not expensive in the market. But that is not
to say that it won't ever be...
Marketing companies say that
diamonds are incredibly valuable – and this alone is not going to
undermine the fact that they continue to be exorbitantly priced. But
if you want to actually have
a ten or twenty carat top grade diamond, the average person is simply
not going to be able to afford one. But you might be able to get a
ten carat top grade rubellite gemstone, even one with an inclusion
that actually looks like the famous fictional Pink Panther! I don't
think there's many people that realize that certain minor inclusions
are prized in
rubellite, unlike inclusions in other gemstones. Yes, The
Pink Panther is a fictional
Hollywood tale about a large fictional diamond with an inclusion that
looked like a pink panther. But no, the tale is not entirely
mythical, but may have been based on Eastern legend about rubellite.
Frankly, if I told you what I know about these legends, you might
rush out and buy some rubellite right away, stick it next to an old
Arabian oil lamp and start to rub it to warm it up.
But there's plenty
of time. You will want to get a lot of quality rubellite stones at
$200 a carat so that you will have a treasure trove of them to sell
at $600 a carat.
Put it this way, if
you bid along with Steinmetz's more-or-less own diamond agent
for the Steinmetz pink at $1.6 million per carat, you are going to be
waiting a hell of a long time to sell it at $3.2 million per carat,
unless you were using your own money; a waste of time and money you
would suppose...
But going from
Even-Zohar's terrific book “From Minesite to Mistress” being able
to sit drinking champagne among millionaires and have your expensive
friend sporting a ten carat top grade rubellite cocktail ring on her
gloved hand, is the stuff of legend not of myth.
Calvin J. Bear
"But in this century, last century's standard approach cannot be applied wholesale and be made to function successfully. Money velocity and fiscal policy conditions are very different."
ReplyDeleteMoney should return to normal in about 8 to 10 years.
Real growth, however, is not going to return to where it was, per Jeremy Grantham.
Anyhow, I love the rubellite idea.
Now, if somebody out there could make rubellite all the rage...
Yeah I read the Grantham team's recent widely publicised article about growth, and fully go along with what was said there.
ReplyDeleteAs for rubellite and what people might think of it in future... The creative process of fining down some 'angle' on the gem that will work on people's psyche/psychology is very challenging. De Beer's original advertising is taught in marketing schools, of course. And rubellite does have properties that diamond and other stones do not - so some new marketing idea has appeal to me. If you ever 'get a lightning strike' of an idea on this matter - PLEASE LET ME KNOW! Right away!!
Well, there's a new Grantham report out.
ReplyDeleteThe market is probably going to go up some more, 20% to 30%, even though it is priced to deliver negative real returns over the next 7 years.
We are just now potentially getting started on another stock market bubble.
So...2100 on the S&P then it is.
At which point, we will have another major bear market.
Yay.
I'm going to create some more cash puddles for now.
They've coined a new phrase, though. "Greed discovery". The process by which a vastly and unnecessary complicated financial system is exploited by expert insiders.
Cute.