TABLE OF CONTENTS

• Collecting Kashmir Sapphires
• Jewelers Burma Relief Project
• Las Vegas Gem Show
• International Gem News
• Gem Robberies
• Auction Reports
• In The News

Collecting Kashmir Sapphires
by Robert Genis

Kashmir sapphires were originally discovered in the Himalayan mountains in the 1880s.  The stones were so plentiful the locals would use them as flint stones. When initially discovered, these stones were deemed inferior to Burma and Ceylon sapphires by the gem trade. Today, Kashmir sapphires are at the top of the gemstone hierarchy. The blue they possess is a cornflower blue or a soft velvety blue. These stones are not “electric blue” like the Burma sapphires.

Kashmir
Kashmir is a mountainous region in northern India. It is about 86,000 square miles and has a population of over 6 million. Due to its beauty and towering mountain ranges, it is often called the "Switzerland of India."  The region is so inaccessible that it can only be reached by foot or mule. Mining is sporadic and only attempted for a few weeks in the summer. In the winter, temperatures can fall below -45 degrees F, and blizzards can last for weeks. By 1925, the mines were nearly depleted.

Kashmir Politics Today
Since 1989, Islamic militant groups have been fighting for Kashmir's independence from India and its merger with Pakistan. More than 65,000 people have been killed in the conflict. India and Pakistan now both claim all of Kashmir. Recent peace overtures have eased the tensions between the nuclear-armed rivals. Kashmiri militants have vowed to continue fighting the Indian forces until India cedes control of its portion of the Himalayan territory.  India and Pakistan have fought two wars over Kashmir since both gained independence from Britain in 1947.

Importance of Country of Origin
The market has already decided gem quality Kashmir sapphires are more valuable than comparable sapphires from any other source.  Kashmir sapphires trade for 300-500% premium (depending on quality) over sapphires from Burma. This does not mean that all Kashmirs are better than all other stones.  The gem market is littered with low quality Kashmirs.  Just because a stone is Kashmir doesn’t assure it is a beautiful stone.  Any stone has to be beautiful first, irrespective of country of origin. 

New Kashmir Production
The last major auction in the Far East of Kashmir goods was 1988.  Basically, the goods sold were low quality rough.  These stones show up on the market today along with new stones from a few areas with limited mining.  According to C.R. “Cap” Beesley, President, of American Gemological Laboratories (AGL), New York, “We give the new Kashmir designation to stones that are technically from Kashmir but do not look like Kashmir stones in the classical sense. Many of these new stones look more like Ceylon sapphires.”

Collector to Collector Market
Since the production of fine Kashmirs is practically nil,  Kashmirs usually enter the market from old estate jewelry.  Stones with bad cutting and bad polish might be Kashmirs. Evidence that the stone has been worn for least 100 years is a good sign. Kashmirs can also be found for sale returning from the investor/collector markets.

Sapphire History
The English word sapphire comes from sapphirus in Latin, safir in French, sappheiros in Greek and sauriatna in Sanskrit. All of these words mean blue. Before gemology became a science, stones were grouped according to color. Most of the blue sapphires in the Bible and old writings were probably not sapphires at all, but rather lapis lazuli, which was a common gem from Afghanistan.  In 1802, France's Count de Bouron discovered that sapphire and ruby were different colors of aluminum oxide of corundum.

Brief Gemology
The majority of atoms in sapphire are aluminum or iron atoms. One or two titanium atoms is all that is needed to create the blue color in sapphire. When a crystal has both titanium and iron, only then does it create the beautiful blue of sapphire. Sapphire is ultra hard at 9 on the Mohs scale. Sapphires have a relatively high refractive index, which provides sparkle and brilliance.

Independent Labs
High quality Kashmir sapphires must be accompanied with a report from an independent lab, preferably from the American Gemological Laboratories (AGL). You might see many stones claiming to be Kashmirs with reports from minor labs that are suspect.

Caveats
The higher percentage of blue in a sapphire, the more valuable the stone. Color purity and saturation are the keys to value. Often you hear, "the darker the color the better", but inky black sapphires are actually a curse. Kashmir sapphires should be a soft, pure blue, not black/blue.  A Kashmir should look good at night and not black-out. Another potential problem you often see with Kashmirs is they tend to be deep stones. They are purposely cut this way to give the stone more body and give Kashmir's more brilliancy and brightness. Also, Kashmir sapphires often have strong zoning and dichroism. Due to their rarity, these facts are less important than compared to stones from other countries of origin. 

Heating
Approximately 90-95% of all sapphire is heated and gems have been heated for over 4,000 years. As a general rule, Kashmir stones are not heated.

Prices
The price of fine Kashmirs simply increase in value every year.  This is because the supply is practically nonexistent. During the Depression, fine Kashmir blue sapphires never sold for more than $500 per carat. These stones are so rare, only a few may be available at any one time. Today, you can easily spend $10,000 for a gem carat size gem, $15,000 for a two carater. Ten carat stones can reach $50,000 per carat and twenty carat Kashmirs are worth $100,000 per carat. This market is controlled by the sellers who want top prices in order to part with their stones.

Conclusion
Kashmir sapphires are far more likely to hold and surpass their current value than most other gemstones. We can safely assume they are not going to find any more gem quality Kashmir sapphires. Analogous to fine property in real estate, Kashmir sapphire continues to escalate in value regardless of what happens to the overall sapphire market. Every serious collector should have one Kashmir in their collection.

Jewelers Burma Relief Project

Last summer, President Bush signed the Burmese Freedom and Democracy Act closing the U.S. market to legal imports from Burma (Myanmar).  The ban went into effect on August 28, 2003 for a three year period. This political action was taken in response to the arrest of Aung San Suu Kyi, the Nobel Peace Prize laureate who has been held by the country's ruling junta since May 30th.  It is her third period of house arrest since the late 1980s. The military regime arrested her, along with numerous other pro-democracy advocates, such as journalists, in an apparent effort to stifle their support of democracy and human rights.

The Burmese Government has ruled the country with an iron fist for the past four decades, with strict regulations and censorship of the press, even ending in imprisonment of those who voice opposition of their views.

Recent US Politics
President Bush renewed the import sanctions against Burma in May, 2004 for another year. The US Senate has warned that the controls may not be removed even if Aung San Suu Kyi is freed. Secretary of State Colin Powell, Republican Senator John McCain and other major political players are committed to renewing the sanctions. Finally, Republican Senator Mitch McConnell wants the UN to impose sanctions against Burma.

European Union
The European Union (EU) has recently renewed targeted sanctions against Burma’s military dictatorship that were to expire on April 29, 2004. The sanctions include a visa ban, an arms embargo and an asset freeze. Brussels resisted calls from the European Parliament to toughen the punitive measures over fears that it could harm the Burmese population.

Burma Campaign UK
Last year, The Burma Campaign UK convinced the last British company, British American Tobacco (BAT), to pull out of Burma. In July, 2003, the British government backed the campaign and asked BAT to leave Burma. The company was deluged with thousands of postcards and emails from political rights activists in over 50 different countries. The Burma Campaign has also succeeded in getting Premier Oil, Triumph International and every major retailer out of Burma.

Jewelers Burma Relief Project
Brian Leber of Leber Jewelers, in Western Springs, IL is passionate about human rights and the people of Burma. He set up the Jewelers Burma Relief Project at the Tucson Gem Show this year in response to the political situation in Burma.

Leber states, “We count on Burma for so many of the gemstones we sell in America and through this project, the industry can do something positive. So many in the industry have neglected the human rights problems in Burma for years, at least the sanctions have focused the attention of people on the issues. Regretfully, change only occurs when the public becomes aware of a problem. Now that Burma is in the news, positive change may occur in Burma.”

Leber does not want what happened to the diamond industry to happen to the colored gemstone industry. Leber expounds, “The diamond dealers kept their heads in the sand about the conflict diamond issue. The industry now has an opportunity to do something positive and stay ahead of the curve. This is our chance to aid the people in Burma who are suffering today.”

Leber fears an organization like Burma Campaign UK will reproduce the results of their campaign in America, and buying or selling Burma gemstones might become politically incorrect. He continues, “The industry needs to do something positive before Ted Koppel and Nightline come knocking on our door asking the jewelry industry what they are doing about this issue. If we don’t act now, this could become a public relations nightmare.”

According to Leber, “The response has been remarkable. I am trying to get the AGTA involved. The main contributors so far have been small independent jewelers.”

Sanctions
Sanctions may or may not hurt the poor people, but unfortunately it is unlikely to affect the government financially. Since the Burmese regime receives income from illegal sources anyway, perhaps they do not care about sanctions. For example, the Burmese government owns or has a controlling interest in every major Burmese mine. They reap the benefits of the mining industry, regardless of the end location of the product. Even if the goods are smuggled, bribes are paid to government officials along the way. Leber says, “The only leverage the United States has is the Burmese government’s desire for legitimacy in the international community. They see the sanctions as giving them a black eye.”

The Foundation for the People of Burma
The Foundation for the People of Burma is a nonprofit humanitarian organization based in California. It is operated by Heather Graham, Executive Director. According to Graham, “Working in Burma is a challenging task. Our main focus in Burma is basic health care. We have created medical boxes that allow people to treat infections. Of course, malaria is prevalent in Burma, and we hope to get some microscope's to help diagnosis the disease.”

It is amazing what a small contributions can do in Burma. For example, The Foundation for the People of Burma hope to fund a $15,000 dormitory for orphans. According to Graham, “We are planning to build a dormitory for the children at a monastery orphanage in the town of Kyaikto. Kyaikto is where the famous Golden Rock Pagoda stands. There are over 400 children of all ages and ethnicities at the monastery. There is only one monk, one nun and one teacher to care for them all. The children suffer from neglect and malnourishment. The children sleep on raised platforms side-by-side in a long row, lined up like sardines. Some of the children are in an unenclosed, bamboo-covered, leaky ‘dorm.’ There are no beds and no privacy for any of the children.”

Graham concludes, “ We are glad to see people in the jewelry industry help out in an area that is in such desperate need and real change can be seen with contributions.” Leber closes, “It doesn't matter whether you are pro-sanctions or anti-sanctions, you should contribute to the Jewelers Burma Relief Project.” Regardless of the politics of the xenophobic, totalitarian Burmese military regime, the people of Burma need the assistance of the diamond and gemstone industry to help lift them out of their dire poverty.

For more information Contact:

Leber Jewelers
907 Burlington Avenue
Western Springs, IL 60558
Tel: 708-246-1455
email: info@LeberJeweler.com

To make a donation:

Jewelers Burma Relief Project
c/o Foundation for the People of Burma
909 Montgomery Street, Suite 500
San Francisco, CA 94133
Tel: 415-486-6527
Fax: 415-486-6786

Vegas Gem Show 04:
by Robert Genis

Although a jewelry, rather than a loose colored gemstone show, one of the industry’s largest trade shows is the Las Vegas Show. It started on June 1st and finished on June 8th. The main shows were the JCK Show, the Gem & Lapidary Dealers Association Show, the Las Vegas Antique Jewelry & Watch Show, the International Gem & Jewelry Show and the Bead Renaissance Show. The prime show for colored gemstone dealers was the AGTA Gemfair at the JCK Show where the dealers competed with 12 other jewelry sections.

Coming off the strong show in Tucson, many gem dealers had high expectations for the Las Vegas Show because of the resurgent worldwide gem and jewelry markets. The consensus of the show was neutral to good. There were no known gangbuster or dramatic sales of major colored gemstones. Sales of loose stones were probably down from last year. One visible trend was mounted goods sold better than single stones. Perhaps this is due to the fact buyers come to Las Vegas primarily for jewelry rather than loose stones unlike the buyers at the Tucson Gem Shows. Last year, single stones seemed to sell better.

Some speculated many buyers would register for the shows and then head for the casinos or golf courses.

Disneyland
A dealer compared going to the Las Vegas shows to going to Disneyland.

He speculates, “if you simply go to Disneyland without a plan, you are overwhelmed by the sheer size and fun of all the rides. If you simply follow your instincts you may miss many exciting rides. The JCK show it is the same. You can enter and get easily sidetracked with the jewelry manufacturers, the designers, the watch dealers and the diamond dealers. You might never get to the loose colored gemstone dealers unless you make a concerted effort, in advance, to visit this section.”

He concludes, “ the show is gigantic and we are hidden on the second floor. I would be surprised if 1% of attendees actually walked past my booth and looked at my stones. The vast size must be overwhelming for the buyers, too.” Many dealers have a different attitude about the Las Vegas show. They go to Tucson to make profits and show at Las Vegas to break even. The general consensus is as long as they sell enough to cover their expenses, they are happy.

Hot Stones
The search for unheated or untreated gemstones remains a strong trend.

Buyers were searching especially for unheated ruby and sapphire.

Russian demantoid and Brazilian alexandrite sold because of their present availability. Pink sapphires and pink tourmaline stones sold well. Some dealers stated tanzanite prices have increased dramatically.

Some dealers sold African emerald.

Conclusion
Obviously, dealers sell the goods they carry. Given this fact, it is often difficult to discern true trends. However, the bottom line is that untreated gems plus red, blue, green and pink colors seem to be hot right now. Given the fact the Las Vegas shows are really jewelry shows, most gem dealers are content to break even by attending. It is often more important for gem dealers to attend the show to make contacts for possible sales later in the year. Most gem dealers will continue to attend this show in the future despite the fact many feel relegated to minor players in the overall scheme of the show.

International Gem News
Formula One Racing Car Diamonds Gone
A Jaguar crashed into a guardrail at Monaco Grand Prix with $200,000 worth of diamonds positioned in the nose of the car. The Jaguars were advertising the forthcoming Hollywood movie "Ocean's 12," which involves an international diamond heist. George Clooney, Brad Pitt and Matt Damon were all guests in Monaco for the race. The car was driven by Austrian driver Christian Klien, a 20-year-old rookie. Klien admitted, “That will be the most expensive drive I ever make around Monte Carlo in my life." The diamonds, the size of a shirt button, were installed in a secure steel ring on the nose cone, but they only needed contact with one of the steel barriers to dislodge the stones. The diamonds were owned by Steinmetz of Israel. The flawless diamonds have yet to be found.

Asia’s Cell Phone Jewelry
The wealthy in Asia demand nothing less than a diamond-encrusted handset from China's TCL Mobile Communication Co. Ltd. or an 18-carat white gold mobile with a sapphire crystal face by Nokia unit Vertu. Another Nokia phone costs $26,550 and weighs 215 grams of platinum. Many analysts say high-end sales are the next growth market for cell phone makers. London-based Vertu and Finnish parent Nokia began developing the luxury models as early as 1997. At the end of 2003, Asia accounted for a third of Vertu's total business and Hong Kong was its largest single market. Asian's tend to trade in their cell phones every nine to 18 months compared with about two years for Europe and the United States.  Motorola recently launched a clamshell V600 model that offers interchangeable covers studded with clear Swarovski crystals and Nokia's new 7200 model offers fabric covers that have analysts calling it the Louis Vuitton phone.  Gem-encrusted handsets became the rage in China, the world's largest wireless market, after TCL Mobile launched its diamond-studded mobile phones in 2000. Its limited edition with genuine gemstones costs up to $2,400. To many Chinese, precious stones symbolize esteem, good fortune, peace and love. So, jeweled mobile phones are both communication tools and lucky charms. TCL Mobile sold more than 12 million jeweled phones - most of which had fake gems - between 2001 and the first six months of 2003.

Gem Robberies
Japanese $36 million jewel heist
Since 1991, The Comtesse de Vendome, a 125-carat, $27 million necklace, had been on display at the Le Supre-Diamant Couture de Maki, in Tokyo’s posh Ginza district. It is studded with 116 diamonds. Recently, a gang posing as English customers, pepper sprayed an employee and used hammers to smash through reinforced glass showcases to grab the necklace. The gang escaped with 12 pieces of jewelry and The Comtesse de Vendome. The gang included two men and two women. The two women helped plan the raid by visiting the store, posing as customers and acting as lookouts while the two men carried out the theft. All four escaped on motorcycles and stayed at a hotel in Tokyo before fleeing the country to Paris under fake Croat and Czech passports. Japanese police have asked Interpol to place them on its international wanted list. Japanese police confirmed that a British woman is in her 50s, two Serbian men in their 30s and a woman in her 20s will be charged with assault and robbery. Fingerprints left at a hotel room matched those of a man on an Interpol wanted list in connection with a robbery in Europe in 1999. Hotel records show the gang members made frequent calls to Sri Lanka during their stay and it is believed they might have already used the black market to sell the stones.

Hidden Cash and Jade
Lana Padilla, an ex-wife of Oklahoma City bombing conspirator Terry Nichols found $20,000 hidden in a Wal-Mart bag Nichols hid in her kitchen in November 1994. Padilla recently testified at the Pittsburg County Courthouse, where Nichols Nichols was recently found guilty on state charges for the April 19, 1995, Oklahoma City bombing. Padilla said Nichols stashed the money at her home in Las Vegas while he traveled to the Philippines. She said she also entered a storage shed Nichols had rented in Nevada and found insurance papers, gold coins, green gemstones, and a bag with a wig, a ski mask, pantyhose and costume makeup, among other things. Padilla said she later learned the value of the items in the shed was estimated at $38,000. Padilla said she contacted the FBI about a piece of jade one of her sons took from the gemstones in the storage shed, after learning similar stones had been taken from Roger Moore, an Arkansas gun dealer.

Auction Reports
Doris Duke's Jewelry Collection
Doris Duke was the only daughter of James Buchanan Duke, who was a founder of American Tobacco, Duke Energy Co. and a benefactor of Duke University. When James Duke died in 1925, he left his daughter an estate worth an estimated $80 million when she was 13. She turned it into over $1.2 billion during her life. She was a recluse her last few decades, her traumas were well publicized: failed marriages, torrid love affairs, the accidental homicide she committed and her late-in-life adoption of a grown woman. Her will was also controversial, some say it was her signed while Duke was mentally incapacitated. It named her shady, alcoholic butler as coexecutor of her estate and included a $100,000 legacy for one of her dogs. Doris died in 1993 at 80 and left a collection includes Victorian heirloom pieces and other jewels from the 19th and 20th centuries. Her jewelry included examples from some of the most important jewelry makers of the time, including Verdura, Cartier, Seamen Schepps and David Webb. The collection includes 80 to 100 pieces from the 1860s through the 1960s. The collection was sold at Christie's in June for $12 million. The auction proceeds will be used for charitable purposes through the Doris Duke Charitable Foundation.

Here are the main sales:

* Buyers paid as much as ten times the estimated prices for the pieces, which included a belle epoque diamond and pearl pendant necklace by Cartier that sold for $2.36 million.

* A two-strand emerald bead necklace, which went for $1,127,500 to a U.S. trade buyer. The necklace, most likely purchased by Duke while on her honeymoon with her first husband brought in more than three times its high estimate and set a world auction record for an emerald bead necklace.

* A 19.72 carat rectangular diamond ring by Tiffany circa 1920, brought $1,261,900 from a private American buyer, slightly more than its high estimate. The ring, originally the property of Duke’s mother Nanaline, and was worn often by both mother and daughter.

* An Art Deco diamond bracelet by Cartier circa 1927, brought $1,217,100 from an anonymous buyer. The hammer price of the bracelet, also originally the property of Nanaline Duke, was more than twice its high estimate.

* An Indian diamond necklace estimated at $400,000-$600,000, purchased by a buyer from the European trade for $701,900.

* A single-strand emerald bead necklace circa 1935, estimated at $150,000-$200,000, sold to a private U.S. buyer for $589,900.

* A pair of Art Deco diamond bracelets by Cartier estimated at $120,000-$150,000, purchased by a private U.S. buyer for $433,100.

* A diamond clip brooch by David Webb, circa 1925, estimated at $180,000-$220,00, sold to a buyer from the European trade for $343,500.

* A sapphire, diamond and seed pearl bracelet by Cartier, circa 1925, purchased by a private U.S. buyer for $332,300 or nearly three times its high estimate of $120,000.

* An Art Deco natural pearl and diamond tiara by Cartier estimated at $150,000-$200,000, which sold to a buyer from the U.S. trade for $298,700.

* A telephone buyer paid an astounding $53,775 for an empty platinum necklace mounting by Cartier. The mounting, from which Duke had removed all of the stones for use in other pieces, was originally estimated at $6,000-$8,000.

Burma Rubies at Auction
At Christie's recent Magnificent Jewels auction in Geneva, several notable rubies were sold. A 9.35 carat reddish-pink unheated Burma ruby fetched over $100,000 per carat. A 7.58 ruby sold for over $68,000 per carat.

Colored Diamonds
At Sotheby's Hong Kong, a 10.80 fancy vivid blue diamond, internally flawless, sold for $4.2 million. It was sold to a private collector. It has described as a perfectly proportioned heart shaped stone. A 5.06 fancy intense pinkish-orange rectangular diamond sold for $692,608 to a US consumer. At Geneva, Christie’s sold a 5.59 pear shaped purple-pink flawless diamond for $423,000 per carat. Also, they sold a marquise blue 4.81 VVS2 clarity, for $350,000 per carat. Sotheby’s sold a 3.90 carat pear shaped blue diamond, internally flawless, for about $462,000 per carat.

In The News
Emerald magnate hopes to mine a richer seam by Andy Webb-Vidal Financial Times, May 10, 2004

It has long been a dream of Colombian sellers to create an organization to imitate the success of DeBeers in the diamond market. The missing puzzle in their dreams are extensive US advertising and marketing campaigns. It is not enough to simply control supply. Victor Carranza can try to manipulate supply of the emerald market, however, the emerald imports were down 12% from 2002 to 2003 and emerald demand in the US remains weak. ED

At the end of a dark, steamy tunnel 220 yards below the surface of Colombia's central highlands, Enrique, a miner, extracts a small green crystal embedded in the rock wall crumbling around him. Enrique gingerly places the prized emerald in his mouth, hoping to peddle it to a black-market trader who, he presumes, will then resell it to a foreign buyer at a discreet office in downtown Bogotá. "That's the way it's done," explains Enrique, his sweaty face blackened from the dust that swirls around him during his eight-hour shift down the warren of narrow tunnels. "Others do it a lot, when they can get away with it."

Such clandestine transactions are the start of the journey for many of the emeralds that reach the international market from Colombia, which supplies about 60 per cent of world output, ahead of Zambia, Zimbabwe and Brazil. But the activities of Enrique and other miners who supply the informal emerald trade could soon come to a halt, as part of a shake-up of Colombia's irregular and, at times shadowy, emerald business. Victor Carranza, 68, a local emerald magnate, is introducing a series of measures to control supplies and, he hopes, lift prices that have been dragged down by the burgeoning black market and weak demand. Emerald prices depend on their quality and size but Colombian stones, considered by experts to be the world's finest, sell at $2,000 to $2,500 per carat on average, 30 per cent less than five years ago.

However, in what could transform the way the emerald trade is supplied, Mr. Carranza and his associates' six main companies have agreed to establish a single marketing company to pool and control supplies. The new system, Mr. Carranza says, will maintain buffer stocks and hold regular auctions, resembling the Central Selling Organization, the marketing arm of the world's top diamond producer, De Beers. "With this agreement we are going to be able to control output, the market, and therefore prices," Mr. Carranza said in an interview with the Financial Times. "This is not the creation of a monopoly, rather the elimination of a black market," he said. "We expect to reverse the 30 per cent drop in price and add 20 per cent on top in a relatively short period of time."

Through the 1980s and part of the 1990s, Colombia's emerald industry was the target of deadly violence from drugs traffickers, some of whom saw the business as the perfect vehicle for money-laundering. Mr. Carranza resisted and was held in custody for four years for allegedly forming paramilitary groups. He was absolved and released two years ago but, in February, Baltazar Garzón, the Spanish investigative judge, opened an investigation into similar allegations, which Mr. Carranza denies. The threat from illegal armed groups has receded but the emerald industry is still largely unregulated. According to the ministry of mines, Colombia exported an average of 6.9 million carats, or 1.38 tons, annually over the past five years. Yet their declared value has averaged just over $12 per carat, far below market prices. Ministry officials suspect that the legal exports are hugely undervalued, while some larger emeralds bypass customs altogether. Mr. Carranza says the problem is the black market, on to which he estimates at least 70 per cent of the stones extracted from his mines find their way, justifying new strict measures.

In Muzo, the main mining region, X-ray machines and lie detectors are being installed at the exits of mine shafts to catch would-be smugglers and to ensure "leakage" does not exceed 5 per cent of output. Some experts doubt that Mr. Carranza's plans will boost emerald prices, which depend as much on fashion trends in the jewelry markets of Asia,Europe and the US, as they do on supply. "Victor Carranza can help emerald prices by restricting supply, but worldwide demand remains the key," says Robert Genis, president of National Gemstone Corporation, an Arizona-based gemstone dealership. But Mr. Carranza is going ahead with his plans regardless.

Around Muzo, hundreds of traders lurk while artisan miners pan the streams that carry the tailings from the leaky mines upstream. The days of this bedraggled crew of ever-hopeful prospectors seeking a nugget of wealth among the rocks may be numbered. As Luis Rodríguez, chief geologist at one of Mr. Carranza's mines, puts it: "We are implementing major changes in the way the mines are run. Things will not be the same again."

Inflation Heats Up
by Kenneth Gassman
Rapaport, June 3, 2004

After nearly a decade of price deflation in the U.S. jewelry industry, it appears that prices are poised to rise this year. Rapaport Research is forecasting that jewelry price inflation could be as high as 4 to 5 percent in 2004.

At first glance, the prospects for diamond and jewelry price inflation may appear to be negative for the industry. After all, Federal Reserve Chairman Alan Greenspan has declared a war on inflation. However, an analysis of the impact of jewelry price inflation reveals that it could benefit jewelry retailers and suppliers.

What Is Inflation?
The simple definition of inflation is when “you pay more and get less.” Currently, in the U.S., the two highest inflation categories are gasoline and health care. The Fed has declared war on inflation because, when left to run rampant, it has two nasty side effects: It can cause wild economic growth and it undermines the value of the U.S. dollar against other world currencies. However, the Fed also believes that a low level of inflation is good for the economy. Assuming the U.S. economy is truly capitalistic and based on supply and demand, modestly rising prices signal that the economy is growing. In other words, consumer demand is strong enough that suppliers can safely raise prices modestly without choking off demand. The Fed has indicated that core inflation, which omits food and energy price changes, should run at +1 percent or less annually. That level will support “real” economic growth of 2 to 3 percent annually, a growth level that economists generally acknowledge to be solid and low-risk.

Jewelry Price Inflation To Heat Up
There are several factors fueling inflation in the jewelry industry, including the following.

* Significant diamond price increases: After only modest stone price increases early in the decade, rough diamond prices jumped by at least 10 percent in 2003 and are poised for a greater price increase in 2004. Until now, suppliers have absorbed most of those price increases either by taking smaller margins or outsourcing cutting and polishing to geographic regions with low labor costs.Several retail jewelers say they have begun to pass along higher diamond prices to their retail customers, especially among higher-end stones. Diamond jewelry sales represent about half of the typical jeweler’s annual sales by value. Rapaport Research’s price analysis indicates that consumer prices for diamonds have risen by 5 percent or so at the mass-market retail level in the past six months.

* Sharply higher precious metals prices: After languishing below $300 per ounce since 1998, gold prices began to rise in 2002, followed by significantly higher prices in 2003 and early 2004. About 10 percent of the typical U.S. jeweler’s revenues is generated by sales of gold jewelry. Further, gold mounts are used for diamonds and colored stones, so the total impact of gold price increases on jewelers is significant. Since early 2002, gold prices are up nearly 35 percent. Most retail jewelers have repriced their gold jewelry merchandise to reflect higher-priced gold. In addition to rising gold prices, platinum prices have soared. In the past five years, platinum prices have more than doubled. This year, they have risen roughly 40 percent above the average for 2003. While platinum represents only a small portion of the typical U.S. jeweler’s revenues — about 2 percent — it adds to the aggregate inflationary pressures facing jewelers.

* Weak U.S. dollar: Since January 2002, the U.S. dollar has fallen by about 20 percent against a market basket of hard currencies including the yen, the pound sterling, the Swiss franc, and the euro. Since most jewelry sold in the U.S. has some cost components — labor, cutting, casting — that are denominated in foreign currencies, the cost of those components has risen significantly. Producers who supply goods denominated in a non-U.S. dollar-based currency have been less able to pass along their cost increases to U.S. retailers up until now. Retailers say that producers are increasingly demanding that supply contracts contain a currency hedge provision.

* Lean inventories: After a strong 2003 holiday selling season, inventories were low throughout the global jewelry distribution chain.
Further, De Beers has slashed its diamond stocks over the past three years; inventories have dropped from about one year’s worth of sales to just over two months’ sales. As a result of improving economies in most major markets, diamond and jewelry demand has risen significantly.
Therefore, supply and demand forces have pushed diamond and jewelry prices higher.

Why Would Inflation Be Good for the Jewelry Industry?
There are two key reasons that price inflation is positive for diamantaires and merchants.

* Rising prices should help reduce margin pressure: If prices rise, pressure on suppliers’ and retailers’ margins will be reduced, especially if prices rise faster than costs.

* Real industry growth would be unmasked: Price deflation has masked the real growth of the U.S. jewelry industry. On an inflation-adjusted basis — actually, a deflation-adjusted basis for jewelry — jewelry industry revenues would have risen by about 7 percent annually over the past ten years, rather than the 5 percent compound annual growth rate that was reported. Rapaport Research continues to maintain that the jewelry industry is a high-growth situation, but its unit growth has been masked by falling prices. If jewelry price inflation had matched the U.S. Consumer Price Index (CPI) over the past ten years, jewelry industry revenue growth would have been well over 9 percent annually, more than double the 4 percent annual growth of all U.S. retail categories.

Inflation Blockers
Despite pervasive industry-wide inflationary pressures, there are a few factors that are poised to keep retail jewelry prices from rising rapidly, including the following.

* Competition from discounters: As Wal-Mart, Costco, and other discounters have attempted to increase their market share through heavy price discounting, traditional jewelers have responded by reducing some prices, especially on items that are easy for consumers to compare. For most of the decade of the 1990s, independent jewelers have reported that their gross margin has fallen. Much of this margin pressure was due to increased competition from discounters.

* Less expensive labor: In an effort to offset higher raw materials prices — diamonds, gold, platinum — diamond and jewelry producers have moved production out of high-cost geographic locations like North America and Western Europe. Jewelers have substantially increased their use of low-cost Asian labor for manufacturing. In addition, there are other pockets of low-cost labor dotted around the world, such as the Dominican Republic, Peru, the Philippines and other locations.

* Internet retailers: There is one new unknown that could rein in jewelry price inflation — internet retailers. Blue Nile, Amazon.com and other internet merchants are trying to take market share from traditional jewelers. Internet retailers’ gross margins are dramatically lower than the jewelry industry average. For example, Jewelers of America reported that traditional jewelers operated with a gross margin of 49 percent in 2002. Blue Nile’s reported gross margin is 23 percent, while Amazon.com says it will operate with a gross margin of 13 percent. If traditional jewelers fight back with lower prices — always a losing proposition — then a decade of jewelry price deflation just might continue.