GOLD BUGS CRUSHED

It is always amazing to me how little we learn from history, both that of the western world and our own.  Take the real estate collapse that led to the great recession of this century, for example.  It was fueled by bank sales of ‘Collateralized Debt Obligations’ to buyers willing to believe that they had value when in fact they were dominated by sub-prime mortgages on real estate sold at inflated prices - a ‘sure thing’ bankers insisted.  Unremarkably, this sort of a scam is as old as the notion of stock markets, beginning with the ‘Great South Seas Bubble’ of the early 1600s.  In like manner, trading commodities at prices exceeding their utility also dates back to the same period of time beginning with (of all things) the ‘Tulip Bulb Bubble’.  So the dramatic fall in the price of gold should not have taken anyone by surprise.

If you’ve not followed this drama, the bare bones facts are these.  About a dozen years ago gold sold for in the neighborhood of $260/ounce.  This price kept many mining operations shut down as the cost of extracting it would be greater than the price it could obtain in the market.  The market, of course was driven by demands divided, roughly, into industrial demand, about 25% of annual production, and the rest, divided in turn, into gold used to make jewelry and gold that was hoarded.  In India, at that time consumer of more than a quarter of the world’s annual gold production, the line between gold hoarding and jewelry was ill defined; as much gold the consumer looked upon as a ‘currency reserve’ was fabricated into crudely made jewelry, the better to keep an eye on it.  In a very real sense, the value ascribed to gold was probably greater than any value derived from its utility; but the differential was not huge.  By the end of April 2003, the price of gold had risen by about 29% over its 2001 market price; a year later the price of gold had crept to about $390/ounce, a 50% increase over its 2001 level.  Soon, this sort of increase would attract ‘hot money’.

Hedge fund operators began to take an interest in gold as a ‘quick fix’ for out of ‘whack’ balance sheets at the end of a quarter.  Invest a few billion dollars in gold (using automated computer trading at the speed of light) and the price of gold would jump up enough, usually in the range of 13% to 14%, to make the old balance sheet look good, then dump it after the need had passed. Interestingly enough, between 2006 and the end of 2011 this rhythmic range (13% to 14%) in the price at which gold was traded remained largely constant.  What changed was the arrival of the “gold bugs”.  These were individual investors who bought and held gold for long term profit; one can justifiably call them speculators.  Ironically, this was often out of a belief that fiat currency was doomed to lose its value.  I say ‘ironically’ because their faith in gold’s value was fueled by manipulation and speculation - the same sorts of actions that affect that other ‘commodity’ detached (like gold) from practical utility - fiat currency.  Ultimately, in the late summer and early autumn of 2011, the price of gold flirted with $1900/ounce; all without any increase in its practical utility.  Like the captain of the Titanic, the gold bugs were roaring full steam ahead into danger.

It came not in a collision with an iceberg; rather it was a collision with that other ‘commodity’, fiat currency, namely, the Euro.  Five Eurozone countries fell economically ‘ill’ in the wake of the ‘crash of 2008’ and required ‘bailouts’ by the rest of the zone to keep from defaulting on their debts.  Among these, the faltering, running sore of Greek bailouts clearly raised some questions for hedge fund managers; and the price of gold fell from its dizzying heights of September, 2011 by about 19% (to about $1535/ounce) at the end of December.  Once burned, twice shy; and interestingly, the swings in the price of gold dropped to an average of less than 2% - hard on speculators.   In late 2012 things got worse.  Banks in Cyprus, another Eurozone economy, had ‘invested’ quite a bit of their depositors’ money in Greek bonds; and as these were devalued, the question of whether Eurozone banking insurance would bail depositors out came into focus.  The answer was equivocal; the Euro shook; and in the denouement of this crisis, The European Commission (on April 9, 2013) declared that Cyprus had agreed to selling off a bit more than $500 thousand in ‘excess’ gold reserves to keep from defaulting.   The chief of the Cyprus central bank demurred, insisting that only he could authorize the sale of gold; and within a week the world price of gold fell by more than 12%.  And if that didn’t put an end to gold fever, on the 15th, American investment banker Goldman Sachs announced that it anticipated the price of gold to fall to about $1250/ounce by the end of 2014.  In a word, if you had bought gold after the end of August, 2010, you could expect to take a loss if you tried to sell it.  So much for the value of gold as an investment.

While I can’t advise you on your economic investment, I can make a solid recommendation about your investments in yourself and others.  Record and celebrate your life and your love with the best in diamonds, Hearts On Fire.  They’ll be an eternal part of your life thereafter and a bit of history that your children and grandchildren will treasure forever.  Check them out on our website, hurstsberwynjewelers.com; then phone us at 708.788.0880 for an appointment.  We’ll listen.  We’ll help you tell your story because were Hursts Berwyn Jewelers, not a common jeweler. 

Sneaky Diamonds

Every now and then I am asked about synthetic diamonds; and every time it brings to mind a story told me by Tom Chatham (a successful maker of synthetic emeralds, sapphires and rubies) almost 20 years ago. Following the collapse of the old Soviet Union many former Soviet scientists were searching for a new identity and a new job; and soon stories about Russian synthetic diamonds began making their way west. When they came to Tom, he decided he had to learn more.

First there was the ‘why’ of Soviet research; and he quickly learned that it was connected to Soviet military research. Unlike the diamonds in 1971’s James Bond film (Diamonds are Forever), synthetic diamonds were not to be used directly in weapons systems. Diamonds are nearly perfect transmitters of heat; and printed circuits, printed on ‘slices’ of diamond instead of glass, that is, lay at the heart of the Soviet research initiative. The electromagnetic pulse emitted by a nuclear blast would ‘fry’ circuits printed on glass at a fairly great distance - thus compromising the utility of modern communications and computer hardware on the ‘nuclear battlefield’. By contrast, a circuit printed on a diamond slice could quickly and uniformly dissipate the heat a blast generated electromagnetic pulse imposed on a circuit printed on it, thus rendering it ‘battlefield hardened’. The government’s collapse had brought research to a sudden halt that left scientists and technicians employed in it high and dry - and looking for a new source of income. Their research and need brought Tom, eventually, to researchers in component states of the old Soviet Union - Russia (Novosibirsk) , Ukraine (Kiev) and Belorussia (Minsk).

In Novosibirsk Tom quickly found scientists interested in making diamonds for the consumer market. Unfortunately, the Russian ‘Mafia’ learned of his interest almost at once and tried to ‘muscle in’. This left Tom waiting in Novosibirsk (and waiting, and waiting) for the problem to work itself out until one day a stranger approached him on the street. The news of his interest has made its way through the gossip underground to Kiev; and the stranger was there to make him an offer. “Come to Kiev,” he said, “And we will make diamonds for you.” Frustrated in Novosibirsk, Tom readily agreed to give Kiev a try.

Sure enough, when he got to the diamond laboratory in Kiev he was shown some small, but nice, recognizably synthetic diamonds; so he and the scientists made a tentative agreement. All did not go well, however. It takes quite a bit of electrical power to synthesize diamonds (using heat and pressure); and shortly after Tom and his new collaborators had made their agreement, Ukraine’s coal miners went out on strike. Coal was not shipped to generation plants; electrical power became irregular; and the new partnership died. Once again at loose ends, Tom cooled his heels in Kiev awaiting the return of power; but the gossip underground was still at work. A new stranger turned up. “Come to Minsk,” he said, “We’re making pretty good synthetic diamonds.” True to his quest, Tom went to Minsk.

He was warmly welcomed in the Minsk lab; and the diamond scientists there readily showed him some of their wares. “Wow!” Tom exclaimed. “These are the best I’ve seen yet, let me seemore.” Somewhat uncomfortable now, the former Soviet scientists admitted that while they had made quite a few more, they had shown him all they had. “What happened to the rest?” queried Tom. A moment of silence, then one of the scientists replied, “We sold them to a Belgian diamond cutter.” Chagrined at a Belgian having beaten him to the synthetic diamond market, Tom could only say, “I didn’t know the Belgians were cutting synthetic diamonds.” Looking down at his shoes, the scientist who had revealed the disposition of their diamonds shook his head saying, “Neither do they.” In short the synthetic diamonds had been passed off as natural and sold into the gem trade; but in the second decade of the 21st century this is far less likely to happen.

Two techniques of synthetic diamond manufacture are currently in use, chemical vapor deposition (CVD) and Russian developed heat and pressure (HPHT); and each leaves its ‘finger prints’ in a diamond grown using it. De Beers, once alerted to the threat of synthetic diamonds being fraudulently introduced into the market as natural gems, put its science team to work and in the late ‘90s introduced two machines into the market, the ‘DiamondSure’ and the ‘DiamondView’. These so accurately ferret out a diamond’s ‘finger prints’ that they’ve come into general use in the diamond trade. Of course, that doesn’t keep the honesty challenged from trying. In the spring of 2012, for example, a parcel of several hundred cut diamonds ranging from about 0.30 carats to 0.70 carats (few larger synthetics have ever been grown) arrived at the Gemological Institute of America’s lab in Hong Kong. All were suspiciously free of nitrogen (95% of all natural diamonds contain traces of nitrogen) and all showed the curved graining typical of CVD grown diamonds. Clearly all were synthetic and all of them were kept out of the market for natural diamonds.

Needless to say, it’s important to know who you are buying diamonds from. Ours are natural, sourced from DeBeers and the cream of the crop. We think the emotional value of a diamond gift is so great that only a beautiful diamond will do; so come see us for the very best in diamonds. You’ll never regret it because we’re Hursts’ Berwyn Jewelers, an uncommon jeweler. You can learn more about us on line at hurstsberwynjewelers.com, then phone us at 708.788.0880 for an appointment.

P.S. If you have diamonds or broken or unworn pieces of jewelry that you would like to sell, come in and we’ll help you establish their market value; and perhaps, we’ll make the best offer to buy them.

Botswana, Diamonds and You

Ever since Leonardo DiCaprio’s staring appearance in the 2006 movie ‘Blood Diamond’ some pseudo-savants have been concerned over the social affects of diamond sourcing without bothering to check facts.  If, perhaps, Charles Leavitt (author of the screenplay) and Edward Zwick (director) could put together a similarly gripping film about columbite-tantalite (important to cell phone manufacture) their attention might be redirected.  At least two unsavory rebel groups in the eastern provinces of the Democratic Republic of Congo are actively engaged in human rights abuses to mine this mineral; but it seems to draw little attention while some continue to demonize diamond sourcing   Nothing could be more misleading.  Allow me to direct your attention to Botswana.

For those of you who’ve never looked into it, you may be pleased to learn that in 2002, and without a shot being fired, the diamond business, agreeing to the Kimberly Process, purged itself of many of the demons raised (long after the fact!) in the ‘Blood Diamond’.   The Kimberly Process is an agreement to frustrate the use of rough diamonds to finance rebellions; and as one of the original parties to the agreement, Botswana deserves a look. Unlike Zimbabwe, where diamond profits, embezzled by corrupt officials, are used to support Robert Mugabe’s dictatorial government, and unlike the diamonds of ‘Blood Diamond’, Botswana’s diamonds have been used for the public good since they were first discovered to be commercially recoverable in 1967.  Indeed, when CNN interviewed Botswana’s Education Minister  Jacob Dicky Nkate (since returned to the private practice of law), about the country’s diamond wealth he pointedly said, "Our former leaders were visionaries.  They insisted that after the discovery of diamonds, every single [citizen] be entitled to a free education from first grade to a doctorate degree free of charge. How many democracies can boast that achievement?"

In fact, or at least according to the ‘CIA World Fact Book’, diamonds have been the driving force in raising Botswana from one of the world’s poorest nations to  one of ‘middle’ wealth with a per capita domestic product on a par with Russia, Chile and Turkey.  The joint diamond mining venture between DeBeers and Botswana, ‘Debswana’, is the world's largest diamond producer by value; and it

is the source of about 30% of Botswana's Gross Domestic Product.  Between dividends, royalties and taxes, the company is the source of virtually 50% of all of Botswana’s Government revenues, and more than 95% of the company’s more than 7,000 employees are Botswanans.   The downside to this, of course, is that Botswana’s dependence on diamonds raises the risk that when the diamonds run out (thought to be about twenty years from now) the economy will collapse.  As this is a foreseeable risk, the Government of Botswana has once again begun to use its diamond wealth as a bootstrap.  DeBeers, for instance, has agreed that beginning this year it will sort all of its diamonds in Gaborone, the country’s capital, which De Beers CEO, Phillippe Mellier, estimates will transform Botswana “into a leading international diamond center.”  And there are other plans as well.

It’s stable and transparent democratic government affords Botswana one of Africa’s best investment climates, one the Government seeks to capitalize on to spur foreign investment in the extraction of some of the other minerals in which the country abounds.  For the present and the diamond buyer, however, it is Botswana’s participation in DeBeers that may be the most telling.

Our former Secretary of State, Hillary Clinton, may have said it all in a 2009 interview.  “...When you buy a diamond from De Beers, part of that money still today goes to help build and maintain roads and clean water systems in Botswana. You can drive anywhere in that country and you can see services that have been paid for by a legal framework, strong regulations, and a national consensus that the money from the Earth and its riches should be spent on the people of Botswana...”

If that doesn’t justify the purchase of a great diamond to celebrate your great romance, I don’t know what else might.  And for your information, all of our superlative Hearts On Fire diamonds are sourced from DeBeers and then cut to a beauty that others just can’t match.  So check out our website, hurstsberwynjewelers.com, then phone us for an appointment to select the perfect statement of your love.  We’re Hursts’ Berwyn Jewelers and our greatest pleasure is helping you say what you want to say with a great gift from the heart.  That’s why we’re the uncommon jeweler.

P.S. If you have diamonds, broken or unworn pieces of jewelry that you would like to sell, come in and we’ll help you establish their market value; perhaps, we’ll make the best offer to buy them.