The Baltic Course

Precious pricing

By Valentin Tracums, expert in gems, editor of the Riga Jeweler magazine*

Gold is the first metal humans learned to handle. Gold was, is and will be a symbol of riches, power and might. Three quarters of all the gold mined in the past 5,000 years was extracted from the bowels of the earth only in the past 500 years. Even so, with demand on the rise there is still a shortage of gold, set to boost prices high, while quite the opposite can be said for diamonds

The gold rush

According to Russia's Scientific -Research Institute of State Defense, the annual increase in global gold extraction (not counting Russia) has been at a steady 6.4% ever since the year 1980. In 150 years between 1503 and 1650, only 315 tons of gold and 45 tons of silver were brought from the New World to the Pyrenees and Europe. The amount of gold mined in the whole world in 1989 amounted to 1,675 tons, which is 75% more than in 1980. During the year 2000, 2,007 tons were extracted across the globe, still not counting Russia, which extracts around 200 tons annually. Since 1996, Russia exports around 155-160 tons of gold annually, and is slowly and scrupulously replenishing its reserve stocks, which - according to various sources - stand at around 750 tons today. The world's money and gold markets sell around 5,500 to 6,000 tons of gold annually, which is quite an enormous amount. Neverthe-less, there is still not enough gold for all the demand. Italy alone consumes 520 tons of the stuff in its factories and jewelry workshops annually.

In the current particular stage of historical, economical and financial development of our society, the entire mass of money on the global consumer market is represented by specific symbols. These symbols are the money banknotes and coins, credit cards and bank accounts, for which the equivalent sum (simply a figure of numbers) is guaranteed by the government of the respective country and usually supported by sufficient stocks of tangible goods.

International calculations are usually carried out in non-cash mode by entering alterations in electronic memories. This kind of mechanism works with the preciseness of a clock, so long as the balance of payments is not broken. But if something falls out of step, permanent chaos and uncertainty could set in on the exchange rates. It is then gold that is used for bringing the system back to comparative calmness and stability. Because of its high liquidity rate, gold allows countries to increase or decrease the exchange rate of their currencies, or putting it bluntly, change the relation of symbols on their empty papers.

Forecasts for the price of gold play an enormously important role in the development of countless countries, and play a much larger role than energy resource prices. When working out forecasts, a vast number of varied methods are used - starting from extraordinary graphs and ending with straight out Delphi and Mentor forecasts. But a range of various more or less direct or indirect signs indicate that the price of gold is set to grow.

First, let's take a look at the main signs indicating a rise in gold prices:

Direct events indicating that the price of gold could change considerably:

All of the above-mentioned reasons combined together indicate that an increase in the price of gold is inevitable. The rise in gold prices is in close correlation to the increasing prices of other precious metals. The diagram below shows that the lowest price for gold (per Trojan ounce) in the past five years was recorded in 1999. At that time, the average price for one ounce was only 254.41 US dollars. By October 2001, the price had increased to 295.13 US dollars and has now set in with a stable trend for growth. The graph clearly shows that the fall in prices has reached its lowest point; while now there is only room for gains. While you read this article, the price may have already reached over 300 and more US dollars per ounce of gold. The question remains as to how far can the price go. I expect that 400 US dollars per ounce will not be the limit either. There was a peak in gold prices in January, 1980, when the price of gold even reached 824 US dollars on the London Stock Exchange. Some lucky profiteers even managed to sell their reserves for 835 dollars per ounce that day.

Diamond chaos

After a sharp rise during the period of 1990-1991, the global market for a girl's best friend - diamonds, has now experienced a fall, caused generally by several reasons. Firstly: the end of monopoly rights for the De Beers company in South Africa, which controlled 65% of all diamond sales and global prices. Secondly: changing consumer demands led to decreased sales of high-quality diamonds costing over 2,000 US dollars per carat; consumer demand for diamonds of 2.5-3.5 carats in Europe, America and Japan; and growth in the demand for gems of lower quality that weigh more. Thirdly: the market has been saturated with large top-quality artificial and synthetic diamond-moissanites, and it's extremely hard to tell the difference between these and the real thing.

The chaos in diamond prices has also challenged the Baltic markets (see table at left). Analysis shows how the price of diamonds has fallen since 1995. The highest prices for gems are in Latvia, the lowest - in Lithuania and Estonia.

Nevertheless, the amount sold in Estonia is bigger than that in both Latvia and Lithuania together. There are reasons for this. Firstly, there is no excise tax imposed on luxuries in Estonia (in Lithuania the duty is 5%, in Latvia - 20%). Secondly, more tourists both from the West and from Russia - the main buyers of jewelry - go to Estonia rather than any of the other two Baltic states. Thirdly, Estonia is a convenient transit corridor for exporting high-quality diamonds.

As for diamond jewelry of local make in the Baltic states, Lithuanians are the most productive in this market. Their wares are different because of original designs and higher quality. Lithuanians now successfully sell their produce across Germany, Poland, Russia, and Kazakhstan. There are also jewelry masters in Latvia, but only a few can produce jewelry of good taste and top quality. The Latvian market is basically dominated by West European goods already around 5-7 years out of fashion. Jeweler schools in Latvia have been completely run down with the best masters having left the scene and no new names yet appearing. There are not really any favorable conditions for developing the jewelry sector at present and it seems that none will emerge in the near future.

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