Wednesday, November 9, 2011

Seven billion, and counting

Sometime in the last month or so the seven billionth living person joined us, or so say the demographers.  We also learn that the world population grew by a billion in just 12 years, and probably another billion in the next 12 years or less.  As a reference, about 50 years ago there were three billion people on the planet.  We know the world's resources are strained now to meet the need of 7 billion people, never mind the 10 billion or so expected before the end of the century.

Let us accept for the moment that the world will adapt - somehow.  A little optimism is a good thing.  But according to futurists and prognosticators, that adaptation will come at the expense of many of our treasured standards of living.  While we in the US and elsewhere in the developed world might be struggling to maintain those standards, many hundreds of millions elsewhere in the world aspire to become "Americans", to enjoy the benefits of leisure time and modern conveniences.

We have already seen that movement in so many countries.  The obvious cases - China in the post-Mao period; India and Brazil becoming economic powers; Singapore, Russia, Indonesia, Eastern Europe and even small countries like Vietnam.  Now we have the Arab Spring, engendered and abetted by by the liberating power of the Internet, the rise of Turkey and the success of tyranny-free Kurds.

Great, we say.  The world is finally looking at war and dictatorship as horrors of the past.  The slate is far from clear, but we now apologize for killing innocent citizens.  Seventy years ago we carpet bombed them with impunity. 

At the same time, we are extinguishing the need for people to work.  Technology has radically improved our productivity - but also our need to employ people.  Companies everywhere are finding ways to not hire people, and that is even true in the developing world.  The US has seen stagnant wages for thirty years, partly due to the export of manufacturing but also due to a growing pool of unemployed, which drives down wages.  (Even in our essentially backward industry, Indian factories now have many diamond cutting steps automated; cad-cam has cut the need of jewelry factory help; and many hand-skills are giving way to machine made look-alikes.)  So the outlook is bound to include longer life-spans, falling death rates, and high poverty rates and unemployment.  Occupy Wall Street may only be the first symptom of the problems to come.

To get to the mundane, can we relate this population growth to jewelry?  Is it good news (more customers), or bad news (booming prices, shrinking supply)?  This is a complex issue, without clear answers, but some patterns are beginning to appear.  While this is a subject I would like to explore in later blogs, let's take a look at gold to start with.

An executive from a major Mexican mining company, Penoles, noted to me in a conversation last week that their gold sales in Mexico to fabricators and jewelry manufacturers has dropped to zero.  For many years it had been steady, but now all gold production is exported, mainly to dealers and governments. 

On the surface, we can say this is understandable.  The Mexican jewelry market, which has always been heavily skewed to silver, must have had a relatively small gold component anyway.  But this comment suggests that designers and manufacturers are simply not seeing enough business anymore to make investment in gold pieces viable. 

Is there comparable effect in the US?  Recent reports from the World Gold Council show a 6% increase in global demand, but that is driven by a surge in investment, and by resilient demand from technology companies.  Worldwide jewelry consumption continues to slip (again understandable), from a peak of about 82% of total demand in 2000 to just 50% last year.  Of that, share of total demand in the US and Europe has dropped from about 57% in 1980 to about 13% today.  In the same period, Asian share has gone from 21% to 68%.  US jewelry share last year was about 3%, a faint shadow of its former dominance.

We could be tempted to bring up the spike and collapse of gold prices in the late 1970's as a cycle that might repeat, but that seems unlikely.  Gold production is falling in spite of heavy investment in exploration; governments are buying gold steadily to diversify away from large foreign exchange holdings; and the marketplace for individual investment and recycling has become global, simple and transparent.  The US and European markets are mature and saturated, with very different public motivations for buying or holding gold than existed there 40 years ago.  The developing markets, and especially Asia, are just getting into a full swing of acquisition by a booming newly-rich public.

What does this mean for US retailers?  More next time....

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