Donna Baker recently addressed the GIA New York Alumni Association and shared her views on the state of the gem and jewelry industry. Below are excerpts from that talk:

Global competition and market trends

Asia: Asia is at the center of the world's greatest consumer boom.China will see jewelry sales of $20 billion by decade's end – double that of 2001 – and is the third largest single consumer jewelry market behind the United States and Japan.

Analysts predict that China's middle class will total 560 million people by 2025 – that's the combined population of the United States and Western Europe. Since China's jewelry demand has been growing by double digits each year, there is strong reason to believe that emerging middle class consumers will continue to buy jewelry with gold, diamonds and gemstones at the same or similar pace going forward.

The middle classes in other Asian markets – including Thailand and most of its neighbors – are under pressure from volatile gold prices and other global economic forces. Fortunately, however, the price of gold seems to have stabilized since last summer, so retailers confidently predicted sales increases of 5-10 percent for 2006.

India:India is also experiencing double-digit demand growth for jewelry. Its diamond industry, the largest in the world, forecasts that consumer demand for diamond jewelry will top $2.5 billion by 2010. India is already the world's single largest consumer of gold jewelry, so there is every reason to expect that demand for gemstones will also post strong growth.

Canada:Representatives of the Canadian government tell us that diamond production there is set to explode within the next 10 years. They say 30 million carats yearly will come out of 11 mines by 2016. Much of this production, they say, will be in the hands of smaller mining companies. This will further fragment rough diamond distribution, which only 10 years ago had largely been the domain of De Beers.

Canadian officials also tell us that diamond manufacturers from Israel and India are making regular contacts with Canadian mining companies, so it appears quite likely that an increasing number of diamond firms will forge partnerships with miners as well.

This will cause profound changes in distribution trends over the coming years.

Distribution and Local Control of Resources

The effects of a diversifying diamond supply have already been felt. In the past five years, for example, smaller diamond producers have transformed Dubai from a center for gold jewelry into one of the world's largest transfer points for diamond rough.

So, what will happen to diamond rough in the next decade? Analysts do not agree on the consequences regarding price volatility, but some clues can be drawn from what has occurred so far. Two major retailers, Harry Winston and Tiffany & Co., have formed partnerships with diamond mining firms to ensure their ability to source diamond at competitive prices and maintain margins in the process.

South Africa, meanwhile, is legislating beneficiation that will require diamond manufacturers to make substantial investments in local factories along with local partners. This too may have profound changes in distribution of rough diamonds from that country, particularly at the higher sector of the market.

Botswana, which has a strong alliance with the De Beers Diamond Trading Company, has won the right to have all of its 30 million carat-a-year diamond production sorted and sold within its borders instead of being sent off to a central facility in London>.

In all of these cases, the diamond industry is quickly transforming itself into becoming a full partner with major producing nations, aiding their development and the efforts to maximize benefits from their resources.

The colored gemstone industry is experiencing a similar transformation. Just last June the government of Madagascar introduced more liberal measures to generate increased revenues from gemstone production, while trying to ensure greater returns for local miners and manufacturers. In short, the result has been higher prices at the source. This is especially important going forward because while Madagascar is already one of the leading and consistent producers of corundum, vast portions of that country remain unexplored.

Tanzania is moving in a similar direction. So if these nations are successful in their efforts to gain greater control over their resources – a strategy strongly encouraged by the World Bank and other international finance organizations – this would certainly spur other gemstone producers to do the same.

Like African producers, the Canadian authorities want their precious resources to help build employment and revenues in their own country. Their approach is to create Canadian “brands” that add value and raise profit margins.

Indeed, governments of gemstone-producing countries are demanding greater control and revenues from their resources. That means added value in terms of employment and business opportunities within their borders. Overall, however, we are seeing a polarization of the gemstone market worldwide. Demand for fine color, untreated gemstones is rising quickly, which is already putting a strain on the industry’s supply capacity.

Consumer Demand

Color has taken on an increased influence and importance in the world's fashion capitals. As a result, fashion magazines have been featuring articles on colored gemstones as a regular part of their coverage.

Demand for fine color, unheated rubies and sapphires soared in last year because the world's wealthy buyers remained largely unaffected by the economic pressures of rising interest rates and higher fuel prices. We are also finally beginning to see a sustained revival in demand for fine emeralds after years of struggling with consumer confidence issues over treatments. As consumer awareness accelerates, so too will demand for many species of gems that have not traditionally enjoyed broad popular appeal.

On the more affordable side of the market, pink sapphire - in both its natural and treated forms – remains popular. Buyers at trade shows in-New York, Las Vegas and Vicenza also favored reds and oranges, and sought gemstones of all species in these colors.

Cultured pearls are also taking center stage with a broad range of new pastels that are adding a whole new dimension to the category, particularly in fresh water cultured pearls. The growing varieties of pearls, along with an increasing desire on the part of consumers to know what processes, if any, their cultured pearls undergo, have prompted GIA to introduce a pearl grading report that will be ready for market early this year.

Colored diamonds have been gaining awareness and popularity around the world, but nowhere more than in Asia. Celebrities wearing pink and blue diamonds have become an integral part of the gossip pages in the United States, Europe and Japan. In other words, one million dollars is no longer an extraordinary price for a top colored pink or blue diamond.

These changes in consumer tastes have led to exciting new opportunities for jewelry designers to create fashion-conscious products and stimulate overall demand. Changing tastes is the lifeblood of the fashion industry.

Technological advances and Treatments

The gemstone industry is experiencing revolutionary advances in treatments that allow stone dealers to change or alter colors of affordable natural corundum into an array of attractive colors. Thus gemstone dealers have a greater opportunity to partner with jewelry manufacturers and designers to seize quickly on fashion trends.

New technology has revolutionized the way diamonds and gemstones are processed and mounted into jewelry. This brings goods to market much more quickly, and permits manufacturers, in collaboration with jewelry designers, to create new shapes and cutting techniques that were impossible only a decade ago.

As the market has seen, however, non-disclosure or incomplete disclosure of gemstone treatments can cause rapid declines in prices for everyone's goods until the issues are resolved. While inter-dealer prices may recover quickly, consumer confidence rebounds much more slowly, which makes disclosure all the more imperative. Fortunately, some countries, such as Thailand, have dedicated efforts to police themselves before such problems progress too far.

Synthetic diamonds are commercially available thanks to technology that is becoming ever more sophisticated. Although the market is still in its early stages, these products make colored diamonds more affordable for consumers who demand them but cannot afford to pay the six- and seven-figure prices that attractive colors command.

I want to stress that GIA remains fully committed to dedicating the necessary resources to detecting and identifying treatments and synthetics. This includes investing substantial sums of money in new, extremely sophisticated equipment to discover and identify treatments that are undetectable using standard gemological procedures. I was proud to announce in Thailand last month the GIA's opening of a new gemological research laboratory in Bangkok to further enhance our colored stone research.

The challenge, of course, is to ensure all products are properly identified, labeled and disclosed, regardless of their price points. Treating or altering the appearance of natural gem materials has gone on for decades, even centuries in some cases. The issue is not whether treatment is acceptable. The real issue to the public, which is the ultimate consumer of our products, is clear disclosure. Anything less is a risk to public confidence and our industry reputation.

At one time or another, many of you may have experienced the loss of confidence in your product through no fault of your own, rather the fault of others in the industry who failed to disclose treatments. We all know that kind of damage is not easy to undo. And the lack of full disclosure by a few in the industry hurts us all.

Corporate Responsibility

Within the major global consumer markets – especially the U.S. and Europe – there is growing pressure to shun governments and entities that pay little attention to human rights or environmental concerns. Our industry is under increasing scrutiny from groups, sometimes hostile, that are often able to command the ear of the news media for their own causes.

I have little doubt that the time will come when the gemstone industry will be asked, pressured – or eventually required – to provide greater employment, education levels and increased revenues to the nations or regions which produce them. Some prescient gemstone firms have already taken steps toward local beneficiation, believing that it is much better to create a partnership with a friend than to live under the rules of an adversary.

Because our industry is increasingly global, new financial regulations introduced throughout the world's major consumer and manufacturing markets will affect the every stage of our business, all the way back to the mining operation.

The Kimberley Process has proved remarkably effective at keeping illicit diamonds from the market. While no system is foolproof, the percentage of diamonds that can truly be called “conflict” has been cut to less than one-half of 1 percent, according to industry sources.

The Patriot Act and related legislation in Europe, India and Japan go much deeper than the Kimberley Process to ensure the industry is not unwittingly engaging or aiding criminal or terrorist money laundering. While laws may vary between countries, they all require every gemstone and gold business to maintain detailed records of all their transactions, including full details of their trading partners.

Furthermore, new corporate governance initiatives will require operations of all types and sizes to acquire additional business skills that go well beyond trading knowledge. These include health and safety issues in mines and cutting operations, as well as alleviating any environmental concerns.