We are quickly hurtling towards a crisis in the global luxury goods market. The cause of this future crisis will be scarcity, or, to be more precise, growing scarcity. The luxury goods market has traditionally used the finest luxury raw materials available, including gold and silver, precious gemstones and exotic hardwoods. However, a subtle, yet growing shortage of these vital materials has slowly been developing.
This is a surprising and unwelcome challenge for mankind in the modern age. During the 19th and most of the 20th centuries, the global supply of luxury raw materials rapidly increased as new mining or harvesting technologies were first developed and then perfected. This massive increase in the prevalence of high-end materials coupled nicely with the phenomenal growth of the middle class in Europe and America during the same period. Any new supply was quickly absorbed by burgeoning middle class consumers with either no or limited impact on pricing.
However, this seemingly endless cornucopia of ever increasing luxury raw materials has begun to diminish. In some cases, production has merely stagnated for the last decade or two. In other, more extreme instances, some of nature’s finest substances, which elegantly graced the fingers and wrists of our parents and grandparents, are now practically unobtainable.
Let’s start by analyzing the king of luxury materials – gold. For most of human history global gold production was extremely small. From the days of the Roman Empire until the 15th century, anywhere between 1 and 10 metric tonnes of gold were mined every year. Then, as technological innovation accelerated, production rose. By the mid 1850s, the Californian and Australian gold rushes had driven mine supply to 300 tonnes per annum.
But this was nothing compared to the tremendous mining innovations of the 20th century. By 1970, world gold production was 1,475 metric tonnes. In the 1980s, heap leaching techniques came online, driving gold production even higher. In the year 2000, global mine production was around 2,575 metric tonnes.
But then a funny thing happened. The growth of total mine output slowed considerably after the turn of the millennium. 2016 mine supply was estimated to be only 3,236 tonnes. This represents an anemic 1.4% growth rate over the past 16 years. This low growth rate isn’t the entire story however. Future mine supply is expected to decline in the 2020s due to relatively low gold prices over the last several years suppressing new mine construction.
Gold is only one of many luxury raw materials with a supply problem, though. The global mine output of diamonds increased dramatically during the 20th century, from just a few million carats per annum in 1900 to a peak of 177 million carats in 2005. However, total diamond production has since collapsed to only about 125 million carats a year, a level that has remained stagnate for the past 8 years.
Although future diamond output is expected to climb to around 141 million carats by 2025, this is still well below the record levels of 2005 and only represents a 1.1% compound annual growth rate from 2016. This estimated growth rate declines to a mere 0.6% if we use 2010 as our starting year and plummets to -1.1% if we measure from the peak of diamond production in 2005.
Both gold and diamond mines have been negatively impacted by many of the same economic pressures. The easily accessible, rich deposits were mined out long ago and are now nothing but fond, distant memories. This has caused prospectors to scour the ends of the earth looking for viable deposits. As a consequence, most new gold and diamond mines have opened in some of the least hospitable places on earth, including the frozen wastes of northern Canada and the baking savannahs of sub-Saharan Africa.
Located in rugged, geo-political hotspots, these mines also tend to have far lower ore grades than the average mine from just a few decades ago. For example, open pit gold mines operating today often yield less than one gram of gold for every ton of ore mined. Modern diamond mining is even more brutal than gold mining, if such a thing is possible. A hundred tons of ore is usually needed to yield a few scant carats of gem quality stones.
But the incipient supply issues with the luxury raw material mainstays of gold and diamonds are just the tip of the iceberg. Many other traditional luxury raw materials are facing even greater supply constraints. Mahogany, a tropical hardwood renowned for its rich, reddish-brown color and great woodworking characteristics, is another prime example.
For hundreds of years mahogany was the wood of choice for master cabinetmakers and woodworkers throughout Europe and the Americas. But the resulting over-logging took its toll on mahogany supplies. By the early 20th century, the type of mahogany traditionally used in antique furniture and other antique luxury goods – Cuban Mahogany – was commercially extinct.
Luckily, another variety of true mahogany – Honduran Mahogany, which had very similar physical qualities to Cuban Mahogany – was available in quantity. Unfortunately, we exploited this new timber resource just as mercilessly. Now Honduran Mahogany is endangered as well.
Less than 15 years ago, in 2003, Honduran Mahogany came under CITES (Convention on International Trade in Endangered Species of Wild Fauna and Flora) trade restrictions. This means that all Honduran Mahogany imported into the West must be either plantation grown or otherwise sustainably harvested.
Predictably, the price of Honduran mahogany has soared since these import certifications were implemented. And, unfortunately, there are no other commercially viable species of true mahogany left in the world. The price of this fine cabinet wood is certainly not coming down again in our lifetime, and perhaps never.
Once again, mahogany is just an example of a larger trend. As the amount of virgin rain forest has inexorably declined over the last 50 years, a wide range of exotic tropical hardwoods have also decreased in availability. Native peoples have not only harvested these valuable trees for timber, but they also clear-cut the forest to create farm land and grazing land. As a direct result, supplies of exotic hardwoods have declined while prices have simultaneously risen.
Gold, diamonds and mahogany are not exceptional. The same story of growing scarcity applies to a variety of other luxury raw materials as well. For instance, organic gems such as natural pearls, tortoiseshell, precious coral and ivory have all become increasingly rare due to widespread environmental pressures. Rising populations have encroached on formerly pristine natural areas while expanding cities have released massive amounts of pollution into nearby oceans and wilderness. Both of these activities destroy large swaths of natural habitat and reduce extant populations.
It might not be obvious yet because of the lingering effects of the Great Recession, but luxury raw materials have already entered an era of relative scarcity. This is one of the reasons I like high quality antiques as investments. They are often crafted from the finest raw materials known to man – luxury raw materials that will only become rarer as time goes on.
