It started in the US and spread all over the world. The Dow Jones Industrial index tumbled first on the back of the virtual collapse of the American real estate market combined with investor fears over highly leveraged funds. The US fall triggered a nervous reaction everywhere. European and Asian markets took nose dives. In India, the Bombay Stock Exchange’s (BSE) sensitive index or Sensex as well as the National Stock Exchange’s (NSE) top fifty index or Nifty both took tumbles, the former dropping 541 points.

Expert opinion that the bad news in the American real estate market could last perhaps as long as two years kept the Dow Jones down despite stronger than expected gross domestic product (GDP) figures. In India, market pundits said the fall was nothing to worry about as the markets had been overheated due to the excessive liquidity of foreign institutional investors (FIIs) and the fall was an “overdue correction”.

The housing market fall is extremely bad news for the global jewellery industry. Apart from just providing shelter, housing is one of the world’s chief investment instruments. Consumers get an immediate perception of capital appreciation when the houses they own and live in steadily grow more expensive. It makes them feel they don’t need to save as much for a rainy day – why should you, when all you have to do is sell the place you’re living in and move to something smaller when you retire?

When they’re not saving as much, consumers spend more on discretionary items like jewellery. A housing market fall will in all probability drive them the other way. And the situation could well last two years! Add to this worries about the health of investment funds and a lot of money looks like its going to be put away somewhere safe. The US is by far the world’s largest jewellery market and others can’t even begin to compensate for any sales slump there.

The irony is that a not so good stock market could drive some of the funds that left the diamond industry back into the market. But if the end product isn’t going to have a good market, nothing much could come from this. Don’t forget, the funds that drove the Indian stock market up were from its usual jewellery export markets in the first place.

In the US, there’s worse to come as the almost certain regulatory crackdown on the subprime market focuses on credit rating agencies and investment banks, whom some have accused of having “participated in a fraud”.

It’s going to be a long, hard year – or two – for jewellery.