From The Wall Street Journal Blog

By Michael Casey

July 16, 2010, 3:41 PM ET. Boom Times for Diamond District.

The world’s financial markets are living through a unique historical moment, one in which a deflationary present competes fiercely with fears of an inflationary future.

A weak economy and high gold prices create a perfect storm for pawn brokers. For proof, look no further than New York’s Diamond District on West 47th Street between Fifth and Sixth avenues. Here, deflation and inflation do battle on a daily basis, creating a new business opportunity for the jewelers who have plied their trade on that strip for the past 60 years.

Deflationary forces lie in the push factors that send a steady flow of people there to convert their gold-based valuables into cash, either through collateralized loans or outright sales. They are the victims of a moribund economy whose modest recovery from last year’s recession is failing to produce jobs or small business revenue growth.

Yet there’s also inflation at work. It’s there in the pull factors driving this business. Both the buyers and sellers on the street know that gold prices are near record highs around $1,200 a troy ounce and are seeking to exploit that. Gold’s gains reflect the broader concern that indebted governments will be forced to devalue their fiat currencies and create monetary inflation.

“It’s usually one or the other that drives this business. Either the economy has come down and people need money, or the gold value has gone up. But in this case it’s both,” said Roni Rubinov, who runs both a pawn broker and jewelry-buying business out of side-by-side offices on W. 47th Street.

He says the flow into his pawn business has, if anything, increased since the 2008 crisis. It’s a trend that reflects the persistence of deflationary pressures in an economy with 9.5% unemployment. Just look at Friday’s data releases: the U.S. consumer price index down 0.1% in June, average weekly earnings down 0.2% in the same month, consumer sentiment down almost 10 points in July.

The flow of pawn customers has increased because the depletion of people’s cash holdings has been “a gradual process” since the crisis, Rubinov said. “It’s not a sudden assault as if someone robbed them…it’s that the well is slowly drying up.”

“The way I’m hearing it, the banks are holding off on personal loans. I guess the public doesn’t have anything else to fall back on,” Rubinov said. He found a moment to talk during a brief break in the stream of clients coming up the stairs, each escorted by a scout from the street carrying flyers that say “We Buy Gold, Diamonds, Watches & Jewelry.”

His analysis of banks is spot on. The Federal Reserve’s latest monthly consumer credit data produced its 18th contraction out of the past 20 months.

Yet, inflation fears are equally powerful.

Yale Zoland, a third-generation jeweler two doors down from Rubinov, did virtually no gold trading until the price started to rise. Now it’s worth up to 15% of his revenue.

It’s a simpler, more commoditized business than the complicated diamond trade his family has traditionally handled. The customers come in and hand over their gold rings and necklaces to Zoland, who weighs them, verifies their carat stamp with acid tests and then offers the sellers a price a few percentage points below that day’s gold fixing. At the end of business, he sells the day’s intake to gold refiners, who melt it.

Given the current public mood, this trade seems unlikely to disappear soon.

It’s about the trust that was destroyed by the crisis, Rubinov said. “People are realizing now they need to have something tangible, not just a piece of paper.”

And yet it is paper — greenbacks, to be precise — that the people coming into his office most want.

Tags: consumer credit, Gold Prices, New York, Pawn Loans, pawnbroker, pawnshop