All the forecasts for the holiday season that is almost upon us will be that it will be disappointing as far as retail sales.

For example, the National Retail Federation just announced that it projects that holiday retail sales will rise 2.2 percent this year to $470.4 billion. This gain would fall well below the ten-year average of 4.4 percent holiday sales growth and would represent the slowest growth since 2002, when holiday sales rose 1.3 percent. That report came out before the recent crisis in the financial markets. Today, the forecast is likely to be much worse.

If you read the newspapers, it looks like only Manhattan is impacted by the problems on the Wall Street. Not so. While we are not sure that, when the rich get richer, everyone is impacted, it’s pretty clear that you have a situation like this, it will definitely impact everyone, from Wall Street to Main Street.

We don’t think the economy will end up in a complete Depression, as some of the worst doomsayers have predicted. We think the United States will be able to muddle through by acting quickly and tightening its belt.

But we are now clearly in one of the most serious financial crises this country has faced in several decades.

On the plus side for the diamond industry, gold is rising. The fact that the government is pumping billions into the economy with the current bailout is likely to further drive down the dollar. And the investors who pull out money from the financial markets may come to feel that hard assets (like diamonds) are the safest haven.

Nevertheless, the industry has felt the impact from the current downtown for some time, as we have seen from the retail bankruptcies. Larger diamonds (four carat and up) are down in price. People used to ask for prices that were significantly over "the list"; now they are asking for prices that are under it.

Just a few weeks ago, people couldn’t buy enough larger stones, as speculators drove the prices up and up and up. Savvy dealers wouldn’t even tell you if they had any big stones in stock, they were just happy to keep them in the safe and let them appreciate. Today, they not only tell you they have big stones, they will call you up asking if you would like to buy one.

But none of this means the business is going to be hurt fatally. Consumers are still going to give gifts of love and commitment for the holidays. In that way, the diamond industry is well-positioned to withstand any downturns.

But it looks like it is going to be a down-grading. With so many people concerned about the jobs and their 401-Ks, this isn’t an atmosphere for luxury spending. As one retail consultant put it to the New York Times, this season there will be: "No Feraris, no Lexuses, no luxury apartments."

So the stockbroker who last year would buy a five carat diamond may instead buy a somewhat smaller bracelet or necklace for Christmas. The people who used to want VVSs are going to "trade down" to SIs.

Our feeling is this is going to be the year of the lower to middle end diamond — meaning diamonds of 3/4 to two carats, and SIs, may outdo the high-end VVSs and D colors.

It may not be a truly glittering Christmas — but it’s a far cry from thinking that they’ve called off the holidays altogether.   v