Prices for polished diamonds stabilized in July, after dramatic inflation earlier this year. Prices for virtually all size diamonds held firm – or softened only slightly – during the month.

 

With diamond demand soft at the consumer level in the U.S. due to economic weakness – and threats that this sluggishness could spread to other global markets – coupled with lighter trading due to diamantaires’ summer vacations, global polished diamond prices were essentially flat in July when compared to June, according to the IDEX Online Polished Diamond Price Index. On a year-over-year basis, global polished diamond prices rose by just under 15 percent, a pace that slackened from the prior month.

 

The big question is this: is the diamond price bubble about to burst? In July, some other commodities – notably oil – pulled back in price. Further, gold and platinum showed little change in price on a month-to-month basis, after rising sharply over the past year. While we have said that the dramatic gains in polished diamond prices which have characterized the market for the past six months cannot continue unabated, it is too early to declare that the pricing bubble has burst.

 

On a short term basis, seasonal factors – such as summer vacations for diamond traders – have lightened trading volume. Further, diamond suppliers and retailers have been slow to make firm order commitments for the upcoming 2008 holiday selling season of November and December.

 

On a longer term basis, however, global factors are in place to sustain polished diamond prices. Favorable consumer demographics – rising affluence, for example – in developing markets will assure that demand for luxury goods such as jewelry will remain solid. Further, there have been no recent discoveries of large quantities of rough gemstone diamonds, so the supply of gems will be constrained near current levels for the foreseeable future.

 

The good news is this: the industry is going through one of its inescapable cycles. Just like the ocean tides, the diamond industry experiences peaks and valleys. They are less predictable than ocean tides, but they are just as inevitable.

 

The graph below summarizes the IDEX Online Polished Diamond Price Index for the past 24 months. This graph represents the composite average prices of all diamonds traded online at the wholesale level. The slope of the line steepened in the first half of the year, reflecting consistently higher prices – and a greater rate of price inflation – for virtually all diamond sizes. However, in July, polished diamond price inflation paused, as the red line illustrates. 

 

Source: IDEX Online Research

 

July 2008 versus June 2008: (0.6 percent)

 

The IDEX Online Polished Diamond Price Index, calculated on the average daily prices during July 2008, stood at 131.19 for the month, barely down from 131.95 for the month of June. The IDEX Online Polished Diamond Price Index stood at 100.00 in July 2004.

 

The graph below summarizes month-to-month changes in global diamond prices for the past thirteen months. Since January 2008, polished diamond prices showed large gains during every month in the first half of the year.

 

Source: IDEX Online

  

July 2008 versus July 2007: +14.7 percent

 

Prices of diamonds below three carats in size showed more moderate inflation levels, while prices for diamonds three carats and larger reflected unusually strong demand which has characterized the market for many months.

 

Even though July’s year-over-year inflation rate moderated some from June, it is unreasonable to believe that this level of diamond price inflation rate is sustainable, even though rough diamond prices are rising at a significant pace. However, most other commodities have risen sharply in price over the past several years. Diamonds are late to the “inflation party.” As we have said many times, the polished diamond industry remains too fragmented for anyone – or any group – to hold pricing power similar to the tight-knit community of rough diamond suppliers. At the retail level, many merchants raised their prices during the first half of 2008. The IDEX Online Polished Diamond Price Index stood at 131.19 in July 2008 versus 114.40 in July a year ago.

 

The graph below summarizes year-over-year monthly polished diamond prices for the global market since the beginning of 2007.

 

Comparisons are based on the daily average prices during the month versus the same month a year ago (e.g. July 2008 versus July 2007). The year-to-year comparison takes into account the seasonality of polished diamond demand and prices.

 

Source: IDEX Online

 

Daily Polished Price Activity Showed Little Change During the Month

After dramatic price increases for almost every month this year, diamond prices held more or less steady, after softening in mid-June. This coincides with the slide of global financial markets as investors and merchants became more worried about the possibility of a worldwide recession in the second half of 2008, extending perhaps into 2009. Diamond traders found that they were unable to buy and sell diamonds at the artificially high prices reflected on some industry price lists. Thus, overall asking prices declined slightly to more realistic levels.

 

The following graph illustrates the average price of polished diamonds on a day-by-day basis for the three-month period May-July 2008. It is clear that diamond prices softened late in the month of June, and there was some modest volatility as traders tested their new prices.

 

Source: IDEX Online

 

Month-to-Month Diamond Prices Virtually Unchanged for All Sizes

It appears that polished diamond prices have stabilized, at least for the short term, with virtually all sizes posting either no notable price gain or perhaps price deflation. While demand had been strong for large diamonds – in the 4-5 carat range – retailers are now seeing some shopper reticence as consumers buy “down.” Rather than the largest, fanciest stone, shoppers are willing to compromise on either quality or size. Shoppers are opting for more modest, though flashy stones, according to retail merchants’ reports.

 

The graph below summarizes the price changes for key sizes of polished diamonds on a month-over-month basis: July 2008 versus June 2008. These seven stone sizes represent about 33 percent of the trading market by value.

 

Source: IDEX Online

 

Year-Over-Year Diamond Prices Continue to Show Double-Digit Price Inflation

On a year-to-year comparison, polished diamond prices continued to rise at double-digit levels for all but the smallest stones one-half carat and below. However, prices for large stones in the three-to-five carat range showed a much larger inflation rate than prices for stones two-carat and smaller stones.

 

The graph below summarizes polished diamond prices by key sizes on a year-over-year basis: July 2008 versus July 2007. These seven sizes represent about one-third of the market, by aggregate value.

 

Source: IDEX Online

 

Forecast: Polished Diamond Prices Will Post A Record Price Increase This Year

Unless the bottom drops out of the diamond market – which would happen only if there is a major global recession – polished diamond prices are poised to rise at a record level in 2008, based on price gains in the first six months of the year, even though inflation paused in July.

 

Despite economic weakness in the U.S., and weakness in demand in Japan, most of the world’s economies are growing at a sustainable pace, a trend which is expected to continue. There are some worries that have surfaced recently about the possibility of a global economic slowdown later this year, particularly related to high energy prices. However, we don’t think this will be a major impediment to diamond demand, unless there is a price spike or a sudden shortage of oil.

 

The IDEX Online Diamond Price Index

The IDEX Online Diamond Price Index is a real-time index derived from actual asking prices in the global diamond industry. The IDEX Online Diamond Price Index objectively reflects price trends as they happen. The Diamond Index and Diamond Drivers were formulated following comprehensive research and analysis of the IDEX Online inventory database, aggregated since 2001. Research and development were conducted in cooperation with Dr. Avi Wohl, Senior Lecturer of Finance at the faculty of Management, Tel Aviv University, Israel.

 

Additional information is available from IDEX Online Research. The e-mail address is diamondprices [at] idexonline [dot] com.