After slackening slightly in July, global polished diamond prices rose modestly in August on a month-to-month basis. The IDEX Online Polished Diamond Price Index averaged 130.23 in August versus 129.20 in July 2008. However, the tone of the market continued to be somewhat reserved, with prices drifting modestly lower throughout the month.

 

Once again, three factors had a dampening impact on global polished diamond prices: 1) very weak demand for jewelry, including diamonds, in the U.S. market; 2) threats to global economic growth primarily related to the continuing credit crunch; and 3) vacations for many diamond traders in bourses around the world.

 

Here’s a recap of global polished diamond price inflation in August 2008:

 

• +0.8 percent – August 2008 versus July 2008 (Month-to-Month)
• +14.7 percent – August 2008 versus August 2007 (Year-to-Year)

While prices were up just under 1 percent in August versus July, this was a reversal from July’s deflation when prices dropped by 0.6 percent in July. Further, on a year-over-year basis, August global diamond prices rose by 14.7 percent, an acceleration from July’s +14.3 percent inflation rate (revised), but somewhat lower than June’s surge of +15.6 percent (revised). As part of its routine database maintenance of the Diamond Price Index, IDEX Online Research made slight revisions to historic price comparisons during August. The largest impact related to 5-carat stones; all others were nominally unchanged.

 

With the pull-back in many other commodity prices in recent weeks, there is some speculation that polished diamond price inflation may also slow. However, it is important to note that diamond price inflation has never been dramatic or particularly volatile during the past few quarters, unlike some other commodities which are freely traded on the financial and commodities markets.

 

It appears that the diamond industry may self-police diamond price speculation. Unfortunately, with the advent of diamond trading funds in the financial markets, it is possible that we will see increased price volatility that may not always reflect true fundamental underlying demand and supply.

 

For the short term, we continue to believe that price inflation in the mid-teen range is a short term aberration that will moderate in subsequent quarters later this year and into 2009. On a long term basis, global polished diamond price inflation should settle into a mid-single digit range. While some analysts suggest that diamond demand will outstrip diamond supply on a long term basis, this is similar to the attitude of crude oil traders. At some point, demand will drop, if prices surge. Who would have believed that American automobile gasoline consumption would really ever decline, as it has done in recent months? In the diamond market, rapidly escalating prices could cause brides to opt for alternative colored gemstone engagement rings and consumers might forego “past, present, and future” diamond jewelry. In periods of high inflation, diamonds won’t be forever.

 

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 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, but rose moderately in August.

 

Source: IDEX Online

 

August 2008 versus July 2008: +0.8 percent

 

With sharp price increases since the beginning of the year, we continue to believe that global diamond prices are poised to rise at a record rate during 2008, but not at the pace of earlier months.

 

The graph below summarizes month-to-month changes in global diamond prices for the past thirteen months. With few exceptions, polished diamond prices showed large gains during almost every month of 2007, a trend which continued into the first half of 2008, but shows signs of moderating in the second half.

 

Source: IDEX Online

 

August 2008 versus August 2007: +14.7 percent

 

It remains unreasonable to believe that the year-over-year diamond price inflation rate for the first eight months of 2008 – +10.7 percent – is sustainable, even though rough diamond prices are rising at a greater pace – +16 percent for the same period (January-August 2008). However, most other commodities have risen sharply in price over the past several years.

 

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.

 

On a year-over-year basis, polished diamond prices showed larger and larger gains each month during the first half of 2008, but the rate of gain has finally moderated in the past two months. 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 (eg. August 2008 versus August 2007). The year-to-year comparison takes into account the seasonality of polished diamond demand and prices.

 

Source: IDEX Online

 

Daily Polished Prices Drifted Lower During the Month

After dramatic price increases for almost every month this year, polished diamond prices drifted downward in August, though the average price index for the month was higher than July’s average. At the beginning of the month, the IDEX Online Polished Diamond Price Index stood at 130.61; by the end of the month, it had slipped to 129.76.

 

This weakness coincides with slump in the global financial markets as investors and merchants became more worried about the possibility of a worldwide recession in the early part of 2009. Further, 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 June-August 2008. It is clear that diamond prices softened late in the month of June. Since then, the market has been drifting in a sea of uncertainty.

Source: IDEX Online

 

Month-to-Month Diamond Prices Show Little Change by Size

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 modest price deflation, yielding an overall month-to-month increase of just 0.8 percent. While demand had been strong for large diamonds in the 4-5 carat range in prior months, prices softened among some larger stones – especially three and five carat gemstones – in August.

 

Retailers report that they are seeing some shopper reticence as consumers buy “down.” Rather than purchasing 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: August 2008 versus July 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. Further, 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.

 

However, year-over-year price inflation has cooled somewhat from prior months. While we normally take the “long view” of the market, it is more important for diamond traders and buyers to understand the current short term market dynamics, especially since we appear to be at an inflection point with polished diamond prices.

 

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 eight months of the year, even though inflation paused in July and rose only moderately in August.

 

In recent months, speculation has increased about the possibility of a global slowdown in 2008. With the U.S. market showing sluggishness, the U.K. weak, threats in the European markets, and uncertainty in Japan, most of the world’s largest jewelry markets are in flux. Assuming that polished diamond prices are determined mostly by supply and demand – a safe assumption in today’s markets, but not so safe in the future as diamonds are traded by financial types who have no understanding of diamond dynamics – we would expect to see polished diamond price inflation moderate in the coming months.

 

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.