(IDEX Online) - In October, polished diamond prices were steady early in the month, but declined sharply during the final week, according to the IDEX Online Global Polished Price Index. After bottoming in September 2009 at just above 108, the Index rose almost every month since late last year until the end of August 2010.

 

The IDEX Online Polished Diamond Price Index averaged 117.8 in October, ending the month at 117.2, and has remained near that level in the early days of November. Further, prices have in fact declined even further due to the weakening of the dollar.

 

The graph below summarizes the diamond price index by month for the past two years. As the graph illustrates, prices have risen at a consistent level with pauses in July, September and October of this year.

 

Source: IDEX Online

 

Polished Diamond Price Momentum Wavering

What has caused polished diamond prices to stall and waver in October? Last month, we cited several factors which have had an impact on polished diamond prices, including the following:

 

·        Polished diamond prices are set by a capitalistic supply and demand market. IDEX Online reports those prices based on the trading market, without any adjustments. Since the polished diamond trading markets are closed to outsiders, short-term oriented financial traders are not whipsawing prices. Thus, the current lack of price momentum for polished diamonds is largely related to weak demand at the consumer level.

 

·        Manufacturers have been trying to push prices up in an effort to maintain margins lost to quickly rising rough diamond prices.

 

·        Retail jewelers are unwilling to pay higher prices for polished diamonds, especially in the face of weak demand from consumers. Retail jewelers are dealing with a couple of factors which have kept their demand for diamonds only lukewarm:

 

o       The average ticket for diamond jewelry in the U.S. market has fallen by about 9 percent, according to the latest data from The Edge. Diamond consumers appear to have curbed their appetite for larger, higher-priced diamonds in favor of lower-cost diamonds.

 

o       Diamonds now represent a notably smaller portion of a typical U.S. jeweler’s sales mix. In the past two years, diamonds and diamond jewelry have fallen sharply from about 47 percent of a jeweler’s sales mix to 43 percent. This is due to four factors:

 

§         The average ticket is down.

 

§         Consumers are opting for other jewelry, such as silver jewelry because they can get the same “flash” for less cash.

 

§         Jewelers have been focusing on non-diamond merchandise which carries higher gross margins. Because diamonds have become a commodity, diamond margins are below the average of most other merchandise in a jeweler’s store.

 

§         Diamonds are no longer a top-of-mind product when consumers think of luxury goods due to a decrease in diamond jewelry advertising.

 

Thus, diamonds and diamond jewelry are less important to retail jewelers, and they are less important to jewelry consuming customers, especially in the American market.

 

Jewelry Price Inflation from Precious Metals

IDEX Online Research noted recently that retail prices of jewelry had finally begun to edge up, but this was due entirely to higher precious metals prices, not diamond prices.

 

Because diamonds have become a commodity, jewelers’ pricing power is limited, and margins are under pressure. Thus, jewelers have been focusing on other merchandise which offers them the opportunity to boost their margins.

 

Will diamond prices edge higher? Over the longer term as the global economy continues to recover, diamond prices are expected to rise, though perhaps more slowly than many anticipate.

 

The economic recovery continues, but at a slow pace. Most economists do not forecast a double-dip recession, but they do predict that the recovery could take another two years. Historically, jewelry and diamond demand have correlated very closely with economic cycles. We would expect this to be the case in the current recovery.

 

Month-to-Month Polished Diamond Prices Down in October

The IDEX Online Global Polished Price Index averaged 117.8 in October, a modest 0.2 percent decrease over September’s 118.1.

 

This was the first month-to-month negative sales comparison in just over a year.

During an economic recovery cycle, there is often volatility in month-to-month indices as the economy lurches ahead at an uncertain pace.

 

The graph illustrates month-to-month price changes for polished diamonds. The lack of price momentum is clear in July, September and late October. Earlier this year, polished diamond prices posted solid gains Source: IDEX Online

 

 

Year-to-Year Polished Diamond Prices Up Due to Easy Comparisons

The IDEX Online Global Polished Diamond Price Index for October was a strong 8.4 percent higher than the average for October 2009.

 

October 2010 was the ninth consecutive month that prices have risen on a year-to-year basis. However, the October price gain was more modest than the prior two months, as the graph below illustrates, reflecting weaker-than-expected demand. However, it is important to note that the low point in the Index occurred in September 2009; thus, comparisons this year were very easy against last year.

 

Source: IDEX Online

 

Diamond Prices by Size Were Mixed in October

On a month-to-month comparison, most diamond sizes reflected lower prices in October than in the prior month.

 

The graph illustrates the broad-based weakness in prices among the various carat sized diamonds in October, when compared to the prior month Source: IDEX Online

 

Year-over-year, prices for polished diamonds by size posted an increase, though the gains were more modest than in prior months. Four and five carat diamonds have shown modest price increases than smaller stones, as the graph below illustrates.

 

However, it is important to note that the year-over-year comparisons are easy against last year’s falling prices. Thus, we would expect large percentage gains this year.

 

Snapshot graphs of a single month are less meaningful than overall trends; diamantaires should look at the longer term movement of the IDEX Online Global Polished Diamond Price Index which illustrates that polished diamond prices have been moving broadly higher, despite pauses in July and September, as well as late October. 

 

Source: IDEX Online

 

The graph below summarizes three years of price movement of polished diamonds by various key sizes.

 

Source: IDEX Online

 

Outlook: Polished Diamond Prices in “Pause” Mode Near Term

We believe that polished diamond prices will likely react to near term demand: with uncertainties looming, prices will languish. However, when fundamental demand from consumers shows solid gains, prices for polished diamonds will increase.