Solid demand for polished diamonds in virtually all global markets in October continued to push prices higher. However, despite a year-over-year price increase of 3.2 percent and a month-over-month price gain of 0.1 percent (about 1 percent annualized), most two-carat and smaller diamonds posted flat or lower prices.

 

Exceptionally large price increases among four- and five-carat diamonds were responsible for virtually all of the increase in the IDEX Online Global Polished Diamond Price Index in October.

 

The current market bifurcation comes as no surprise: retail jewelers have been reporting the same trends for months. Guild jewelers such as Tiffany & Co and Harry Winston have been posting substantial sales gains, while a majority of mass market jewelers who specialize in lower-ticket, smaller diamond jewelry have barely been able maintain flat sales year-to-year.

 

The graph below summarizes the IDEX Online Polished Diamond Price Index from the beginning of 2006 through October 2007. This graph represents the composite average prices of all diamonds traded at the wholesale level. It is clear that diamond prices are posting solid, consistent gains, especially during 2007.

 

Source: IDEX Online Research

Outlook Remains Bullish

Our outlook for the balance of 2007 remains bullish for both the jewelry and diamond markets. We are forecasting that diamond prices will continue to rise, though there could be some month-to-month fluctuation. Consumer spending in the U.S. remains solid, and our forecast for jewelry and diamond sales remains unchanged at about +4.5 percent for the full year ending December 2007. This implies that sales during the holiday selling season will be up about 4 percent or so. However, it is important to note that the market is bifurcated: mass market jewelers are treading water while guild jewelers are generating solid double-digit sales gains. Two factors are driving this divided market: 1) oil price inflation hurts lower and middle income mass market consumers much more than free-spending higher-income consumers who are likely to shop at guild jewelers; and 2) consumers want something unique, and that is characterized by better-quality, larger stones; these gemstones are typically found only in guild jewelers.

 

October 2007 vs. September 2007 +0.1 percent

 

The IDEX Online Polished Diamond Price Index, calculated on the average daily prices during October 2007, stood at 113.75 for the month, up slightly from 113.67 for the month of September. Polished diamond prices rose during the first three weeks of October, but fell back during the fourth. The Index stood at 100.00 in July 2004.

 

The graph below summarizes month-to-month changes in global diamond prices for the first ten months of 2007. With the exception of February, May and September, polished diamond prices have shown solid gains during almost every month of 2007.

 

The percentage change comparisons on the graph are based on the daily average prices during the month of all sizes and qualities of polished diamonds. The percentage change shown is based on each month’s average price versus the average price in September.

 

Source: IDEX Online Research

 

October 2007 versus October 2006 +3.2 percent

 

If diamond prices continue to increase at this annualized rate, it would be one of the larger annual price increases in the past two decades for polished diamonds.

 

We don’t think this diamond price inflation rate is sustainable, even though rough diamond prices are rising at a greater pace. The diamond industry remains too fragmented for anyone – or any group – to hold pricing power similar to the tight-knit community of rough diamond suppliers. Further, jewelry retailers are still feeling margin pressure from rising precious metals prices over the past three years.

 

Near term uncertainty among U.S. retailers – an uncertainty that we do not share – will cause retailers to resist higher polished diamond prices. The IDEX Online Polished Diamond Price Index stood at 113.75 in October 2007 versus 110.19 in October a year ago.

 

After some softening earlier in the spring, polished diamond prices continued to show solid gains in October compared to October 2006.

 

The graph below summarizes year-to-year monthly polished diamond prices for the global market since the beginning of 2007. Clearly, diamond prices reflect a solid uptrend.

 

Comparisons are based on the daily average prices during the month versus October 2006. The year-to-year comparison takes into account the seasonality of polished diamond demand and prices.

 

Source: IDEX Online Research

 

Currency Valuation May Be Distorting Overall Market Conditions

Diamonds are denominated in U.S. dollars in global markets; as a result, the IDEX Online Polished Diamond Price Index measures diamond prices in U.S. dollars. However, due to the decline in the value of the U.S. dollar, the market could be stronger than the index indicates. By our calculation, if the U.S. dollar had remained flat to other major “diamond” currencies (Euro, Rupee, Rand) over the past year, diamond sales would have been up about 11 percent, assuming the same unit volume.

 

In fact, we could argue that year-to-year diamond prices are actually up about 14 percent – 11 percent due to currency and 3 percent due to inflation.

 

Polished Diamond Prices Peak in Third Week of October

The following graph illustrates the average price of polished diamonds on a day-by-day basis in October. Around the third week of the month, prices peaked, before declining later in the month. For the past several months, daily diamond trading patterns have followed roughly this trend: up mid-to-late month, then falling back somewhat at the end of the period.

 

Source: IDEX Online Research

 

Diamond Demand Strong for Large Sizes

Retail jewelers have been saying for some time that their customers want larger, better quality diamonds. Recent price trends for polished diamonds confirm this trend. Large stones showed a dramatic price increase in October, based on month-over-month comparisons, while prices of diamonds two-carat and smaller fell across the board.

 

The graph below summarizes the price changes for key sizes of polished diamonds on a month-over-month basis: October 2007 versus September 2007. These six stone sizes represent about 30 percent of the trading market by value.

 

Source: IDEX Online Research

On a year-to-year comparison, polished diamond prices showed a greater bias: prices for large stones in the four-to-five carat range rose much more sharply while prices of stones two-carat and smaller were basically flat. 

 

The graph below summarizes polished diamond prices by key sizes on a year-over-year basis: October 2007 versus October 2006. These sizes represent just under one-third of the market, by aggregate value.

 

Source: IDEX Online Research

Forecast: Polished Diamond Prices Likely to Continue Upward

Economists’ forecasts call for the global economy to remain reasonably healthy, though there could be some pockets of weak economic activity in some regions of the world such as Japan. Overall, though, forecasters are now suggesting that the Asian, Indian and European economies will post markedly strong growth. The U.S. is expected to post moderate economic growth this year, followed by an acceleration in the second half of 2008.

 

Despite some uncertainty by retail jewelers in the U.S. market, which consumes roughly half of all diamond jewelry sold worldwide, there is guarded optimism about the upcoming all-important holiday selling season. 

 

The same two macro factors that have affected diamond prices in prior months will continue to have an impact on diamond prices in the near term. First, rough diamond prices are rising at a pace faster than the diamond pipeline can absorb. Thus, there is much pressure on cutters and polishers to raise their prices, a trend that is likely to continue. Second, demand in most markets for diamonds and diamond jewelry remains strong. Aside from weakness in Japan and some uncertainty in the U.S., consumers in virtually every major diamond-consuming nation around the globe are vying for diamonds and diamond jewelry.

 

Because of more favorable economic forecasts, our outlook for the U.S. jewelry market for the remainder of 2007 remains positive. Earlier this year, we were predicting that jewelry sales might rise at an annual rate of 3 percent or so in America in 2007; we are now forecasting an annual sales increase of 4.0-4.5 percent for U.S. jewelry merchants. It is likely that diamond sales will exceed this annual demand pace. In 2006, U.S. diamond sales were up just over 6 percent; it is possible that diamond sales in 2007 could rise by 5-6 percent.

 

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.