Global polished diamond prices held about steady in June, according to the IDEX Online Polished Price Index. That’s good news: for the second consecutive month, prices held steady, after a precipitous decline that began late last summer. Global polished diamond prices were up by a miniscule 0.1 percent in June versus May, in line with May’s modest increase of 0.3 percent.

 

Polished diamond prices were firm and consistent throughout the thirty-day period; they did not show any volatility. At the beginning of June, the IDEX Online Polished Price Index stood at 108.6. During the month, it touched 109 during several days’ trading activities, and closed the month at 108.9. The IDEX Online Polished Diamond Price Index stood at 100.00 in July 2004.

 

It appears that the sharp decline in polished prices is over, but price trends in June do not yet suggest that prices are headed higher this summer. Consumer demand for luxury goods is far too uncertain, especially in the upcoming November-December 2009 Holiday Selling Season, to provide the impetus to push polished diamond prices higher from their current levels.

 

While vendors tell us that their order indications from the JCK Las Vegas show were not a disaster, most suppliers did not receive a slew of orders that caused them to run out and stock up on polished goods. In other words, diamond demand was so-so at this critical show.

 

There are other indications that the polished diamond market has bottomed, including the following:

 

• Rough diamond demand has picked up, though there are analysts who warn that this is merely a short term bubble.

• Some manufacturers in India report that they are calling back workers who were laid off earlier this year.

• First quarter specialty jewelers’ retail sales in the U.S. market were running at 85-90 percent of last year’s levels; that’s better than the 77 percent level in November and December 2008.

• Retail jewelers report that traffic is generally solid in their stores, though customers are buying less expensive merchandise. This confirms the historical trend which typically occurs in a recession: consumers trade down, but not out.

We believe that the worst is over, and that the signs point to a more optimistic – though perhaps subdued – near term future.

 

Short Term Polished Diamond Price Trend Stable

Positive signals have begun to emerge from the consumer market, especially in the U.S. Other global markets such as China are also showing signs of an economic recovery. Thus, it is likely that prices will at least hold steady and perhaps firm up later this year. Longer term, a gradual recovery of polished diamond prices will likely ensue. While polished diamond prices may remain subdued – or even test their prior lows – for a few more months, we strongly believe that they have bottomed.

 

The graph below illustrates polished diamond prices for the past 24 months.

 

Source: IDEX Online Research

 

Monthly Polished Diamond Price Trends:

June 2009 versus May 2009: +0.1%

 

On an annualized basis, June’s price increase represents just over a 1 percent annual inflation rate for polished diamonds, a pace that is well below the long term trend for polished diamond prices. Like the stock market, polished diamond prices may dip, but there are indications that demand is firming in some key global markets, so it is more likely that there is ample support for firm and perhaps rising prices.

 

We believe history is a great forecaster for the future. If so, the rate of diamond price inflation could rise later this year or in early 2010, especially if demand turns out to be stronger than projected. However, we continue to believe that polished diamond price inflation will return to its historic norm of about 3-4 percent annually.

 

The graph below summarizes month-over-month changes in global diamond prices for the past thirteen months. Beginning in February 2008, polished diamond prices showed large gains during every month in the first half of the year. By mid-2008, price increases began moderating. In September 2008, polished diamond prices weakened, showing repeated month-to-month decreases, a trend that continued through the end of April 2009, but appears to have ended in May.

 

Source: IDEX Online Research

 

June 2009 versus June 2008: -15.4%

On a year-over-year basis, global polished diamond prices dropped by 15.4 percent in June 2009 versus the same month a year ago – June 2008. This was the 12th consecutive month of deceleration of year-over-year price increases for polished diamonds, and it was the sixth month that year-over-year prices dipped for polished diamonds. On a year-over-year basis, all key diamond sizes experienced price deflation, with large diamonds – three carat and up – showing much larger price decreases than diamonds below three carats in size.

 

Even if diamond prices show a recovery on a month-to-month basis, the year-over-year percentage change will continue to show increasingly disappointing comparisons, through at least August of 2009, when prices peaked in the current cycle. However, we continue to predict that polished diamond prices will return to their historical trend line inflation rate of 3-4 percent annually, perhaps later this year or 2010.

 

The historical inflation rate of 3-4 percent annually is sustainable, in our opinion, over the long term. While some forecasters are predicting a “New Normal” where conspicuous consumption will be out of favor and demand for luxury goods will be more muted, we believe that demand for jewelry will revert to near historic levels.

 

The merchandise mix will likely change – in favor of a unique look, rather than a large stone dangling from a neck chain – but overall jewelry demand won’t evaporate. Based on 50,000 or more years of consumer demand for jewelry – to denote wealth, nobility, and standing in the community – the recessionary environment of 2008 and 2009 won’t wipe out a basic human demand trait for jewelry. Finally, we believe that polished diamond prices will ultimately reflect market demand and supply; when demand stabilizes, prices will also stabilize. The IDEX Online Polished Diamond Price Index averaged 108.85 in June 2009 versus 128.68 in June a year ago.

 

The graph below summarizes the year-over-year inflation rate by month for polished diamond prices in the global market for the past thirteen months. Comparisons are based on the daily average prices during the month versus the same month a year ago (e.g. June 2009 versus June 2008). The year-to-year comparison takes into account the seasonality of polished diamond demand and prices.

 

Source: IDEX Online Research

 

Day-to-Day Diamond Prices Steady-to-Upward

Polished diamond trading patterns in June on a day-to-day basis reflected solid demand, with little price fluctuation or volatility.

 

The graph below summarizes polished diamond prices on a daily basis for the past three months. Short of some kind of a system shock, we believe that polished diamond prices appear to have bottomed in April.

 

Source: IDEX Online Research

 

Polished Diamond Price Trends Heartening

After rising rapidly, only to fall just as quickly, diamond prices by key sizes appear to have bottomed. Even more likely, we believe that they are poised to hold steady, and perhaps begin moving higher later this year.

 

The graph below summarizes 24 months of price trends for seven key diamond sizes; these diamonds represent just under one-third of the total value of the trading market.

 

Source: IDEX Online Research

 

Month-to-Month Diamond Prices Rise Modestly for Smaller Sizes

Month-to-month price comparisons for polished diamond previously have shown some decline for all of the key sizes since last summer. While demand had been strong in 2007 and early 2008 for large diamonds – in the 4-5 carat range – retailers were seeing shoppers who are willing to compromise on either quality or size. Worried consumers have been opting for more modest, according to jewelers’ reports. As we noted earlier, consumers tend to trade down, not out of the market; many jewelers confirm that customer traffic is more or less holding up, but shoppers are buying less expensive jewelry. Thus, prices for larger stones had been showing a greater decline than some of the other key sizes over the past month.

 

In June, polished diamond prices for diamonds smaller than two carats or so showed improvement over their May levels. But here’s the key piece of news: prices really didn’t vary much by size on a month-to-month basis.

 

The graph below summarizes the price changes for key sizes of polished diamonds on a month-over-month basis.

 

Source: IDEX Online Research

 

Year-Over-Year Diamond Prices for All Key Sizes Show Deflation

On a year-over-year comparison, polished diamond prices for the key sizes and qualities fell – some significantly – from the prior year. Virtually all sizes of diamonds showed a double-digit loss in June. Comparisons were difficult, since there were a string of double-digit price gains for the larger diamond sizes in 2008.

 

The graph below summarizes polished diamond prices by key sizes on a year-over-year basis.

 

Source: IDEX Online Research

 

Forecast: Diamond Prices Have Likely Bottomed

We believe that month-to-month polished diamond prices will likely show flat or modestly positive comparisons in subsequent months. As a result, year-over-year price comparisons will likely begin to show less disappointing comparisons by the late summer. At some point, probably in 2010, we believe that diamond price inflation will recover to its historic trend line of a 3-4 percent, annual inflation.

 

The U.S. market consumes roughly half of the world’s diamond jewelry. Its economy is showing some vitality, after significant weakness over the past year. It is important to repeat the following list of factors fueling a U.S. economic recovery:

 

• The U.S. government has thrown all of its defenses at the recession early in the economic decline, long before other nations. Unfortunately, some nations around the world are still arguing about what to do – they remind us of Nero fiddling while Rome burns.

• The U.S. economy is far more resilient than most people understand.

• Don’t bet against the Fed, the government body which is engineering the stimulus to put U.S. economy back on track. The Fed may not be perfect, but overall its success record is enviable.  

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.