I can always tell it is a slow news day for the mass media when a reporter calls with an off-the-wall question about the diamond and jewelry industry. It is often a young writer who has dug up some obscure fact – usually out of context – and is trying to come up with a news story that will beat the competition.

 

I don’t blow them off; I just roll my eyes and shake my head in despair. After all, back in the Dark Ages, I was one of them, trolling for the news story that would win a Pulitzer Prize.

 

My news reporting ended when I went off to Business School, but at some point very early in my short-lived writing career, I realized that a little knowledge can be a very dangerous thing, especially in the hands of this young whippersnapper reporter.

 

And, that’s the subject of today’s Gassman’s Insiders View.

 

If you have a short attention span, you can go to the end of this article to read the punch-line. This will be a short lesson about diamond price economics.

 

In the two months leading up to Christmas, I received several phone calls from news writers – from obscure small-town dailies to the Wall Street Journal – and they all had the same question: “If diamond prices are down 10 percent this year, diamond jewelry must be a good deal for holiday shoppers. Right?”

 

Stop and re-read the question. They’ve poised it so the only answers can be either “yes” or “no.” And, in this case, neither answer is correct. Further, they only say “diamond prices are down,” not “wholesale diamond prices” or “rough diamond prices.” To the uninformed, it would seem logical that diamonds are a commodity just like gold, silver, and other components of jewelry; therefore, there must be one benchmark price, just like precious metals prices.

 

At this point, I’m sure every retailer’s marketing department would howl at me: “Just tell them that diamonds are a good deal, and leave the details out of the story.”

 

As the expression goes, “Sorry . . . no can do.”

 

I’m an industry analyst, and my bias is supposed to be neutral. Other than the fact that I own 100 shares of every publicly held jewelry company, I don’t get paid to say good – or bad – things about the diamond and jewelry industry by any jeweler. As we say here in the South, I don’t have a dog in this fight.

 

To set the record straight, here are the facts. In the future, I’ll be referring enterprising writers to this story:

 

·        From their peak in August 2008, global polished diamond prices are down roughly 16 percent, based on wholesale trading prices through the end of 2009.

 

·        During the 2009 calendar year, wholesale polished diamond prices were down about 5 percent between the beginning of the year and the end of the year. Most of the decline in diamond prices occurred in late 2008.

 

·        Large carat diamonds – 3 carats and higher – experienced a decline in price in the high 20 percent range from their peak in 2008, while smaller carat diamonds, especially those in the one carat range and below experienced a much smaller price decline in the low-to-mid teen range from their peak in the late summer of 2008.

 

·        From April 2009 through December 2009, polished diamond prices have been more or less flat, though they began to show a very modest uptick in price this December (about 0.4 percent which doesn’t really “move the needle” but is directionally hopeful).

 

It is at this point that I usually say to the reporters, “I don’t know where you got your information about a 10 percent price decline in diamond prices, but it doesn’t match any information that I have.” I explain that I use the IDEX Online Global Polished Price Index, and that this index tracks very closely with other independent data that I obtain.

 

I also explain that wholesale diamond prices and retail diamond prices don’t move in unison. In fact, this is a characteristic of most retail merchandise: fluctuations in wholesale prices – either of the finished goods or key components – don’t necessarily mean that retail prices will move in unison with changes in those underlying wholesale costs.

 

 A Detailed Explanation for the Tenacious Reporter

If the reporter isn’t satisfied with this explanation, then I move into the second part of my analysis about how diamond and diamond jewelry retail prices operate. Unfortunately, this part of my presentation is fairly technical.

 

Here’s the second part of my explanation:

·        While polished diamond prices have declined over the past year or so, this does not mean that those lower-priced diamonds have found their way into the local jeweler’s store.

 

·        Diamonds and diamond jewelry inventory turn on average about once a year, based on data from both the Jewelers of America and the publicly held jewelers such as Zale, Signet and others.

 

·        Since loose diamonds and diamond jewelry inventory turn about once a year, most jewelers still have high-priced diamonds in their inventory – diamonds that they bought in the late summer and early fall of 2008, when diamond prices were at their peak.

 

·        Thus, diamond prices in most jewelers’ stores don’t reflect lower-cost diamonds from 2009 yet. In short, shoppers should not expect to pay less for a diamond.

 

·        The current lower-priced diamonds are just beginning to work their way into jewelers’ inventories. However, it is possible that retail diamond prices won’t ever reflect lower-priced diamonds. Why? Most retail jewelers are experiencing squeezed margins, and if they can hold their retail prices near their current level while selling diamonds with a slightly lower cost basis, their margins could potentially recover to pre-recession levels. In short, don’t look for retail merchants to start marking down retail diamond prices in 2010, just because wholesale diamond prices have fallen from their peak.

 

·        Remember, too, that retail prices for diamonds and diamond jewelry did not jump in 2008 when wholesale prices soared. Merchants throughout the channel of distribution absorbed those price increases which squeezed their margins. As diamond prices have been declining, merchants’ margins have been returning to more normal levels.

 

Only one or two reporters have asked about the disparity between prices of rough diamonds and polished diamonds. I always congratulate them on their industry knowledge, and I point out that this disparity can’t continue – something’s got to give.

 

Now, it would be nice if the story actually ended here, but it doesn’t.

 

In a market where wholesale polished diamond prices are declining, there is one place that consumers can often find a “better deal.” And that is from the pure online diamond merchants such as Blue Nile.

 

This may make a diamantaire’s blood pressure shoot up 10 points, but remember, it is  the diamantaire who has been supplying these online merchants with their virtual inventories.

 

Here’s how most pure online merchants do business:

·        Most online diamond merchants do not own their inventory. They offer diamonds from the inventories of diamond wholesalers.

 

·        The online merchants apply a percentage markup to the wholesale price of those diamonds. If the wholesale price of a diamond moves, the online retail price may also move in unison (this is somewhat over-simplified, but the concept is accurate).

 

·        In a market where wholesale polished diamond prices are declining, the best deal on a diamond can often be found online. Online retail diamond prices reflect wholesale price fluctuations almost immediately. In contrast, store-based merchants are stuck with high-cost diamonds.

 

·        In a market where polished diamond prices are rising, the best deal can be found by shopping around – both online and at store-based jewelers. Obviously, online merchants are selling from a pool of higher-cost diamonds, while a store may have lower-cost diamonds in their inventory.

 

·        We note that online merchants’ average markup is often substantially below a typical store-based jewelers’ markup, so even if polished diamond prices are rising, online merchants can often sell diamonds at or below prices charged by store-based jewelers. After all, online jewelers don’t have store rent, sales associates, or many of the costs of a store-based jeweler. On the other hand, traditional store-based jewelers offer many on-site services and the confidence of buying locally from a known entity.

 

Finally, if the writer is particularly perceptive, they may ask this question: “Why isn’t there a benchmark price for a diamond, like there is for gold, platinum, and other precious metals?” That’s an easy question to answer. The price of gold, for example, is based on pure 24-karat gold; discounts for less pure gold can be mathematically calculated. Further, gold trading markets are transparent and public.

 

In contrast, no one in the diamond industry can define a “pure 100 percent diamond” since different diamonds have different characteristics and therefore no unified price (if you ask ten diamantaires this question, you’ll likely get fifteen different answers). Without an industry standard, there can be no single benchmark wholesale price for diamonds. Further, the diamond trading markets are closed, and far from transparent.

 

If the writer seems to want to latch onto the lack of transparency in the diamond markets, I usually send them on to the colored gemstone markets. Those markets, I explain, are reminiscent of the lawlessness of the Wild West 150 years ago: no benchmarks, huge spreads between the “buy” and “sell” price, minimal standards of quality, and shrouded in secrecy. In short, the diamond market, while not particularly transparent, appears orderly and open when compared to the colored gemstone market.

 

Gassman’s Insiders View: The Bottom Line

So, where does this get us?

 

1.      Wholesale prices for polished diamond prices hit their low in the current cycle in April 2009, scraped along the bottom through November 2009, and appear to be showing some upward energy as we enter 2010.

 

2.      These lower-cost diamonds will be in retailer jewelers’ inventories sometime in 2010.

 

3.      Don’t expect retail diamond prices to reflect every move in wholesale costs. In fact, don’t expect retail diamond prices in 2010 to be less expensive than they were in 2009. Merchants discounted heavily in 2009 to generate business; as shoppers return to the malls, those discounts will decline.

 

4.      Be on the lookout for a new price list published by IDEX Online, called the Diamond Retail Benchmark (DRB). It is essentially the high retail price for polished diamonds. The benchmark prices will change to reflect movements in the underlying wholesale prices. Over time, the DRB will provide a historic tracking for diamond prices..  

Here’s the punch line to today’s insiders view on the economics of the diamond industry: rough diamond prices, polished diamond prices, and retail prices for diamond jewelry do not move in unison.