(IDEX Online) – After rising consistently since late 2009, global polished diamond prices stalled in August, based on the IDEX Online Global Polished Diamond Price Index.

 

The IDEX Online Index finished at 145.4 on August 31, down from an intraday record high of 148.1, which was reached in late July. As diamond trading began in August, polished prices slipped even further – to 145.1.

 

For the entire month of August, the IDEX Online Index averaged 146.3. The Index stood at 100 in mid-2004.

 

Throughout the month of August, polished diamond prices showed weakness.

 

The graph below illustrates global polished diamond prices for the past twenty-four months.

 

Source: IDEX Online

 

Polished Diamond Prices Slackened Steadily in August

The highest polished diamond prices occurred early in the month, with the IDEX Online Index hovering just above 147.6 in early August. By the end of August, they had declined to 145.4. Since then, in the opening days of September, polished diamond prices have softened more.

 

The graph below illustrates the daily average price of polished diamonds during August 2011.

 

Source: IDEX Online

 

 

Month-to-Month Polished Diamond Prices Show Softening

When polished diamond prices are compared between August and July 2011 – based on the average price for the month – prices slipped by 0.3 percent in August. This decline was the first material monthly drop since late 2009, when polished diamond prices bottomed as the recession was officially declared over (though it would be a while before the diamond industry would be convinced that a recovery was underway). In July, the month-to-month increase in diamond prices was 5.6 percent: this out-sized increase should have been a sign that we were nearing the top of a price bubble.

 

The graph below illustrates month-to-month price trends for polished diamonds. While there was some softness in mid-2010, prices had been quite strong until August.

 

Source: IDEX Online

 

On an annualized basis, the month-to-month price decrease would be about 3 percent or so. If this price decline gains momentum, it will signal the end of the current bull market for polished diamonds, and the price bubble will deflate rapidly to more normal, historic levels.

 

Our biggest worry is the timing of the potential kink in the demand curve: at some point, consumers simply won’t pay higher prices for diamonds. They will switch their allegiance to another gemstone or worse, some other luxury item and it will be difficult for the diamond market to regain consumers’ share of spending.

 

Year-to-Year Polished Diamond Prices Up Double-Digit Levels

Polished diamond prices in August rose by a near-record 24.1 percent from the same month a year ago, based on average prices during the month. This gain was eclipsed only by the 25.0 percent rise in July, and it reflects the price bubble that has built up over the past twelve months.

 

Year-to-year comparisons are important because they take the seasonality out of diamond demand trends. In addition, they provide a longer-term view of trends, which are usually less volatile than month-to-month comparisons.

 

As the graph below shows, August’s polished diamond price increase of 24.1 percent is well above prior gains over the past year, but slightly below the increase for July. IDEX Online Research has never seen diamond prices rise this sharply in recent history.

 

In the heady days of early and mid-2008, just before the Great Recession gripped the jewelry and diamond industry with its “take no prisoners” bone-crushing decline, year-over-year prices were rising in the low-to-mid teen range. By mid-2009, polished diamond prices were declining by mid-teen levels, but turned positive at the beginning of 2010, and perked up significantly by mid-year 2010. Since then, there has been no slowdown in polished diamond price increases, until August.

 

Source: IDEX Online

 

Prices Down for Most Sizes of Polished Diamonds

Month-to-month prices were down in August for most key sizes of diamonds. The prices of two-carat and smaller slipped slightly, while stones in the four- and five-carat size fell further.

 

The graph below shows polished diamond price trends on a month-to-month basis – August 2011 versus July 2011 – for key diamond sizes.

 

Source: IDEX Online

 

On a year-to-year comparison, polished diamond prices in August were up strongly for most size of diamonds. Diamonds one-carat and smaller posted sizable price gains, while prices of four-carat diamonds also rose sharply. Price gains were more modest for 1.5, 2.0 and 5.0-carat gemstones. This pricing disparity is similar to June and July 2011 price trends.

 

Source: IDEX Online

 

The graph below summarizes three years of prices for key polished diamond gemstone sizes and qualities. After being relatively flat for more than a year, prices are clearly edging higher.

 

Source: IDEX Online

 

Outlook: Polished Diamond Prices Poised for a Pause

There are a number of positive factors – and few negative factors – that are affecting polished diamond prices in the current market. As a result, we expect prices of polished diamonds to continue to rise over the long term, after a possible pause near term.

 

Historically, polished diamond prices have risen by 3-4 percent annually. However, due to the lack of new supply coupled with increasing demand from new markets, it appears that diamond prices – over the long term – may continue to rise above their historic trends.

 

We note with caution that these seemingly “new” trends often turn out to be unsustainable. While it looks like there is no end in sight to higher prices, diamantaires must remember that diamonds are a discretionary consumer purchase. At some point, shoppers may find a less-expensive alternative, and demand will wane. We may not be able to pinpoint exactly what could cause a slowdown in the current upward price trajectory, but it will come, in our opinion.