IDEX Online Research: September Polished Diamond Prices Continue to Rise

October 03, 07 by Ken Gassman

Solid demand during September for polished diamonds across virtually all global markets continued to push prices higher. Despite some uncertainty by retail jewelers in the U.S. market, which consumes roughly half of all diamond jewelry sold worldwide, the guarded optimism about the upcoming all-important holiday selling season was enough to send polished diamond prices higher, according to the IDEX Online Global Polished Diamond Price Index.

Mirroring trends of prior months, demand for larger, better-quality stones was especially strong; prices of those gemstones rose substantially during the month, both on a month-to-month basis and a year-over-year basis.

Polished diamond prices rose on average by 3.1 percent in September 2007 versus the same month a year ago. This was the largest gain this year, and is at the high end of the overall long term price inflation rate in the polished diamond industry.

On a month-to-month basis, polished diamond prices in September rose by a modest 0.1 percent from August 2007. This suggests that while demand remains solid, it is not as robust as in prior months, reflecting some uncertainty about the upcoming economic outlook.

The same two macro factors that have affected diamond prices in prior months continued to have an impact on polished prices in September. First, rough diamond prices continue to rise 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 serious weakness in Japan and some uncertainty in the U.S., consumers in virtually every major diamond-consuming nation around the globe are clamoring for diamonds and diamond jewelry.

Finally, jewelry trade shows around the globe have helped create demand for polished diamonds. Because there are several major holiday periods in the second half of the year – in India, the U.S., Europe, and elsewhere – diamond demand is set to peak on a seasonal basis over the next month or two, before slowing seasonally in early 2008.

Global Economic Growth Solid

Despite some uncertainty about worldwide economic growth earlier this year, the global economy has remained generally strong, even in the U.S., where some earlier dire predictions had suggested that consumers would significantly tighten their purse strings. Gold prices are up and oil prices continue to rise, but neither of these factors seems to have had a measurable impact on demand for luxury goods such as jewelry and diamonds.

Fortunately, the U.S. Fed has done a good job of calming the financial markets. Interest rates in the U.S. were cut in September, and more reductions are likely to follow in the coming months. This will keep the economy buoyed, and consumer spending should remain solid.

The only notable negative is that lower interest rates in the U.S. mean that the value of the U.S. dollar will likely continue its precipitous decline well into 2008. This makes jewelry produced in overseas markets more expensive, and it will cause the price of gold to rise in dollar terms.

While diamonds are denominated in dollars across the global markets, we look for inflation in diamond jewelry prices because costs associated with the production of rough diamonds and diamond jewelry are denominated in local currencies, all of which have risen – some sharply – against the U.S. dollar.

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 we are leaving our forecast for jewelry and diamond sales at about +4.5 percent for the full year ending December 2007.

This implies that sales during the holiday selling season will be up in the 4-5 percent range. However, it is important to note that the market is bifurcated: mass market jewelers are barely 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 income mass market consumers much more than free-spending higher-income consumers who are likely to shop at guild jewelers; and 2) demand is strongest for better-quality, larger stones; these gemstones are typically found only in guild jewelers.

September 2007 versus August 2007 +0.1 percent

For the month of September 2007, average global polished diamond prices rose by 0.1 percent versus average diamond prices during August 2007. On an annualized basis, this suggests that diamond prices could rise by a very modest 1.2 percent during 2007, a level that is at the lower end of the historic range. However, unrelenting pressure from higher rough diamond prices suggest that September’s modest increase may be only a pause in an otherwise long term inflationary trend related to polished diamonds.

The IDEX Online Polished Diamond Price Index, calculated on the average daily prices during September 2007, stood at 113.67 for the month, up slightly from 113.52 for the month of August. Prices early in the month of August were up sharply, then softened later in the month. Further, there was some day-to-day price volatility in the second half of the month caused by increasing uncertainty about diamond demand in the U.S. in the upcoming holiday season. The IDEX Online Polished Diamond Price Index stood at 100.00 in July 2004. We believe that diamond prices will continue to rise for the foreseeable future, based on current economic and consumer trends.

September 2007 versus September 2006 +3.1 percent

On a year-over-year basis, global polished diamond prices rose by a very strong 3.1 percent in September 2007 versus the same month a year ago. 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. Despite rising rough diamond prices, 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 113.67 in September 2007 versus 110.30 in September a year ago.

IDEX Online Diamond Price Index Up in September

The graph below summarizes the IDEX Online Polished Diamond Price Index from the beginning of 2006 through September 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 gains, especially during 2007.