Diamond prices surged again in May, breaking records set in prior months. On a year-over-year basis, diamond prices were up a dramatic 12.3 percent, according to the IDEX Online Polished Diamond Price Index. Even on a month-over-month basis – May 2008 versus April 2008 – diamond prices rose significantly.

 

Large, high-quality diamonds posted the most remarkable price increases. On a year-over-year basis, three, four, and five carat diamonds posted price increases of 47 percent, 64 percent, and 77 percent respectively.

 

Even more striking, diamond prices spiked sharply on May 23 and again on May 27, after remaining relatively stable for about two months.

 

What is behind these leaping diamond prices? Demand continues to surge in many markets, and diamond prices appear to be reflecting true supply and demand. This is a notable shift from the past, when demand in the U.S. market generally had the most impact on diamond prices. The U.S. consumes roughly half of all diamond jewelry produced in the world. In the past, when the U.S. economy slowed and diamond demand softened, diamond prices usually softened too. That’s not the case this time: other than the U.S. and perhaps Japan, the economies of most of the larger global diamond markets are posting solid gains. As a result, consumers in those growing markets are demanding better diamond jewelry, and more of it, keeping diamond prices elevated.

 

The best example of the trend in global markets can be seen with Tiffany & Company’s first quarter results. The company’s sales in the U.S. were soft due to a weak economy. In all other global markets – the Middle East, the Asia-Pacific region (except Japan), Canada and Europe – demand in Tiffany stores was very strong.

 

We view this trend – prices reacting to total global market demand, rather than being pegged to U.S. demand – as healthy for the industry. Markets, including the diamond market, are now global, and prices reflect this shift.

 

Our outlook: as long as demand for diamonds and diamond jewelry remains strong, especially in emerging markets, prices are expected rise. Further, since rough diamond prices have been rising faster than polished diamond prices, there is ongoing pressure to pass along those price increases. While we believe the current pace of diamond price inflation won’t continue, there is no reason to suggest that a price pull-back is likely, either.

 

The graph below summarizes the IDEX Online Polished Diamond Price Index for the past 24 months. This graph represents the composite average prices of all diamonds traded at the wholesale level. The slope of the line has become significantly steeper this year, reflecting rising prices for virtually all polished diamonds.

 

IDEX Online Polished Diamond Price Index 24 Months Source: IDEX Online Research

 

Global polished diamond prices were up substantially – +1.9 percent – on a month-to-month basis – May 2008 versus April 2008. May’s month-to-month spike was in line with the month-to-month gains for the past three months – February +1.6 percent, March +2.0 percent, April +2.3 percent. All of those gains were dramatically larger than historical trends of 0.2-0.4 percent monthly gains. On an annualized basis, this is a dramatic 24 percent gain in polished diamond prices, a rate that seems both unreasonable and unsustainable. With sharp price increases since the beginning of the year, we believe that this could portend a significantly higher inflation rate for polished diamonds this year, though perhaps not at the current +24 percent pace. The IDEX Online Polished Diamond Price Index, calculated on the average daily prices during April 2008, stood at 127.08 for the month, up 1.9 percent from 124.66 for the month of April. The IDEX Online Polished Diamond Price Index stood at 100.00 in July 2004.

 

The graph below summarizes month-to-month changes in global diamond prices for the past thirteen months. In 2007, polished diamond prices showed modest gains during almost every month; however, since February 2008, month-to-month inflation for polished diamonds has been dramatic, as the graph illustrates. .

 

Source: IDEX Online Research

Global polished diamond prices surged by a record 12.3 percent in May 2008 versus the same month a year ago – May 2007. This was the largest year-over-year gain on record for the IDEX Online Global Polished Diamond Price Index, and it is far beyond the high end of the overall long term price inflation rate in the polished diamond industry. Further, it is 220 basis points (over two percentage points) above the prior record price increase last month (April 2008 versus April 2007). This dramatic price increase reflects strong polished diamond demand that characterizes most global consumer markets. All key sizes of diamonds posted a price increase during May 2008, though the greatest price increases occurred in stones three carats and larger, an ongoing trend.

 

While we continue to worry about the sustainability of such large year-over-year price increases in polished diamonds, the market appears to be operating in a true capitalistic supply-versus-demand mode. If demand remains strong, prices will rise. Conversely, if demand weakens, prices could drop. This trend is especially important to note, since the U.S. is in an economic slowdown. Historically, prices in the global diamond market reacted to U.S. demand; now, prices are reacting to global diamond demand. The IDEX Online Polished Diamond Price Index stood at 127.07 in May 2008 versus 113.18 in May a year ago.

 

On a year-over-year basis, polished diamond prices have shown larger and larger gains each month over the past year or so. The graph below summarizes year-over-year monthly polished diamond prices for the global market since the beginning of 2007.

 

Comparisons are based on the daily average prices during the month versus the same month a year ago (e.g. May 2008 versus May 2007). The year-to-year comparison takes into account the seasonality of polished diamond demand and prices.

  

Source: IDEX Online Research

Day-to-Day Polished Diamond Prices Were Steady Until Late in the Month

Diamond prices have been behaving strangely. They seem to hold steady for days or weeks, and then spike irrationally over a one- or two-day period. If the diamond market was regulated – as it will be, if diamond futures trade – you can bet that the commodities exchanges would be investigating these trading patterns, examining each person’s trade. In regulated markets, buyers and sellers can’t hide their identities; the market will know who is selling and who is buying.

 

Explanations for the price spikes have been offered: for example, diamond buyers are anticipating a reasonably good 2008 holiday season, and they pushed prices up just prior to the all-important JCK Las Vegas show. Others suggest that demand has been strong overseas, and prices are spiking to reflect this robust demand. The falling U.S. dollar has also pushed diamond prices higher. As long as the diamond trading market is unregulated, we don’t have transparency, and we don’t have explanations.

 

IDEX Online’s recently launched service – Guaranteed Diamond TransactionsTM – has enabled us to begin recording and analyzing individual trades, thus enhancing our insight into the polished diamond price hikes and allowing us to identify their origins. Our future price index reports will include information based on the new service as it gains researchable volume.

 

With the possibility of diamond futures trading just around the corner, it may be time to ask if diamonds should be traded in Euros or U.S. dollars, or even Rupees, since India is by far the largest producer of cut and polished diamonds in the world, based on units produced. Because diamonds are currently traded in U.S. dollars, the impact of this weakening currency is having an adverse impact on the price of diamonds.

 

We normally show a one-month daily graph of diamond prices, but it is more instructive to see daily diamond prices on a three-month basis, in order to understand when polished diamond prices actually surged.

 

In March, there was a sharp spike mid-month, and those higher prices carried over into April. However, while prices were at record levels in April, they were relatively flat throughout the month, a trend that continued into early May. The market was apparently digesting the price spike that occurred in March; many suppliers were waiting to see of prices would hold firm. They were rewarded for their patience: prices were steady in April and early May. However, near the end of May – May 23 and May 27 – diamond prices spiked again.

 

The following graph illustrates the average price of polished diamonds on a day-by-day basis in March and April 2008.

 

Source: IDEX Online Research

 

Diamond Demand Remains Strong for Large Sizes

Month after month, demand remains robust for larger size, high-quality diamonds. Retail jewelers say that their customers are seeking the best quality gemstones they can afford. It is not just about size; it is also about fire, brilliance and those other markers of a quality diamond. As a result, prices for the larger size diamonds are rising rapidly.

 

The graph below summarizes the price changes for key sizes of polished diamonds on a month-over-month basis: May 2008 versus April 2008. These seven stone sizes represent about 33 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 three-to-five carat range rose much more dramatically while prices of stones two-carat and smaller posted more moderate gains. Did five-carat polished diamonds really rise by nearly 77 percent year-over-year? Ask any diamantaire who deals in large, high-quality stones – they will confirm that prices are spiking daily.

 

Following February, March, and April, May is the fourth consecutive month in which all key diamond sizes – one-half carat through five-carat stones – showed a price increase on a year-over-year basis. The price increase for smaller stones in the one-half carat size range was modest, but it was up.  

 

The graph below summarizes polished diamond prices by key sizes on a year-over-year basis: May 2008 versus May 2007. These seven sizes represent about one-third of the market, by aggregate value.

Source: IDEX Online Research

 

Forecast: Polished Diamond Prices Higher, But Inflation Pace Should Moderate

Economists continue to forecast that global economic growth will decelerate modestly during 2008, particularly among two of the world’s larger economies – Japan and the U.S. In the U.S., economists are predicting a modest recession, no more than two quarters in length, though they are now saying that the recovery could come more slowing than previously expected. Consumers have been in a mental recession, and have cut back on their discretionary spending. On a positive note, there are signs that the job market cutbacks may have bottomed, and there are forecasters who say believe that the housing market has bottomed. Interest rates are at a four-year low, and preliminary first quarter economic growth was slightly positive, rather than negative as many economists had feared.

 

The good news: economic woes in the U.S. have not spilled over materially into other global markets, as many forecasters had predicted they would. The U.S. market historically has consumed about half of all the world’s diamonds and diamond jewelry by value. High-growth economies – such as China and India – continue to post robust gains, despite politicians’ claims that they are trying to rein in growth. As a result, jewelry and diamond demand during 2008 could moderate, though gains will likely be solid. While this forecast may seem unrealistic in light of the surging growth we have seen since the beginning of the year, our long-term forecast algorithms continue to suggest that the pace of polished diamond price increases cannot continue unabated.

 

Because rough diamond prices are rising at a pace faster than polished diamond prices, there is much pressure on cutters and polishers to raise their prices, a trend that is likely to continue. This will help keep polished diamond prices from falling, and should provide support, along with baseline consumer demand, to send prices higher, but at a more moderate rate, in our opinion.

 

The IDEX Online Research Diamond Price Index

The IDEX Online Research Diamond Price Index is a real-time index derived from actual asking prices in the global diamond industry. The IDEX Online Research 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 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@idexonline.com.