Global polished diamond prices have finally begun to rise, after falling since the late summer of 2008, according to the IDEX Online Polished Diamond Price Index. In May, polished diamond prices rose modestly – and solidly – after bottoming in April. The May price increase of +0.3 percent versus April’s levels was modest, but it was real, and it was broad-based (prices of almost every key diamond size moved higher).

 

Further, prices strengthened as the month progressed. Early in the month of May, the IDEX Online Polished Diamond Price Index was about 108.40; by late May, it peaked at 108.75, and finished at just under 108.70 on the final day of the month.

 

Are prices really creeping upward? Is this real, or is this simply a “suckers’ rally” (that’s Wall Street-speak for a rally which suckers in uninformed investors to whom the professionals can sell their distressed stocks)?

 

We believe that polished diamond prices have likely hit bottom, and are ready to move higher, though perhaps slowly. There are other signs that the diamond and jewelry industry has bottomed, including the following:

 

• The May DTC rough diamond Sight was substantially larger than prior Sights this year.

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

• There are indications that overall consumer demand in the U.S. market is strengthening modestly. New unemployment claims have stopped climbing; unemployment remains under 10 percent, though it is projected to top out at that level sometime in 2010 (or perhaps sooner).  

• U.S. specialty jewelers’ sales are currently running at about 84 percent of last year’s levels. This is an improvement over the 77 percent level experienced in November and December. However, there are indications that May jewelry sales – especially relating to Mother’s Day merchandise – were weak.

• Tiffany & Co., a high-end jeweler whose sales have been particularly hard-hit by the recession, reports seeing a light at the end of the tunnel (and it is not an on-coming train). Chairman Mike Kowalski recently noted that “we are now almost one month [he’s referring to May] into our second [fiscal] quarter and, although it's still too early to draw any conclusions, we are seeing a lessening in the rate of year-over-year total sales decline.”

• Sterling Jewelers, the largest mass market jeweler in the U.S., reported that its first quarter same-store sales were down only 2.6 percent, after dropping by 16.1 percent in the fourth quarter of 2008.

Diamond prices could also react positively to the results of the important JCK jewelry show in Las Vegas, since the mood was not as melancholy as we had expected. To be sure, it is tough for suppliers, but the smart merchants have figured out how to do business in a recessionary environment, and they will emerge stronger than ever.

 

In short, we believe that the worst is over, and that the signs point to a more optimistic – though perhaps subdued – future.

 

Short Term Price Trend Hopeful

The graph below illustrates polished diamond prices for the past 24 months. Positive signals have begun to emerge from the consumer market, especially in the U.S. Other global markets such as China have also shown signs of a recovery. Thus, it is likely that prices will continue to firm up, and a gradual recovery of polished diamond prices will ensue. While it is possible that polished diamond prices may remain subdued – or even test their prior lows – for a few more months, we believe that they have bottomed.

 

Source: IDEX Online Research

 

May 2009 versus April 2009: +0.3 percent

For the month of May 2009, average global polished diamond prices rose by a modest 0.3 percent versus average diamond prices during April 2009. This was the first positive comparison for polished diamond prices since August 2008. Further, polished prices continued to firm and show modest upward movement throughout the month. Most key sizes of diamonds showed higher prices on a month-to-month comparative basis; only diamonds of one-half carat and three-carat size showed slightly lower prices in May versus April.

 

On an annualized basis, May’s price increase represents just under a 4 percent annual inflation rate for polished diamonds, a pace that is in line with the long term trend for polished diamond prices. Like the stock market, polished diamond prices could test the lows of the past couple of months, but there are indications that demand is firming in some key 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, 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 IDEX Online Polished Diamond Price Index, calculated on the average daily prices during May 2009, stood at about 108.70 for the month, up from 108.40 for the month of April 2009. On the last day of May, the IDEX Online Polished Diamond Price Index stood at 108.64, up from the 108.53 level registered on the first day of the month. This reflects firmness in prices during the month. The IDEX Online Polished Diamond Price Index stood at 100.00 in July 2004.

 

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. In mid-2008, price increases began moderating. In September, polished diamond prices began showing consistent month-to-month decreases, a trend that continued through the end of April, but appears to have begun reversing in May.

 

Source: IDEX Online Research

 

On a year-over-year basis, global polished diamond prices dipped by 12.1 percent in May 2009 versus the same month a year ago – May 2008. This was the eleventh consecutive month of deceleration of year-over-year price increases for polished diamonds, and it was the fifth month that year-over-year prices dipped for polished diamonds. On a year-over-year basis, all key diamond sizes experienced price deflation.

 

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, in our opinion. We have made tentative projections for global polished diamond prices through this fall based on May’s performance and historical data. It is likely that year-to-year price trends will continue to show increasingly unfavorable comparisons through at least June, and perhaps through September, even if monthly price comparisons continue to show a positive trend. This is mostly due to difficult comparisons last summer when polished diamond prices spiked. However, we continue to predict that polished diamond prices will return to their historical trend line inflation rate of 3-4 percent annually.

 

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 economy” where demand for luxury goods will be more muted and commodities prices won’t spike, diamonds and diamond demand have remained more or less on the sidelines during the recent turmoil in the commodities markets. Thus, we believe that diamond demand and diamond prices are more likely to remain relatively untouched by potential commodity market volatility in the future, once the U.S. and the global economies stabilize. Further, based on 50,000 or more years of demand trends, we do not expect to see any major shift in consumer demand for diamonds or other jewelry as the global economy emerges from the current recession. 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 stood at 108.70 in May 2009 versus 123.63 in May 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. May 2009 versus May 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 May on a day-to-day basis reflected solid demand, with little price fluctuation or volatility. There was one price spike on May 7, but even when this so-far unexplained spike is removed from our calculations, diamond prices during May rose over their April levels.

 

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 hit bottom. Even more likely, we believe that they are poised to begin moving higher in the coming months of 2009.

 

The graph below summarizes 24 months of price trends for the seven key sizes of diamonds; 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 Most Key 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 retail merchants’ reports. Thus, prices for these larger stones had been showing a greater decline than some of the other key sizes over the past month.

 

However, in May, polished diamond prices for most key sizes – especially most of the larger size diamonds – showed improvement over their April levels. Three-carat diamond prices were notably weak, and one-half carat diamond prices showed very modest weakness. Otherwise, most sizes reflected slightly higher prices in May.

 

The graph below summarizes the price changes for key sizes of polished diamonds on a month-over-month basis: May 2009 versus April 2009. These seven stone sizes represent about one-third of the trading market by value.

 

Source: IDEX Online Research

 

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

On a year-to-year comparison, polished diamond prices for the key sizes and qualities fell from the prior year. Almost all sizes of diamonds showed a double-digit loss in May. 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: May 2009 versus May 2008. These seven sizes represent about one-third of the market, by aggregate value.

 

Source: IDEX Online Research

 

Forecast: Diamond Prices Likely Near Bottom

We believe that month-to-month polished diamond prices will likely show 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, in our opinion. At some point, we believe that diamond price inflation will recover to its historic trend line, reflecting annual inflation of 3-4 percent.

 

The U.S. market consumes roughly of all of the world’s diamond jewelry. Its economy is showing some vitality, after significant weakness over the past year. There are three 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 (especially the mass media).

• 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@idexonline.com.