No Bubbles, No Panic

After polished and rough diamond prices raced upwards, rough prices are softening a little and polished is stable. In many respects, the industry is holding its breath to see what will happen on either of its sides: upstream what the DTC will do next week at the Sight and downstream, will consumers keep buying despite the recent economic "issues." The short answer is less extra goods (ex-plan) and steady prices on one end and continued purchases on the other. Here is why.

Measured in carats, De Beers is mining at a steady pace, and whatever overhang it had was mostly offloaded at the previous Sight. With the price of rough softening by a high single digit, the chance that DTC will increase prices is slim. The expectation for a billion dollar Sight with a lot of ex-plan goods will not materialize. We are likely looking at a smaller Sight than the previous one (around ~$800 million) and some ex-plan goods. As for the hope for improved box assortments (a de facto but not official decrease in prices), that is yet to be seen. 

After a long period of taking money out of the business, large diamond firms are investing their revenues back in their companies and the level of debt owed to banks is decreasing.

On the consumer front, sales are solid. In China and India, many new diamond jewelry stores need inventory. This is driving a large chunk of the wholesale demand. These stores will do well. Don't forget that after good rains there is a good harvest. Many consumers in these economies are dependent on agriculture. Good rains results in harvesting cash – and that is translated into buying gold and diamonds.

In the U.S., all the metrics are showing solid diamond jewelry sales, not wildfire growth, that won't happen, but good steady demand as evidenced by the 7% year-over-year rise in real jewelry sales (with inflation cleaned out.) In Japan, jewelry sales rose 5.3 percent in department stores even though overall sales were flat (-1%). 

There is no good without the bad. Diamond manufacturers' inventory levels are rising again. In the U.S. and Europe there is genuine concern about the local economies and in China, the growth rate might slowdown. 

As former De Beers CEO Gareth Penny used to say, "The fundamentals are there." He was right. Pitted against each other, the positive outweighs the negative. Expect to see polished goods to maintain its current level in the short term and rough prices to soften as demand decreases for high-priced DTC boxes. There is no fear of producers flooding the market with excess rough simply because they are mining less. Therefore – no bubbles, no panic, no dramatic falls, just a summer lull.

Have a peaceful and relaxed weekend.