IDEX Online Research: Does a credible diamond price list exist?March 30, 26
By Ken Gassman
Despite repeated attempts by a number of firms to create a credible, consistently reliable price list for polished diamonds, no one has gotten it quite right. Some are closer than others, but “perfection” hasn’t been reached, yet.
From a diamond trader’s viewpoint – and from this analyst’s viewpoint – there is simply not enough information to be able to gauge the diamond trading market as accurately as traders, analysts, buyers and sellers can gauge similar markets for other commodities, equities and real estate transactions.
In a way, this comes as no surprise. After all, the diamond industry has been shrouded in secrecy for decades. Change – and transparency – come very slowly.
Diamond price lists abound, but are they accurate?
There are many price lists for polished diamonds. The problem is none of them offer anywhere near the level of transparency found in other markets, especially the financial markets.
When a trader places a buy or sell order for stocks, bonds and commodities, he can see both sides – bid (or buy) and ask (or sell) prices – of the market. Transactions in the financial trading markets are transparent.
Unfortunately, in the diamond bourses traders can easily see only one side of the market – the “ask” price. And, often, the “ask” price is artificial. “Bid” prices – the price buyers are willing to pay – are not available. As a result, sellers operate at a disadvantage, since they really can’t gauge fundamental demand. Buyers, too, operate at a disadvantage; sellers can take advantage of uninformed buyers. Thus, both diamond buyers and sellers can be easily misled by current trading practices in the market.
Even in the few cases where prices of so-called “actual trades” are published, there is a lack of transparency. No one knows where the buyer and seller started their negotiations. Further, there is little information about fundamental demand, when a single price is reported. Far too often, these “actual trades” may represent only one sale, and it may be an aberration from the norm. Finally, too few actual trades are reported, leading to more misinformation.
Does the diamond industry really want pricing transparency?
The diamond industry says it wants pricing transparency. In this case, actions speak louder than words. If the industry really wanted transparency, its participants would have created a trading market similar to the financial markets, with a system for determining clear “bid” and “ask” prices for diamonds. There are systems for trading thousands of different equities; the same systems would work just fine in the diamond market, if the market actually wanted transparency.
In our 20 years of experience on Wall Street, we never had any trouble gauging the market based on “bid” and “ask” prices. We often questioned “why” the certain securities had valuations (prices) that appeared too high or too low, but we never failed to obtain a price at which we could make a guaranteed transaction.
Should diamond pricing schemes be transparent?
There are several reasons to support pricing transparency for diamonds and other commodities – particularly colored gemstones – used in the jewelry industry. These reasons include the following: integrity, credibility and certainty. In our opinion, the jewelry industry engages in “pricing roulette” at both the retail and supplier level. At the retail level, consumers are bombarded with promotions offering price discounts – the “deal of the day” – similar to car dealers and furniture merchants where “list prices” are fictitious. Casual shoppers don’t know the “real price” they should pay for jewelry. Further, many smaller jewelers who generate limited volume don’t watch the market on a day-to-day basis; suppliers often take advantage of their lack of market expertise.
How efficient can trading markets be?
Trading markets operate on the basis of the “inefficient market” theory. Prices move up or down, based on asset fundaments that are driven primarily by supply and demand and information about the likelihood of future supply and demand. In a perfectly efficient market, the “bid” and “ask” price would be identical (except for a trading fee or commission).
Trading markets should be slightly inefficient. Those inefficiencies reveal critical information about marketplace conditions: Is demand strengthening or weakening? Is the supply of goods tightening or loosening?
But, when buyers and sellers do not have access to price trading data, levels of integrity and credibility drop and uncertainty rises. There is always the lingering question: who is the “stool pigeon” in this transaction? Our view is that the diamond trading markets are highly inefficient, based on current trading and transaction practices.
What is the analyst’s viewpoint?
When we review all of the industry price lists, we continue to gravitate to the IDEX Online price database for analytical purposes. Why? Because it reveals more information than any one else is willing to disclose.
Do we have a conflict of interest? As a result of our relationship with IDEX Online – it publishes our proprietary research on an exclusive basis (we are not an employee) – it could be argued we have a conflict of interest, when it comes to comparisons between various industry price lists. We argue just the opposite: as part of our research, we have examined and analyzed various industry price lists, and we made our choice of business partners based on our findings related to – among other things – the integrity of the information in the IDEX Online price list versus alternative prices lists in the industry.
Price lists: what are the current alternatives?
As an industry analyst, we see fewer than five meaningful competitors who compile diamond price lists. At the suggestion of our attorney, we won’t name them. Nor will we evaluate each of them individually. Rather, we’ll point out some shortcomings that plague some of these price lists and give us heartburn as an analyst.
Editorialized prices – Some industry price lists reflect what we call “editorialized” prices. In other words, many of the prices appear to be the publisher’s opinion of what the price of a particular diamond ought to be, rather than a reflection of actual trading prices. In other cases, there is too little trading volume to report market asking prices, so prices are interpolated. That is, they represent a mathematical calculation based on trades of similar, but not identical categories of diamonds.
Sample size too small – Many of the competitive price lists take only a sample of diamond pricing activity, rather than reflecting the entire market. Sampling may be fine for predicting the outcome of a political election, but it is not a viable method to calculate diamond prices. Worse, the sample sizes are often too small to represent actual market trading activity. Finally, some of those diamantaires sampled may throw in a “red herring” – they may deliberately misreport the price of a diamond category in an effort to try to influence the trading market in their favor, especially when they know they have significant influence in the compilation of a particular publisher’s price list.
High asking prices – At least one (or more) price list reports “high asking” prices. These “high” asking prices – an artificial level at which virtually no trades occur – allow traders and retailers to claim they are offering a “significant discount” to the industry wholesale price list. Insiders know the prices are “high ask.” But outsiders are bamboozled by these fake prices, similar to the prices automobile dealers put on their cars. These artificially high prices decrease industry transparency and reduce industry integrity and credibility levels, especially in the minds of consumers.
Misrepresentation of free-market transactions – Some price lists claim to compile free-market transaction prices when, in reality, they include special prices that suppliers have negotiated with their customers that include allowances for co-op advertising, exclusivity and volume discounts. At best, the artificial prices associated with these special deals distort true market prices; at worst, they misrepresent the market and add to the misinformation that exists.
The IDEX Online Polished Diamond Price list eliminates these four major problems that have an unwanted impact on other industry price lists.
No editorialized prices – If there are no offers (“ask” prices) in a particular diamond category, no prices are shown. This is an important piece of information for traders. It indicates that market activity has dried up. Further research by the trader will reveal whether it is a demand or a supply problem.
No sampling – IDEX Online prices and the related indices reflect trading prices for the entire universe of diamonds listed for trade. There is no sampling; all goods offered for sale comprise the IDEX Online price matrix.
No artificial “ask” prices – Prices reflect the real “ask” prices in the market. Traders don’t need to stop to calculate “discounts” from a so-called list price.
No “special deal” prices – IDEX Online prices represent only market prices that are offered to everyone, regardless of their volume, advertising needs, or other factors that could affect a special negotiated price.
Here are some other advantages we see, from an analyst’s viewpoint, to the IDEX Online Polished Diamond Price list:
- It is derived in real-time from asking prices of inventories, which over 1,000 diamond suppliers post online with IDEX Online. These inventories are updated daily.
- While the “average” asking price is posted on the price grid, buyers can search the list of individual asking prices used to calculate the “average” asked price.
- When buyers and sellers need more information on a specific average asking price on the polished diamond price grid, they get data such as the highest priced 10 percent of the goods, the lowest priced 10 percent, the prior three months’ average prices, and demand and supply graphs.
- The IDEX Online system rejects prices that don’t make sense. If a dealer attempts to manipulate the system, the IDEX Online algorithms spot “fake” prices. Those “fake” prices are eliminated.
In the early days of television in the U.S., there was a police show called Dragnet, which starred investigative detective Joe Friday. When Detective Friday was interrogating witnesses, they often strayed from his queries. He would get them back on track with his classic quote – uttered in almost every episode of Dragnet: “The facts, ma’am, just the facts.”
As a research analyst, that’s all we want: just the facts. And the IDEX Online Polished Diamond Price List, with its integrity, credibility and certainty, is our choice for “the facts, just the facts.”