On average, worldwide polished diamond prices fell nearly 1 percent in August versus the same month in 2005, according to the IDEX Online Polished Diamond Price Index. This appears to be a reaction to a slowing business cycle related to weakening consumer fundamentals, especially in the U.S. market.

 

The average price of polished diamonds in August 2006 declined by 0.7 percent versus polished diamond prices in August 2005. On a month-over-month basis, diamond prices rose about 0.6 percent from July levels. However, this is not unexpected, as demand often picks up in anticipation of the upcoming holiday selling season.

 

While polished prices have fallen over the past 12 months, Diamond Trading Company prices of rough diamonds rose about 4-5 percent in the same period, even after adjusting for a modest price decrease this past summer. This pricing squeeze is affecting the entire diamond pipeline, and is expected to put some financially weak diamond traders out of business.

 

The graph below summarizes global diamond price trends by month over the past year.

 

Polished Diamond Price Trends Percent Change Year-over-Year by Month Source: IDEX Online

Diamond Price Softness Reflects Two Key Factors

Diamond prices are soft as a result of factors both inside and outside the diamond industry.

 

• Weakening Demand and High Debt in the Jewelry Industry – High diamond industry debt coupled with slowing demand for diamonds has pushed prices down from their recent peak in the third quarter of 2005. In the face of sluggish demand, diamantaires are anxious to get cash for their diamonds, and they are selling their inventories at nearly any price, just to be able to pay down their bank debt.

• Weak Fundamentals in the Consumer Market – High energy prices are eating into discretionary spending. Geopolitical uncertainties are causing shoppers to restrain their spending. In addition, interest rates are rising, consumer debt levels are at record heights, and the consumer savings rate has been negative for nearly a year.

U.S. Jewelry Retailers Report Softening Trends

Many U.S. jewelers, whose demand represents about 50 percent of the value of all diamonds and diamond jewelry sold in the world, have reported that sales softened in July and August. As a result of these softening trends, jewelers have been slow to replenish their diamond jewelry inventories. They appear to be waiting until the last minute before purchasing merchandising for the all-important upcoming holiday selling season when jewelers generate about one-third of their annual sales volume (November and December).

 

Further, retail jewelers are worried, since jewelry demand is often a leading indicator for economic growth. With jewelry demand appearing to soften, the U.S. economy, which represents about one-third of total global economic growth, will have a notable impact on diamond jewelry demand worldwide, if it softens later this year.

 

The graph below summarizes the IDEX Online Polished Diamond Price Index since the beginning of 2005. The only good news is that August prices showed a small increase over July prices. However, this is probably only a seasonal aberration.

 

2005 - 2006 IDEX Polished Price Index 100 = June 2004 Source: IDEX Online

Stone Prices for Two Carats and Below Softening

As the graph below illustrates, the price for polished diamonds two carats and below in size has softened dramatically over the past four months. For the first time in recent history, the price of 1.5 carat and 2 carat polished diamonds fell below the same period a year ago. In short, the diamond price weakness which first affected the smaller stones – 1.5 carats, for example – has now begun to affect larger stone sizes.

 

Polished Diamond Price Trends by Size Average Price - Four Months May-June-July-August 2006 vs. 2005 These Four Sizes = 29% of the Market Source: IDEX Online

 

Very Large Stone Prices Show Solid Gains

The only good news is that prices of larger polished diamonds continue to show solid gains, on a year-over-year basis. Round polished diamonds – 4 carats and 5 carats in size, which represent an aggregate of about 1 percent of the market by value – continue to post solid price gains, year-over-year, as the graph below illustrates.

 

Polished Diamond Price Trends by Size Average Price - August 2006 vs August 2005 These Six Sizes = 30% of the Market Source: IDEX Online

Consumer Market Demand Remains Uncertain

As the global market heads into the all-important holiday selling season, jewelers remain highly uncertain about demand during November and December.

 

IDEX Online Research continues to believe that jewelry demand will not plummet later this year, though it is possible that aggregate jewelry sales, by value, could be at or near last year’s levels.

 

The Diamond Trading Company (DTC), the sales and marketing arm of diamond-producer De Beers, plans to increase its global diamond advertising and marketing efforts during the holiday selling season. The company announced that it is increasing its U.S. advertising budget by 17 percent this year; its clients are also expected to increase their marketing efforts. These efforts should help support jewelry demand during the holiday selling season.

 

The IDEX Online Diamond Price Index

The IDEX Online Diamond Price Index is a real-time index derived from actual asking prices of 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 inventory database, aggregated since February 2001. Research and development were conducted in cooperation with Dr. Avi Wohl, Senior Lecturer of Finance at the Faculty of Management, Tel Aviv University.

 

Additional information is available from IDEX Online Research. Email diamondprices at idexonline.com.