The Great Roller Coaster Ride of Diamond Prices

That prices of materials fluctuate is no surprise to anyone or news, for that matter. Every material, especially a commodity, is affected by market forces of many types and sources, which jointly impact prices. Diamonds are no exception; they are affected by the same and similar forces.

Among these forces are availability, retailers and consumers demand, the interplay between availability and demand, rarity, regulations, and costs, such as energy, shipping, financing, and many more. The recent trade wars started by the US also highlight additional forces, including policy and taxation.

There is no way of telling how price will change under laboratory conditions. That is, by how much price will rise or fall if we isolate some of the forces that impact price. Having said that, a review of long-term trends must take all factors into account and with full market conditions. We often look at diamond prices in a somewhat narrow way – only a size category, or simply over the past month. It is worthwhile looking at these prices as a long and varying trend, if not for any other reason but to examine the forest and not just the trees.

The following graph shows year-over-year changes in the Mercury Diamond Global Tracker™ index, based on monthly changes to the index. By nature, year-over-year graphs are less affected by annual cyclical trends, and are very good at flashing out changes in the cyclical activity. For example, comparing sales in December, the pinnacle of the holiday season, to sales in March when there is no strong consumer driver, will show a decline, but not necessarily a real one but rather a normal cyclical trend. Comparing December to December in a year-over-year comparison may show declines, and is therefore far more educating.

And with that, the graph clearly shows a diamond market experiencing great change. We see that in the past eight years, prices during the November-December holiday period tend to rise, but the change is often relatively small compared to the wider fluctuations during the year. Even when prices are overall in decline, the decline tend to be small during the November-December holiday period.

Another clear trend is a long-term price fluctuation that overrides cyclical changes. These are extended declines from mid-2011 to mid-2012, repeated between from mid-2014 to mid-2015, but then a slowdown in declines since mid-2016. The price rises are there too, albeit smaller and less frequent. This indicates a profound weakness that we are aware of, though many tend to overlook it as a deep-seeded issue. The reasons for these ebbs and flows are the same as noted above - availability, demand, the interplay between them, rarity, regulations, cost of energy, financing, and more.

Another thing that should be said about these price fluctuations is that they are wide, ranging by as much as 40% from top to bottom, and by more than 15% as the long-term norm. Considering the slow pace of these changes – they changed direction only five times in eight years – the trends are clear, defined, easily recognized, and therefore relatively easier to predict.

Compared to the long-term trends of year-over-year price behavior, monthly changes are very different. They are erratic, localized, and yet, fairly limited, although on occasion there are wild changes. As the next graph shows, the range of change is typically within an 8% variance. Recently they hardly broke the 1% range.

Some price increases and decreases are indeed cyclical, yet even cyclical trends change. Note that prices used to rise in December compared to November, and then decline in January compared to December. However in recent years, since 2014 to be exact, this trend has reversed. In December prices declined compared to November, and in the following Januarys, prices were either flat or higher compared to December. This is a reflection of distress among wholesalers and pessimism among specialty jewelry retailers, who lower prices on the last minute to ensure they get the business. In turn, the short term sales spurs a quick period of activity characterized by stock replenishments. This is, sadly, a moody business.

Overall, the shifts in price direction are seemingly erratic, jumping willy-nilly in all directions. Partially, this is typical of monthly changes, a continued series of small price adjustments. Yet, if we look for longer-term trends, they are there, hidden among all small changes. We see a general move up in price in the first half of 2011 and then a deep decline during the second half of the year.

There were wider price fluctuations in 2012-2015, followed by a mellower period since mid-2015 to date. These reflect a much calmer market, one that seems to have struck the balance between the various forces (demand, availability, etc.), and therefore requires small tweaks, rather than large corrections. For an industry seeking stability, this is a desired position to be active at.

Much can be learnt from analyzing these trends. They offer plenty for companies to learn from when considering long-term strategic changes. We can only hope that many more companies take these and other insights into consideration and learn the important lessons that data analytics can offer them.