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The Top Appreciation is Not Where You Expect It

The Top Appreciation is Not Where You Expect It

If you look closely at the following graph, you may get the impression that the two best-performing size ranges over nearly a decade are thirds (0.30-0.39 carats) and three quarters (0.70-0.89 carats). Lately, the price of round diamonds in these two size ranges have appreciated, telling us a story about the industry.

If we index all prices to 100 in April 2009, you will see that round thirds are the best-performing diamonds in terms of price appreciation, rising 29.9% in the 107 months that have passed since that April 2009. This is not a very high return on investment. The price of gold rose by approximately 42% during the same period, crude oil increased 21%, and the S&P 500 soared 187%. Diamonds, however, are not a regular commodity.


Price Appreciation 

If you follow polished diamond prices, you know that they tend not to change much. The prices are relatively stable, price fluctuations are limited, and even when prices do rise or fall sharply, it is usually due to an extreme market situation, often external to diamonds. For example, a major economic fallout of the kind experienced in late 2008 and throughout most of 2009, for example. Therefore, the comparison to gold, oil, or the stock market is so diverging.

Price fluctuations tend be at most around 1-2% a month, often significantly less, and rarely slightly more. On average, prices of round thirds in 2009-2018 changed on average by 0.3% from month to month. As noted, small changes. On a year-over-year basis, however, the price change can accumulate. On average, we see a 2.1% year-over-year price fluctuation, and yet, at times this year-over-year change can be much higher – as much as 10% is not rare, and at times, as much as 40% during a volatile period. However, even of prices tend to rise much over time, they also tend to cool and decline, as the following graph shows.


One of the major influencers of prices during this period was consumer demand. If we compare price fluctuations of thirds to those of 0.70-0.89 carats, we see that they change in similar patterns, both in terms of timing and in terms of level of year-over-year price change.


Note that there are two periods when price trends did not correlate at all. One was in 2014, when the price of thirds rose markedly, while 0.70-carats increased very little. Another time we saw this happening was over the past few months. Thirds rose and 0.70 carats declined year-over-year. There is a reason for this.

What is Driving This Price Appreciation?

Today gem-quality diamonds are primarily purchased as a component of jewelry. As such, their retail price is set by consumer demand for jewelry and is subject to many influences, such as desire, interest in competing luxury products (handbags, prestige beauty care, and cars, for example), other competing consumer products (mobile phones, smart speakers, and vacations), not to mention changing economic outlook and level of discretionary income. Moreover, there are internal diamond industry pressures that need to be accounted for, such as availability of the specifically desired items, cost of polishing, cost of rough diamonds, and even the cost of mining.

Above them all is another influence on the retail price of diamonds —fashion trends. Diamonds became fashionable thanks to their beauty and association with movie stars and royalty, which was leveraged by De Beers to extend availability to anyone and everyone. Yet since that time, American taste has focused on a very tight definition and for many years has not wavered from G-I color, SI-I clarities, and round shape. Do not get it wrong, the entire range of diamonds are sold in the US, and American consumers as a whole will by any diamond. But as a rule, the majority of consumer purchases are within this range of color, clarity and shape.

There is one important characteristic that I did not note above, size. Most research into the US market will show that diamonds weighing 1-carat are the most popular size. That is true mainly in a very specific context – in-store setting. If a consumer walks into a jewelry store looking for a diamond ring, they are likely willing to divide their purchase into two – the ring design and the central diamond. To meet every possible consumer interest, all retailers carry a wide range of semi-mounts. These are rings without a diamond set in them or with side stones, but not a central one. These jewelers also carry a wide range of loose diamonds. This way they can let a consumer pick a design and a diamond and set the latter in the first.

In practice, by number of diamonds sold, other diamond sizes top the list, and the top diamond size changes over time. It is often a smaller diamond, always way below 1-carat. This is often set by availability and cost of diamonds to jewelers and jewelry makers. Another force involved in this are the aforementioned fashion trends. It is important to put this in context. About 50% of all diamond jewelry purchases are driven by bridal. This covers wedding bands, earrings, and bracelets purchased for the wedding, and most importantly the engagement ring. The trend is to buy a large diamond, often 1-carat or larger, although half a carat and two thirds of a carat (0.70-0.89-carats) are common as well.

The interest in larger diamonds carries into “regular” diamond jewelry purchases, but here it is impacted by the high cost and, once again, fashion. What we found over the course of the last couple of years is that consumers are now showing a greater preference for smaller diamonds. This trend is true not only for “regular” diamond jewelry purchases, but also for bridal. More and more American brides and grooms feel that a large diamond is too great an expense and prefer buying lower-cost diamond engagement rings. The strongest demand we have seen in recent months is for thirds.

This trend has an economic manifestation – as demand for thirds rises, so do their prices. The move to smaller diamonds has impacted the price of one-carat rounds, pushing it downwards, and lifted the price of thirds, as the following graph shows.



As for the size range referred to as two-thirds, the 0.70-0.89-carat size range, why are they appreciating even though their prices seem to decline lately on a year-over-year basis? Actually, for a similar reason. A 0.80-carat round diamond does not look much smaller than a 1-carat diamond. The difference in price, however, is meaningful. As the desire to go small becomes more pronounced and is partially driven by a desire to cut on the expenditure, there is a growing trend to choose lower cost diamonds while trying to keep size up.

The bottom line is that the entire diamond industry, from retail all the way up to mining, is very strongly influenced by consumer demand. It is a demand-driven industry and not a supply-driven industry. If the diamond industry would like to see growth in demand, it must invest in marketing and education. Only if we make the effort to increase awareness, desire, and try to impact fashion trends, will we see price appreciation and renewed sales. If, in contrast, we neglect this side of our business, we will find that we are surprised by shifting consumer demand, changes that we may not adjust to in a timely manner (or unable to at all), and may even possibly find ourselves with growing inventories of polished diamonds that have lost favor among consumers. Such an outcome could have a lethal impact on the industry’s financials.


The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser.

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