Two Carats – Stability is The Name of the Game

When thinking of diamond prices, the diamond industry clearly hopes that prices appreciate. Rising diamond prices can potentially fuel diamond industry activity, provided that they result in greater profitability. A few weeks ago, we looked at the changing prices of third carats. This week we are looking at what one would expect to be a well-performing diamond size, two-carat rounds.

Our diamond price index was launched in April 2009. In the nine years that have passed since then, we have witnessed the lows and then a recovery from a major international financial crisis, a period of increased financing marked by strong levels of demand for diamonds, and a period of slowly relaxing demand for diamond jewelry. All had a great impact on diamond prices, and this turbulent period therefore is an interesting way to see how prices of specific diamonds behave through them.

In the following graph, all key sizes of polished diamonds are indexed to 100 in April 2009. As noted in the previous article, round-shaped thirds (0.30-0.39 carats) were the best-performing diamonds in terms of price appreciation, rising 29.9% in the 107 months that have passed since April 2009. As noted, this is not a very high return on investment. The price of gold rose by approximately 42% in the same period; crude oil increased 21%, and the S&P 500 soared 187%. Diamonds, however, are not a regular commodity.

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First, diamonds are not traded on a commodity exchange, there are no futures derivatives or hedge funds invested in diamond-related financial tools. Because there is no such involvement of the financial markets in diamond trading, they do not have any impact on polished diamond prices. Also, polished diamonds are mainly purchased as a component of a consumer product – diamond jewelry. 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, it is within a very narrow range. If the price changes sharply, it is usually due to an extreme market situation, often external to diamonds. 

If you look at the changes in price of two-carat rounds, you will see that it is one of the most stable diamond items out there. Since April 2009, their price has been practically flat, rising just 3.9% in the past 107 months.

On a year-over-year basis, we see that in 2010 prices rose by some 30% and even 40%. This is not surprising, because it came on the heels of a slow period – the 2008-2009 financial crash, so this is really a recovery of prices. In 2011, when prices were inflationary, prices rose, but no more than 20% and on average by 12.7%. Compare this to thirds, which rose by 20-30% and even 40% at one point, and average 16.5%. One-carat rounds shot as high as 40% and more several times during the same period and averaged 25.9% in 2011. So clearly, two-carat rounds are a very tame item from a price perspective. 

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The wild year-over-year price increases of 2010 and 2011 have since been replaced by a series of prices changes that were mainly declines. Prices of two carats declined through most of 2012 and 2013, with a brief series of price increases half way through 2013. In 2014, prices showed a series of small year-over-year declines, followed by a series of deep year-over-year price declines of more than 20% each. Only recently, in early 2018, are we seeing prices rise on a year-over-year basis. The price rises of 2010-2011 have been practically obliterated.

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A look at prices on a month-over-month basis shows that round 2-carat diamonds have very small price fluctuations, rarely exceeding one percent. In fact, for the entire nine-year period between April 2009 and March 2018, prices of round 2-carat diamonds fluctuated on average by just 0.1% on a month-over-month basis. In short, this is a very stable item on a long-term view. This is not only exceptional for a commodity, but even for diamonds that tend to fluctuate at most by around 1-2% a month, often significantly less, and rarely slightly more. 

Once again, comparing to third-carat rounds, prices of round thirds in the 2009-2018 period changed on average by 0.3% from month to month. While still small changes, this is triple the average change for 2-carat diamonds.

It is important to see the wider trend. In the following graph, year-over-year price changes of thirds and two-carat rounds are compared. Thirds showed a mellow price change in the 2010 to mid-2013 period. Prices started to fluctuate to a great degree when consumer demand changed. Two caraters, while sought after right after the financial crash in 2009, because of their relatively low price (and no one wants to pass on an attractive buying opportunity), lost favor and have since stabilized.  

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There is another aspect to the great stability of two carats. It is very rare, and therefore relatively pricy from a consumer perspective. It is in good demand for bridal – as a diamond for engagement rings. The bridal demand is relatively steady, which could be a driver for price increases, especially because of the rarity of diamonds this size. Yet this item is very price sensitive, because consumers who buy engagement rings are acting within a very limited budget – willing to splurge, but not go crazy.

In the long-term, despite its rarity and steady demand, prices of two-carat round diamonds are mainly impacted by external economic forces, such as during 2008-2010, and only seldom by internal diamond-related forces, such as during 2011. As such, once diamonds become a commodity traded on the financial market, it could potentially be a very interesting option for those seeking a solid hedge.

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 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.