Diamond Prices and the “Bubble” Question

As diamond prices continue to spiral dramatically upwards,
the question has arisen: Is this a bubble?

Yes, the increases are somewhat related to market
fundamentals; demand from China and India is growing tremendously.  And the long-term outlook is for diamond
prices to rise, as demand outstrips supply. The problem may be that too many
people are aware of that, including, quite possibly, investors from outside the
industry. What should be a steady rise has become a lot more dramatic, and it’s
been given a boost by tenders and other new sales mechanisms.  

As one wise person just pointed out to me, there are factors
that have played a role in previous increases that are, interestingly enough,
not really players here. The first is, of course, the U.S. The American market
is still in rough shape; most jewelers would prefer prices not rise. But this
is not our boom.  And the second is price
sheets. While the Rap sheet is sometimes said to have helped fuel the 1970s
boom, this time “the list” has been relatively conservative. It’s not uncommon
to read on the Rap website that prices are going up, and yet not have that
reflected on the Rap price list.

So where are prices headed? Most feel, as Idex just wrote,
that the “ceiling has not been reached.” Varda Shine
this week predicted
diamond prices will rise for the rest of the year. (And the head of Harry Winston said something similar.) Other
producers I’ve talked to have been less certain. Certainly, the speed at which
prices have risen, the ongoing disconnect between rough and polished prices,
and the industry’s history of bubbles (particularly in the summer of 2008),
should give us all pause. The recent disappointing auction news is not a great
sign, either. The view that this is a bubble has been endorsed
by no less a player than the head of Alrosa
—who notes that prices are now
higher than in the summer of 2008, even though the market hasn’t fully
recovered—as well as just about every dealer I’ve spoken to. Not that they
think that prices will crash; they are just uneasy about what is going on.

A big manufacturer once told me that buying rough is
like playing musical chairs. As long as the price keeps going up, people can
trade and buy, and everyone makes money. But at some point, the music runs
out, and one person ends up stuck. The music will likely stop sometime. But at
this point, no one knows when.

JCK News Director