Are We Heading Towards a Diamond Price Bubble?

Diamond Price Bubble - Edahn Golan
Share this:

Polished diamond prices are on a near year-long rally, rising more than 18% since last July when they hit a record low. This is great news for a languishing diamond trade that hasn’t seen extended price hikes in a decade. However, concerns are starting to creep in that this slingshot trajectory is reaching its apex and that we are facing a diamond price bubble.

It is not only polished diamond prices that are rising. Rough diamond prices rose a high single digit in the last month alone against high demand. The main reason for rough and polished diamond price increases is the booming sales of diamond jewelry at jewelry stores in the US and China, driven in turn by voracious consumer demand.

The View from the Cash Register

Much has been said about just what drove consumers to spend on diamond jewelry, but what did this look like in real time? An analysis of retailer sales shows that in the first five months of the year, overall jewelry sales shot up 75% year over year to $32 billion.

According to our analysis, US jewelry sales in May totaled $8.57 billion – a record high for May. Year over year, sales were up 109.3%, and up 52% over May 2019. Year to date, US jewelry sales have rebounded a massive 41% compared to 2019.

US Jewelry sales Jan 2019-May 2021 - Edahn Golan

Diamond jewelry has also done exceptionally well since May of 2020. Our specialty jewelers’ sales analytics show that the average size of diamonds set into jewelry rose from 1.06 carats to 1.22 carats in the last two months. Clearly, consumers want more, bigger, and even pricier diamonds.

Early Signs of a Diamond Price Bubble

Despite the good news, we are seeing the first signs of a slowdown in consumer demand. While total jewelry sales by all outlets remain very positive, at specialty jewelers, the picture is a little different.

Total sales of all jewelry items declined a low single point in May, mainly due to a decrease in spend per item.

Also, total diamond jewelry sales seemed to fall a low double digit. This is already a warning sign. If demand for all jewelry is starting to decline, and diamond jewelry in particular is declining, we know something deeper is happening.

Is this the proverbial gun in Act I?

The Wholesale Perspective

Wholesale polished diamond prices have risen across the board. It seems that every worry that had cast a shadow on the midstream disappeared under the bright sun. Lab-grown proliferation, declining bank financing, unfriendly tax regimes, large inventories, poorly managed inventories, limited market data, the slow response to shifting consumer tastes – all vanished like an overleveraged trader with mounting debts and no source of income. Poof!

This positive feeling is fueled by the 14.7% average rise in wholesale polished diamond prices. The combination of a steady cash flow, less bank debt, and access to all the rough diamonds they could possibly need serves to reinforce the sentiment.

 

Diamond index: Polished Wholesale Diamond Price Index Jan 2020-May 2021 - Edahn Golan

 

Compared to 2019, prices are not much better – only about 1.4% in May 2021 over May 2019. And yet, any trader will sign off on a steady 1.4% annual rise in diamond prices.

On a broader scale, the diamond midstream hasn’t seen extended price hikes since the first half of 2011. The past decade was a tough one for the diamond industry. in many ways, it was a lost decade. There is no need for fancy diamond analytics to see that.

Diamond traders, manufacturers, and wholesalers are all reporting strong downstream demand for polished diamonds. Great news, right? Wait for Act III.

What Will Happen When Retail Sales Cool?

Consumers are rushing to stores today, but will they tomorrow? Currently, they are not only spending what they saved last year while stuck at home. American consumers are also again accumulating debt to celebrate life.

Relying on credit is a time-honored tradition in American consumerism, but it does have its drawbacks. For example, credit reliance leads to inflated prices. Buying at a high rate results in competition over supply and shortages, causing price hikes. And as the song goes, what goes up, must come down.

The cyclicality of the economy dictates that today’s high demands will be followed by tomorrow’s declines.

Is There a Diamond Price Bubble?

A bubble is a fast rise in prices, followed by a quick decrease, and it is caused by “exuberant market behavior”. Sound familiar?  

Let’s summarize. Demand for diamond jewelry shot up to record highs starting about a year ago. Since then, rough diamond supply has risen, polished diamond prices have climbed to a 33-month record high, and jewelry retailers have stocked up on goods in response to exceptional consumer demand.

In the last couple of months, retailers felt that their inventories were low. Thus, they bought with added zest. This has created a possible diamond price bubble.

However, diamond jewelry sales softened in May, in particular, at specially jewelers. If consumers are starting to ease off diamond jewelry, will a combination of high diamond prices and inventory overflow result in a drop in diamond prices? This is not an unlikely scenario.  

If the tide is starting to turn, then calculated moves are in order including:

  • Selective rough diamond buying,
  • Paced manufacturing,
  • Continued reliance on self-financing rather than on leveraged spending, and
  • Careful inventory management.

The Bottom Line

Price fluctuation is unavoidable in any market. After an extended downturn, it’s nice to have a rise. It is a testament of the vitality and lasting emotional, as well as aesthetic value of diamonds in the eyes of consumers.

Now, it is in the hands of the industry to maintain the power of diamonds and continue to drive growth. Careful management at all times will hopefully avert a diamond price bubble.


If you are interested in learning more about demand for diamond jewelry or get more details on the specific data behind these trends, please contact us.

 

About the Author:

Edahn Golan
Facebook Twitter LinkedIn

Edahn Golan has 20 years of experience as a diamond industry analyst. He has a unique ability to provide a global view with context to the exclusive granular data he shares. The New York Times, Wall Street Journal, Business Insider, and other leading publications quote him regularly.

The LGD Price Anomaly: Demand Rises, Prices Decline
Israeli Bank Financing of the Diamond Industry Slashed

Leave a Comment