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Analysis
 

Global financial crisis squeezes diamond market

By James Clatford

LONDON, September 27, 2008 – The global financial crisis is stealing liquidity from the wholesale polished diamonds market, potentially dampening prices as nervous buyers remain on the sidelines.

But inflation worries and a lack of investment alternatives should eventually trigger a price recovery.

There are already signals that dealers may be holding back big, rare gemstones, as buyers wait until clarity returns to stricken financial markets. Worries over the availability of credit lines are a major talking point for diamond businesses, as a result of the most serious financial meltdown since the Great Depression of the 1930s.
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Although Rapaport listed prices of almost colourless “D”, high clarity VVS1 round diamonds weighing 10 carats have held steady over the past couple of months, diamond brokers see risks of a softening of prices of big stones in the near term after double-digit annualised percentage increases earlier this year.

And the outlook for Christmas season purchases of mid-tier diamond jewellery in the United States, the biggest diamond jewellery market, is poor as American household incomes are increasingly hard hit by the effects of the credit crunch and soaring food and fuel prices.

But as asset prices fall, notably real estate and stocks, investors struggle to find returns for their cash.

Fears of inflation, stemming in part from the U.S. government’s $700 billion rescue plan for financial markets, will force buyers to turn again to big, rare diamonds as a safe haven investment, potentially stoking another price boom.

While the luxury wallet is emptying in America and Europe, the vast riches rapidly accumulating in emerging economies such as the Gulf, Russia, India and China can make up for the shortfall as wealth travels eastwards.

As the mood shifts towards austerity in luxury in the West, the rapidly emerging industrial economies are seeing a monumental increase in the number of high net-worth individuals with the capacity to spend huge sums on rare and splendid diamonds and diamond jewellery, both contemporary and vintage.

The underlying scarcity of big, exquisite diamonds will only add to their unique appeal and to their price.

And diamonds are distinct from other collectable asset classes such as fashion-conscious art because of their durability.

However, the pressure will remain on the diamond and jewellery trade to step up marketing efforts to reinforce the Diamond Dream among stressed consumers.

The risk is that if shoppers shun jewellery stores, buyers of rough diamonds could at some point pressure polished prices lower.

Results from recent tenders of rough diamonds have been mixed, and marketers need to intensify their efforts to ensure the final consumer everywhere understands the diamond’s role as a unique symbol of romance and love.