Reframing the Discussion on Diamonds

For the past year and half, I have been analyzing and discussing the diamond sector. Like any other economic sector, it has its share of ups and downs, and changes in demand, prices, supply, financing, and more. Up to this point the discussion has centered on technical aspects of the diamond sector – how it reacts to change and what changes are necessary to move forward. The discussion now needs to move forward in order to consider diamonds' role in a wider context.

From a distance it appears that consumers are primarily interested in very specific goods, and that the industry is fighting tooth and nail to provide these goods. As a result, the main focus has been costs, prices, and profit margins. It is time to expand that focus, first and foremost by thinking about how to take charge of the direction, instead of simply following consumers’ fickle tastes. We need to take control of our destiny.

Consumer Demand

The trends of the past few years are well known: average polished diamonds with average qualities aimed for the average, mainly American, consumer, have been sold at affordable prices. It all boils down to price point. And it seems that consumers in China and India are adopting the same tastes and expectations as American consumers.

This taste is for 0.18 to 1 carats, primarily round shape, H-M color, SI1-I3 clarity, and a variety of cut qualities.

Are we truly interested in focusing on these goods, battling daily to make a meager profit? If your answer is “yes” to this question, keep in mind the following facts: lab-grown goods are presently close in price to natural diamonds, but in time their price will come down. In a price-oriented market, where the discussion is about how these two products appear the same and investment is being made in marketing lab-grown, where celebrities are endorsing lab-grown and  ethics are being waved in a misleading way, and where lab-grown represents something “new” – how long do you think it will take until American consumers become indifferent to natural diamonds and abandon them for lab-grown? That should keep you awake at night!

I want to add something  missing from the discussion: rarity. Natural diamonds are a unique and rare creation of nature, and nature did not make an unlimited amount. That separates natural diamonds from lab-produced minerals. If we strive for longevity in this market, we must reframe the discussion.

Rarity

Demand for especially rare diamonds is low. High color and clarity 3-carat diamonds are no longer trendy. Because demand for these goods is decreasing, prices are set very low in order to make a sale. So low that a manufacturer cannot afford to polish them from the limited availability of rough diamonds in a cost affective way. This is in contrast to fancy color diamonds, whose prices are only increasing.

To understand how rare top color and clarity diamonds are, do a simple search of D VVS rounds in the market. There are approximately ten 5-carat triple-X, no fluorescents, GIA graded diamonds of this kind available globally; there are some 15 such stones weighing 4 carats and fewer than 100 such 3-carat diamonds! These items are very rare – so why is the discussion framed around price?

Even smaller, more available diamonds are not frequently found and offered. There are also far fewer than 100 2.01-2.05 carat diamonds that meet the above criteria. People may think that at any given time there must be thousands of one-carat goods of this kind. This is wrong, there are far fewer than a thousand, and not even 500 of them are currently available on the market. I found around 300 such diamonds. There are far more Dior bags available on the market than top quality 1-carat diamonds, and there are more Andy Warhol prints available than 3-carat diamonds of this kind.

Similarly to Warhol’s prints, natural 3 carat diamonds are no longer made. Unless you are willing to settle for a mass-produced poster, which in many ways is the equivalent of a mass-produced lab-grown stone, we are offering a special, beautiful, and rare creation.

Data-Driven Analysis

If we look at the prices of the top color and clarity items described above, we see that historically they did well. Their price appreciated more than average, and therefore offered not only an opportunity to generate decent margins for the trade, they were also an antidote for lab-grown diamonds. More importantly, they offer consumers something special: a holding that has the potential to appreciate in value.

Our efforts to promote diamonds decreased, while at the same time lab-grown goods became more prevalent; as result, the taste for diamonds became closer to the average and we now observe a decrease in prices of the top items over the past couple of years, losing the gains of years past.

This is not necessary. Consider the following graph. It shows the Mercury Global Diamond Tracker™ against leading economic indicators, in items that people around the world invest their savings to protect and increase their value.

One can see that diamond prices were relatively stable compared to equities, commodities and bonds. That is the kind of market that we can and need to cater to.

The Road Ahead

In the coming weeks I will detail my vision for charting our way forward. I propose a series of decisions, actions, and data that together put into action a philosophy that states the following: we are selling a rare and beautiful item that can also serve as a store of value. However, we are so focused on making it through the short term that we have lost sight of the long-term. As a result, demand for diamonds is declining, prices are not growing, profit margins are shrinking, and collectively – miners, manufacturers, wholesalers and retailers – we are slowly sinking.

The decline in profitability led to a decline in marketing that resulted in a drop in market share compared with other luxury goods. Sadly, diamonds are losing their position as a luxury and we are now being threatened by a technology-driven product, an imitation mass-produced knockoff.

To change the course, we need to reframe the discussion on diamonds – internally and then publically. Diamonds, even 1 carat diamonds, are luxury items – they should be promoted as such and sold as such. We must provide full disclosure about every diamond we sell – its source as well as every characteristic of the diamond. Only when we perform these two actions – promotion and disclosure – will we see demand increase, prices firm up, and our own capital grow.

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.