Heated Market Set to Hibernate

The fire that has ignited business in the diamond trade so far in 2010 has begun to flicker. Demand for diamonds has been unusually high since early January, but there are signs that it has weakened in the past few weeks. Some of that weakness can be attributed to a seasonal slowdown that usually starts in May and gradually grinds to a halt during the July and August summer months, only to revive in September and continue strong until the end of the year. This year, it appears that the slowdown started a bit earlier than usual.

Price Confusion

There is also a certain amount of confusion regarding prices. It is common knowledge that the price of rough diamonds has been on the increase, which would be reflected in the price of polished. But, in some cases, it is quite obvious that prices being quoted are way above reason and, in fact, are highly speculative. Dealers are not willing to add stones to their inventory at these speculative prices, which, in a way, increases the shortage of these goods in the pipeline when there is a call for them.

For some weeks now, the market has been anticipating an increase in the Rapaport price list, as discounts for many items in the list are now trading in the lower 20s. While it is true that these prices are for specific goods trading in a narrow band and not for every list category, the last time the list increased prices, it did stimulate the market and dealers and retailers took advantage of the opportunity to justify to their clients the higher prices they were asking.

China to Hibernate

The China market, which has been extremely hot for the past few months, has at best a few more weeks of trading and will then go into hibernation until autumn. One factor is that the Chinese government is sending out signals that it will be curtailing its policy of pumping money into the economy and is ordering banks to cut back on their lending and to beef up their reserves.

Recently, there have been a fair number of meetings between the U.S. and China regarding the revaluation of the Chinese currency. The bone of contention is the huge investment that China has in U.S.-guaranteed loans and bonds. If the yuan does appreciate against a weakening U.S. dollar, there will, of course, be a loss of exchange for the Chinese, something they are not prepared to suffer just to underpin the U.S. dollar and aid the U.S. economy. If, however, they do agree to appreciate the yuan, they will no doubt have to come to some agreement to protect their U.S. dollar–based investments.

For diamonds, such movement would be a boost, because it will mean that for the largest emerging market in diamonds of this century, diamonds will be cheaper.

Investors

Recently, there has been a huge move by wealthier Chinese investors into such solid investments as property, works of art, gold and diamonds. This, of course, applies only to a small percentage of the population, but this sector has grown so rich and is so voracious in looking for something to buy that it has driven prices sky high.

Auction houses have been doing a roaring business catering to the newly rich investors in China. Both auction houses, Sotheby’s and Christies, have announced that they will be auctioning 5-carat fancy vivid blue diamonds in April and May. However, the first vivid blue auctioned — a 5.16-carat pear shape sold by Sotheby’s in Hong Kong — fetched only a shade over the low estimated selling price of $900,000 per carat. There was hope that the stone would fetch well in excess of $1.15 million per carat, but this was not the case.

Demand for large stones continues to be strong, mainly in China, but it centers on very specific stones — D, IF in top makes and in sizes from 3 carats and larger. It also appears that stones larger than 7 carats to 10 carats are the favored sizes. However, while the demand is constant and strong, buyers remain patient and will not accept prices they consider out of line. They are very well informed and have very quickly developed a feel for what prices are reasonable.

Once the Asian markets close down for the summer, all these highly priced diamonds floating in the pipeline will have to go into cold storage until the end of summer. What happens to their prices will depend on what the scenario is when the market resumes.

Article from the Rapaport Magazine - May 2010. To subscribe click here.