By now, it should be clear that diamond demand and prices are highly dependent on the global economy. External economic forces operating completely independent of the diamond industry control how much money people have to spend and how secure they feel. When money and jobs become scarce, the greatest fear among consumers is that they will not be able to maintain the lifestyle that they are accustomed to.
Over the past six months, economies have collapsed. Everyone has lost money and many have become frightened about their futures. For low-income earners, the need to secure essential necessities such as food, shelter and fuel has eliminated the demand for luxury goods. The middle and upper classes are not much better off. The more they had, the more they spent and the more they borrowed. “Can we afford to send our child to college if one of us loses his or her job?” “How do I tell my wife she can no longer drive a Mercedes?” “What do we do about the second home with the mortgage we can’t pay?” When it comes to the middle class and the rich, some have been hit even harder than the poor. Husbands leave their homes every morning, briefcases in hand, going nowhere. They are afraid to tell their wives that they have lost their jobs. People aren’t thinking about new luxury purchases; they are thinking about how to manage a reduction in lifestyle.
It’s not that women no longer desire diamonds. Just because you can’t have it does not mean you don’t want it. On the contrary, the more unobtainable the diamond, the greater its aspirational demand. But desire is one thing, affordability another. For many, diamonds have become a powerful dream of desire. This is a good thing. Diamonds are getting back their mojo.
Fortunately for the diamond industry, there is still one kind of diamond demand that transcends economic conditions and other luxury purchases: the diamond engagement ring. It is the foundation and cornerstone of all that is diamond. The sweetest and dearest, once-in-a-lifetime purchase takes on even greater emotional meaning in these troubled times. Couples will continue to buy diamond engagement rings as long as they are fairly priced.
We must recognize that the economic crisis has opened up a Pandora’s box of restructured societal values. Young people are challenging the excess of the past. In a deflationary, tight-budget environment, they are questioning every expenditure, particularly expensive ones. If diamond prices are too high, it is possible that young couples will replace the diamond as the primary factor in the engagement ring. After all, the idea behind the engagement ring transcends the diamond. Essentially, diamonds are hitching a ride on the young couple’s emotions. It’s emotion first, diamond second.
If word gets out that the mining companies are keeping diamond prices artificially high by manipulating supply, young couples will feel exploited. There will be a backlash and diamonds could lose their cool. De Beers, Russia and Angola might think they are doing the diamond industry a favor by halting production and stockpiling diamonds but, in fact, they might be laying the seeds of destruction. If diamonds lose their integrity because our industry appears to be exploiting consumers during a recession, then all the king’s horses and all the king’s men won’t be able to put Humpty Dumpty back together again.
Furthermore, the diamond trade makes its living trading diamonds, not holding them. If rough diamond prices are too high, the diamond trade is hurt in two ways. First, fewer diamonds are sold and the trade’s profit margins are squeezed. Second, artificially high rough prices not only make diamonds too expensive for consumers and threaten the reputation of the diamond industry, they also destroy the ability of the diamond trade to manage and optimize diamond sales and distribution in what is turning out to be the most challenging economic cycle of our generation.
Finally, what about all those stockpiled diamonds? What if the market drops again and banks put on the squeeze? Can De Beers stop production forever? How long will Russia and Angola keep buying surplus rough? Will all those stockpiled diamonds come onto the market at the worst possible time, pushing prices down even further? One thing is sure: The diamond trade cannot afford another rough price bubble.
The big idea is that diamond prices need to be as natural and transparent as the diamonds themselves. Diamond prices need to float freely in a competitive market for ultimately, the value of diamonds is not based on their current price, but rather on the honesty and integrity of the market we create for them.
Article from the Rapaport Magazine - April 2009. To subscribe click here.