Don’t Let Short-Term Problems Blind You to Long-Run Positives - Dec.2008

In 1980, Richard Liddicoat, the late Chairman of the Gemological Institute of America, joked that to report on diamond prices is like reporting on your tires in the middle of a road trip. Today, it is probably more like changing tires on a flying airplane.

While there have been reports in the media about diamond prices falling, most of the decreases have been on the rough side, and getting a handle on prices in a slow market like this one can be difficult.

For example, this week we were looking for a seven carat stone. We found two of them. Between the two stones, there was a 50% difference in price. The difference was one cutter wanted to sell. The other wanted to wait.

There are so many conflicting opinions and assessments about what is going on in our industry right now that it is hard to make any kind of final judgment.

On the one hand, these are extremely hard times. For example, one young cutter told us that his father gave him clear instructions, "Don’t buy and don’t sell." He shouldn’t buy because of the uncertainty of the times and the uncertainty of the prices. But he also shouldn’t sell because he didn’t know which of his customers can be trusted to pay their bills in January 2009.

That is the pessimistic view. It is shared by enough people that trading has come to a virtual standstill.

On the optimistic side, even with the recent drops in prices, the dips are hardly as big as we are seeing in the stock market and with some other commodities.

One large dealer told us he is ready to buy at "decent" prices any stone between three carat and five carats.

This optimistic view is shared by Diamond Trading Company Managing Director Varda Shine, who recently said that: "Diamonds are a tangible product, a luxury item that expresses emotions, which is why they have greater value than other luxury goods. The value of diamonds is expected to rise because, when looking at demand compared with supply, there is a very wide gap looking ahead three to four years.
"No large diamond mine has been discovered in the past twenty years, and diamond reserves in the ground are shrinking. On the other hand, the increase in the middle class in China and India is boosting demand for diamonds."
One diamond dealer recently gave five good reasons for buying diamonds: "Shrinking supplies." "Stock market instability." "Real estate volatility." "Inflation." "Political uncertainty."

In the long run, this thinking is correct. The supply-demand curve for the industry looks very favorable. In fact, it is hard to think of many industries that have such a good long-term perspective for growth as the diamond industry.

The question is, how long this long run will be. People who bought very large stones, such as four carats and above, are, for the time being, stuck with them. Take a look at the recent auction sales, when some large stones didn’t sell, and those that did sold at a very low price. (See our report on page 5.)

Still, we remain optimists at heart. Many years ago, at the height of the 80s crash, the Diamond Registry’s Joseph Schlussel was interviewed by Barron’s, and told the reporter that the market will recover. At that point, his wife said, "Are you sure?" That exchange made into Barron’s.

For once, the husband was correct. The diamond market did recover, although it took a few years. And it will recover again. Not overnight, but it will happen. Now, things are bleak. But in the long-run, we should count ourselves fortunate we’re in this business.  v