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When Diamond Prices Fall

Diamonds are considered to be one of the most durable, if not perfectly durable, consumer goods. Because diamonds are highly durable, and thus are typically purchased only once by an individual over a long period of time, the demand for diamonds depends on consumer expectations about future prices. Presumably, a prospective customer who expects diamond prices to decrease over time would be willing to wait to make the purchase – so long as the gain from price decrease is greater than the opportunity cost of waiting.

Historically, the diamond industry worked to combat this issue through clever advertising and rigid supply control. Consumers were slyly coerced into collectively sharing artificially inflated valuations of diamonds. Diamonds were marketed as scarce, precious, and exceptionally valuable. They were tied to the concept of love and marriage, in effect magnifying the opportunity cost of waiting to make a purchase. Diamond producers followed predetermined price progression strategies, raising price by a few percent each year. These tactics, for a long time, worked to keep diamond prices high.


Today, diamond prices are driven by market forces, and this has proven problematic for the industry.


Reduced demand amid slowed economic growth has sent tremors through the global diamond pipeline. Chinese diamond purchases decreased significantly amid the country’s short-lived stock market surge, with consumers pouring money into equities instead of jewels. Following the economic downturn, Chinese consumers, who represent the second-largest market for diamonds, have been understandably reluctant to spend disposable income on diamonds. Low oil prices and a weak ruble in the Middle East and Russia have also contributed to the decline in global diamond demand, resulting in significant price decreases for diamonds around the world.


According to the Rapaport Diamond Trade Index, one-carat polished diamond prices have fallen 27% on average from their high in mid-2011, while larger 3-carat diamonds are down 23% over the same time period. Consulting firm Bain & Company estimates that diamond prices fell 25% in 2015. Inflated expectations for future growth in demand were not realized, resulting in excess stock accumulation for several of the world’s top clearinghouses.




So what happens when diamond prices fall?


The problem lies in the diamond industry’s deeply tangled supply chain. Consumers aren’t taking the bait on lower prices, and retailers have found themselves stuck with high levels of inventory. As a result, they have begun to cease purchases from wholesalers, sending the ripple further upstream. De Beers and other prominent industry players have been forced to close mines and factories in countries such as South Africa and Botswana, putting thousands of miners, cutters, and polishers out of work. Consolidation at the midstream level of diamond production has intensified due to the high level of business closures. Developing nations whose economies depend on the diamond industry are particularly feeling the adverse effect, seeing sharp cuts in GDP. Anglo American, parent company of the famed De Beers, saw its shares hit a 15-year low in August of 2015.




Perhaps, the immensely successful marketing tactic behind the diamond has lost its charm. Or, more likely, the diamond industry is suffering the effects of a lag in the pipeline, and prices will eventually bounce back.



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  1. Athena Cao Athena Cao

    As we saw earlier this term from another blog, De Beers strategy was brilliant because it positioned diamond outside of the scarcity and price equation. But the trick might be getting old today. As more and more people become aware of the fact that there are more diamonds than gold, the price of diamond is slipping as Walker points out in this blog. So what now? Do we have a similar situation as the oil crisis? Should suppliers simply stop producing?

  2. ruffingk18 ruffingk18

    I think that suppliers may need to slow down production. Diamonds are a luxury item and while there strategic advertising may have worked to inflate prices previously the same strategy cannot be used during an economic downturn. People may not be trying to wait for the price of diamonds to drop but they may simply be less willing to spend a large sum of money on a luxury item that doesn’t have a high liquidity value.

  3. grantk17 grantk17

    In all honesty, the notion of waiting for price to drop is somewhat irrelevant to me in some cases of diamond purchase. Perhaps I’m being more of a romantic than an economist, but buying a ring with which to propose is not something I view as a wait and see game. If diamond prices are high in 2016 but you expect them to decrease by 2020, are you going to wait four years to propose? The answer is likely no. Diamonds really are forever – there will always be some semblance of demand. Although trends and changes in disposable income might influence purchases such as gifts or Valentine’s gestures, there is never going to be a replacement for a diamond ring in proposing. But with this, the issue of supply becomes tricky. Cutting back supply could result in eventual price increase based on the notion that diamonds will always be in demand. With this, I contend logical diamond suppliers ought to continue to close some mines until prices return to higher levels.

    • doncheza17 doncheza17

      I agree with this point especially considering that diamonds are often classified as a luxury item. If we draw a parallel between diamonds and other luxury goods (let’s say a sports car), most consumers bases in this category often have flexible and disposable incomes. I don’t think for most high-end diamond buyers that a marginal change in price is going to alter their preferences.

    • przybylag17 przybylag17

      I agree with you, and think you make a really good point that someone planning on proposing isn’t going to wait a couple years for prices to change. But, depending on their socioeconomic background, they might wait a month or two. Also, when diamond prices are lower, people who otherwise might not have bothered buying another diamond might reenter the market – for example, a middle class family might purchase a diamond to celebrate a wedding anniversary when they might have bought a different gem if diamond prices had been high.

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