Diamonds have long been regarded as a stable investment asset that can provide steady returns. However, the diamond market has seen increasing volatility in recent years. When buying diamonds for investment purposes, it is crucial to understand the key factors that drive diamond prices. This article will examine the major forces influencing diamond values, including controlled supply by cartels, emerging lab-grown diamonds, consumer demand shifts, and macroeconomic conditions. By appraising these core diamond investment factors, investors can make informed decisions when allocating capital into diamonds.
Diamond cartel’s supply control policy once ensured stable pricing
For much of the 20th century, diamond prices steadily rose due to supply control by the De Beers cartel. By restricting diamond supply and stockpiling inventory, De Beers created artificial scarcity that allowed it to dictate prices. However, its market share has declined from 80% in the 1980s to around 30% today due to competition. With less control over global supply, De Beers can no longer smooth out diamond price fluctuations as effectively.
Lab-grown diamonds gaining share and disrupting market
The growing popularity of lab-created diamonds has disrupted the market. Prices of lab diamonds have fallen to 20-30% of mined diamonds. While still a small share, laboratory diamond production is rapidly increasing. As lab diamonds become more affordable and indistinguishable to consumers, they may substantially reduce demand for mined diamonds. This technology shift could exert lasting downward pressure on natural diamond prices.
Demand highly dependent on economic cycles
Diamond demand is closely tied to the state of the global economy. During recessions, discretionary purchases of diamond jewelry tend to decline. Demand from China and India, which comprise about half of consumption, is also vulnerable to fluctuations in those countries’ growth rates. Hence, macroeconomic trends significantly sway diamond investment returns.
Industry no longer able to smooth out price swings
Whereas De Beers once stored excess supply to mitigate diamond price volatility, today’s more fragmented industry lacks this capability. When demand softened during the 2008 financial crisis and COVID-19 pandemic, prices dropped sharply. Without a dominant player able to restrain supply, temporary demand reductions now translate into major downturns. Investors must account for this increased volatility risk.
Key forces impacting diamond prices include decreased supply control, lab-grown diamond growth, cyclical demand, and reduced volatility smoothing capacity. Considering these critical investment factors allows for prudent diamond allocation.