Diamonds Update

July Rough Diamond Prices up 5%

De Beers Diamond Trading Company (DTC) has increased the average prices of rough diamonds more than 5% at its sixth sight distribution July 7-11.  While the average was over 5%, the price of higher quality rough diamonds over one carat increased as much as 15 percent.

The next sightholder rough diamond distribution, scheduled for the week of August 18, will likely have further price increases.

The prices of polished diamonds tend to track closely with the rough diamonds because the cutters and wholesaler have to pass on the increased cost of new diamonds.  It is only a matter of days or weeks before the retail market reflects these increased diamond prices in polished diamonds and diamond jewelry.

Expected Diamond Price Increases

De Beers has scheduled sightholder meetings in July and August, which is where they sell the rough diamonds to cutters.  Industry expectations are that there will be significant price increases for rough diamonds and that the expected increases will probably take place in August rather than July.  Traditionally De Beers announces in advance what the range of increases will be but that information has not been released, resulting in anticipation of double digit increases in for some groups of diamonds.

Price increase announcements for rough diamonds are usually scheduled ahead of the three major industry trade shows (Basel in March, JCK Las Vegas in June, Hong Kong in September).  Price increases tend to be the greatest for larger diamonds since those are the items with the biggest differential between supply and demand.  The last major price increase was in May with average prices increasing about 8% but some four-carat and above diamonds increasing over 20% in one day.  Production of small diamonds tends to be more in line with demand so they have seen relatively small price increases.

The price increases for polished diamonds tend to follow close behind the rough diamond price increases so the likely timeframe is August or September.  If you are planning a large diamond purchase in the next few months, I would suggest taking action sooner rather than later.  We do not know when the retail price increases will occur, for what types of diamonds, or how much the price increases will be, but all the signs are that they will go up near the end of summer.  It would be a shame for a consumer to pay 5-10% more just because they waited a few weeks too long to make their purchase, especially if they have been made aware of the impending price increase.

Hearts On Fire Lawsuit Against Blue Nile

Hearts On Fire, the Boston based diamond jewelry company, filed a lawsuit against Blue Nile asserting that the Seattle based online retailer infringes the Hearts On Fire® trademark.  Blue Nile is accused of using “Hearts On Fire” as a search term in its pay-for-click and sponsored link advertising on search engines.  Moreover, Blue Nile is alleged to also use the “Hearts On Fire” phrase in the text of those links implying it sells Hearts On Fire® diamonds.

One of many companies in the 1990s who created brands based on the Hearts and Arrows patterns, Glenn Rothman renamed his company after his trademarked “Hearts On Fire” brand.  Within the diamond industry, Glenn is known for his marketing success as he has promoted the Hearts On Fire® name to be one of the top brand names.

Jewelers are desperate for ways to differentiate their diamonds from the price competition of online retailers and the Hearts On Fire brand has benefited.  The power of Rothman’s marketing skill is evident in that consumers are willing to pay more than double for the brand.  Ironically, the Hearts and Arrows pattern not a requirement for brilliance and sparkle, but is more of a by-product.

The Hearts and Arrows pattern is a result of diamond cut with great optical symmetry when viewed under a Hearts and Arrows scope.  Many of the exceptionally cut round diamonds display the Hearts and Arrows pattern so there is nothing unique about the brands, other than the marketing.  In fact, cubic zirconia can be cut to display the Hearts and Arrows pattern so there is nothing intrinsically valuable about the pattern other than the consumer perceptions from the marketing.

Clients of Diamond Source of Virginia are happy to find the majority of round diamonds sold by the company display the Hearts and Arrows pattern.  This is a result of only recommending round diamonds with at least Very Good GIA grades, Excellent Holloway Cut Adviser ratings, and at least Very Good proportional symmetry.  What makes Diamond Source of Virginia client even happier is that they do not have to pay extra for the Hearts and Arrows pattern.  They can get exceptional beauty for less than half the price of the brand name diamonds.

No doubt, the Hearts On Fire lawsuit against Blue Nile will generate considerable publicity for both companies.  Only time will tell how much diamond buyers will hear and learn about Hearts and Arrows patterns and if the increased awareness of generic Hearts and Arrows alternatives will lead to greater sales for Blue Nile and Diamond Source of Virginia.

Diamond Investment Fund

The rising prices in high-end diamonds have not gone unnoticed by the financial markets.  On June 24, the first publicly traded polished diamond fund will be launched on the London Stock Exchange.  The closed-end investment fund, named Diamond Circle Capital plc, will consist of rare white and colored diamonds.

As mentioned in earlier blog articles, rare diamond prices are exploding as worldwide demand grows at a faster rate than production.  In the past, investors who wanted to profit from these increased diamond prices had to purchase shares in diamond mining companies or buy diamonds directly.  Diamond company profits are not necessarily growing as fast as prices of high-end diamonds.  Likewise, buying and selling diamonds is a risky proposition for the average investor.  The new diamond fund will provide investors an easy way to invest in diamonds without having to be a diamond expert or in the diamond industry.

While the upward trend in rare diamond prices seem to be a sure thing, every booming investment seems to be a sure thing just before it crashes.  Like any speculative investment, the potential for high rewards goes with very high risks.

The diamond investment fund will be one world-class diamond collections but it is doubtful that it will have any a significant impact on the market for diamonds.  However, the launch of this new fund is a clear sign that speculation in diamonds is rampant and speculation is driving a significant part of the current price increases.

Round Diamond Prices Up 8.5% Already This Year

Even though there is a softening of the Unite States diamond retail market, prices of diamond are continuing up due to increases in rough diamond prices.  Prices for rough diamonds this year through the May De Beers sight distribution are up 8.5% overall and over 25% over the past 12 months.  However, most of the price increases were for high clarity and larger carat weights (those that will be finished to 2-carat weight).

One of the reasons that diamond prices is continuing to go higher is that the worldwide demand for diamond jewelry is still growing, thanks in part to an exploding Chinese jewelry market.

While the price increases for rough diamonds mean higher prices for consumers, it is the middle of the diamond distribution pipeline that are getting hurt the most.  The diamond cutters and wholesalers are often not able to pass on all of their cost increases and become susceptible to cash flow shortages.  For many of these diamond cutters, survival will depend on whether they can pass these cost increases to retailers and what financing support they can get from banks.

De Beers Role Has Changed

In discussions with clients the past few weeks, I have spent considerable time discussing the changes in the diamond industry, especially the role of De Beers.  The topic typically comes up when the diamond shopper makes a comment about De Beers owning vast supplies of rough diamonds and keeping diamond prices artificially high.

It becomes obvious that the average consumer is basing their perceptions of the diamond industry on stories that are now decades old.  Those of us who work in the industry every day are well aware that the industry has seen dramatic changes.

For about 100 years, De Beers operated a near monopoly by either mining or buying as much as 70% of the world’s rough diamond supply.  They did use their stockpiles of diamond to control the supply and thus the price of diamonds, keeping the industry stable during times of widely fluctuating demand and production.  A byproduct of the tight De Beers control was that they ensured the bulk of the profit left the country where the diamonds were mined as quickly as the diamonds were moved to London for sorting and marketing.

In the last decade, De Beers has dramatically changed their business model under the direction of Gareth Penny, the current managing director.  Today, De Beers only manages the diamonds it mines, which totals about 40% of worldwide production.  That means other companies market 60% of the world’s rough diamonds.  The vast stockpiles of diamonds are long gone with only enough diamonds kept to keep the pipeline of diamonds moving fluidly.

One of the other big changes is in how De Beers and the rest of the diamond industry are attempting to improve the lives of the miners and compatriots in the countries where the diamonds are mined.  There is no better example of this change than in Botswana.  The mines have long been operated as a equal partnership between De Beers and the government of Botswana but now the country is getting even more benefits.  De Beers has moved its diamond sorting operation from London to Gaborone, the capital of Botswana.  The new facility will employ 500 Botswana workers and generate another 2,500 support and related job, including 16 cutting and polishing factories built around the new sorting plant that will process about 22% of the world’s production.

The economic growth and governmental stability of Botswana have not gone unnoticed by other diamond producing countries, especially in Africa.  The De Beers/Botswana model is likely to be implemented in other countries and is expected to continue the ongoing positive change within the diamond industry.

Maximize the Price for Your Gold Jewelry

With the price of gold bouncing around the $1000 per ounce mark, consumers worldwide are sorting through their jewelry boxes for gold jewelry items they no long want.  Since the metal is being sold as scrap, it does not matter if the rings, bracelets, and other items are damaged or broken.

What many consumers do not realize is that where they sell their jewelry items may have a significant impact on how much money they get for their gold items.  Consumers must sell their gold items to retail business like jewelry stores, pawnshops, or coin dealers.  These retailers then sell the scrap jewelry to wholesale refiners who provide that service and are often located in different cities.

Just like there are no rules dictating what price a jeweler can sell an item, there are no rules on what price the retailer must offer for buying from consumers.  Prices offered by retailers can vary significantly with some retailers offering as much as double the rice as other retailers.  Why is there such a big variance in prices?

• Gold jewelry is an alloy with only a part of the weight being precious gold.  For example, 14-karat gold is 14/24 or about 58% gold.  Therefore, a one-ounce piece of jewelry only has about 0.58 ounce of gold.  When consumers bring in a bag of jewelry items, they seldom know the exact weight and composition of the metal.  Likewise, some retailers are not as experienced at determining the actual gold content of jewelry.

• Gold refiners typically pay retailers for scrap at about $20 to $30 an ounce less than the current market price for gold so are getting about 97% of the current market price.  However, retailers are generally offering consumers 50% to 75% of the gold’s value so are pocketing the rest.  With potential profit margins of 50% or higher, it is no wonder pawnshops are posting big signs advertising they are buying gold jewelry.

It is up to the retailer to decide how much of the value they want to offer the consumer and up to the consumer to accept or go elsewhere.  In fact, going elsewhere might be a worthwhile strategy if they have a significant amount of jewelry.  By getting price quotes from several retailers, the consumer can avoid the low offers and perhaps make double the money.  If you do not know what you have or what the true value of the gold is, getting numerous price quotes can help you maximize your gold jewelry sale.

If you do not have many options of places to sell your jewelry items, the more you know about your gold jewelry and the composition of the gold, the more advantage you will have when negotiating with the retailer.  If you have an accurate scales, weighing your jewelry can help you estimate the value if you can separate the jewelry into 10-karat, 14-karat, 18-karat, or 24-karat (pure) piles.  If you can get the retailer to offer you 75% of the gold’s value at current market prices, you should feel fortunate.

The more knowledgeable you are when selling your gold, the more money you will get.  Be wary of impulse selling, especially if you are depending on the retailer to tell you what you have and what it is worth.  On a recent trip to the diamond district in New York, there were people with “gold buying” signs about every twenty feet on the sidewalks.  Do not assume that you are getting a special deal in these tourist locations.  It is certainly not worth making a trip to New York or similar large city since retailers in your hometown might be willing to give you a better price.  The key is being knowledgeable so you will recognize an appropriate price.

Letseng Diamond Mine Expands Production

Gem Diamond, who owns 70% of Letseng along with the Government of the Kingdom of Lesotho, reported an 81% increase in annual diamond sale in 2007 with $152 million compared to $83.9 million in 2006.  Because of the productive operations last year, Gem Diamonds is doubling production this year when it starts its second plant in June.  The new plant will process ore when it begins mining the main kimberlite pipe adjacent to the satellite pipe, which has been the source of some of the largest diamonds discovered in the world.

Letseng is renowned for its large white diamond finds and the large diamonds provide about 80% of mine revenues.  With approximately 85% of Letseng production being gem quality diamonds, an exceptional 14-20% of those stones are over 10.8 carats.  No other diamond mine can match the large-stone production of Letseng.  As a result, Gem Diamonds is investing in facilities to take advantage of the unquenchable world thirst for large diamonds and enable them to exploit the 25-30 years of mine life provided by development of the main pipe.

Some past posts related to Letseng Diamond Mine:

Letseng Mine Produces 18th Largest Diamond

493-Carat Diamond Name "Letseng Legacy"

Graff Jewellers Purchases 493-Carat Letseng Legacy Diamond

Four Giant Diamonds Discovered at Letseng Mine

215-Carat Diamond Sold

Lesotho Promise: Largest Diamond Found This Century

Diamond Mining Activity in Lesotho

Canadian Diamond Mining Update

With the worldwide production of diamonds on the decline, mining efforts in Canada’s northern regions are continuing at full speed.  The premier Canadian diamond mine is the Diavik mine, located a mere 130 miles south of the Arctic Circle.  The mine is a joint venture of Rio Tinto and Harry Winston Diamond.  Diavik production in 2007 totaled 11.9 million carats, which is about a tenth of worldwide production.  Operations include a 650-foot excavation pit, preliminary work on a second pit, and funds committed to underground operations that will keep the mine productive past 2020.  Diavik Mine’s Kimberlite pipes have proven to be even more diamond rich than initially estimated so the owners continue to invest in future production.

Some of the other Canadian diamond mines are having economic troubles due to an unusually warm winter causing shortages of fuel, equipment and supplies.  These problems were compounded by the rising Canadian dollar, which increased the cost of diamond production relative to diamond sales that are based on the dollar.  Even though diamond prices have increased, the production costs have increased even more, resulting in economic challenges for De Beers’ Snap Lake project.  With construction costs, three times original estimates, De Beers recently took a billion dollar write down in stated value of its Canadian diamond mining operations.

De Beer’ Victor mine in Northern Ontario is planned to begin production later this year but it is facing the same financial pressures as the Snap Lake mine.  The economic troubles were intensified by the Ontario government increasing the value tax on diamond production from 5 percent to 13 percent, resulting in an 8 percent increased burden on mining operating margins.

Early in the permitting process, De Beers’ Gahcho Kue project east of Yellowknife is projected to have economics that are more favorable.  As a result, development efforts are being accelerated to recoup quicker the investments.

Tahera Diamond’s small Jericho mine opened in 2006 in Canada’s Nunavut territory with the financial support of Tiffany & Co.  The warm winter limited the use of the ice road necessary to supply the mines and Tahera was unable to meet financial obligations in January and halted mining operations.  The mining company is now seeking potential buyers for the company.

While not part of Canada, Greenland shares the same geological craton (stable part of the earth’s crust) which has produced the major diamond productions in Canada.  Hudson Resources, an exploration company, is conducting bulk-sampling operations in West Greenland to determine the diamond content of the ore.

Energy Outages Putting Pressure on Diamond Prices

For several years now, the demand for diamonds has exceeded the supply and that trend is going to be continuing for the next several years until new supplies can offset the declining production in older mines.  Recently, the supply situation has been hampered by an energy crisis in the southern regions of Africa.

South Africa’s energy problems result from a booming economy and an incompetent government that has strained the energy infrastructure.  In Zimbabwe, the problem stems from a dictator’s management crisis.  As a result, some diamond mines are experiencing a 40% drop in production compared to last year at a time with demand and prices are soaring.

The slowdown in the U.S. economy has slowed the demand for diamonds in the market that historically purchases 50% of the diamonds sold annually.  However, the economies of India, China, and the Middle East are on fast growth paths for their economies and diamond production so that worldwide demand for diamonds continues to grow.  As the growing demand hits the declining production, diamond prices are on the way up.  Diamond speculators are fueling the demand already and it is hard to image what the diamond industry will be faced with in the next 5 to 10 years of this continuing imbalance of diamond supply and demand.