How is the diamond market changing

How has the diamond business changed? A Zurich dealer tells

Younger generations have a different concept of jewelry than their parents and grandparents. This has an impact on the demand for diamonds.

There is an apocalyptic mood on Zurich's Bahnhofstrasse. The once posh shops are barricaded, rubbish lies on the street, here and there careless figures burn rubbish in rubbish bins to warm their hands. Bankers, emaciated to skeletons in their worn winter coats, stand in a long queue at Paradeplatz. They hope to get hold of a warm potato soup in the entrance hall of the former Credit Suisse, which has been converted into a makeshift soup kitchen.

Anyone who has sewn a diamond into the hem of their jacket in such a hopeless situation, in which all structures have collapsed and everyone is on their own, can calculate the best chance of escaping this inferno. Because diamonds are the hardest currency there is. No other material asset is so mobile and stores so much value in such a small space. A diamond cut to a brilliant-cut diamond weighing two carats (0.4 grams), which meets the highest standards in terms of purity and color, can cost a good 50,000 francs. This is currently roughly equivalent to the price of a kilogram of gold.

Weak demand

And yet: The diamond market is going through difficult times. According to a study by the consulting firm Bain, the demand for gemstones is weakening. Their prices have tended to crumble since an interim high reached in 2011. There are mutliple reasons for this. Probably the most important: younger generations have a different understanding of jewelry than their parents and grandparents. For them, piercings or tattoos are definitely alternatives to gemstones. They also place less emphasis on quality, are price-conscious and are increasingly using online channels to shop. Jewelry vendors are struggling with the trend toward digitization, which is addressing new customer needs and undermining their traditional business model.

The changes in buyer behavior are also felt by a Zurich diamond dealer who attaches great importance to discretion and therefore wants to remain anonymous. Unlike in earlier times, he now sells fewer small stones to his customers, primarily goldsmiths, jewelers and small businesses in the processing industry. On the other hand, given the low interest rates and the associated investment crisis, wealthy customers often purchase selected larger diamonds - partly to show off their purchasing power and satisfy their own ego, but also to invest in diamonds as alternative investments. The diamond dealer strongly advises against viewing gemstones as a separate investment category. Instead of speculating on price increases, according to his advice, one should think long-term and rely on their stable value.

Diamonds are not only struggling with changing jewelry terms and new trends in fashion. The lack of transparency in this market is a further complication. It is difficult for a buyer to be certain of the origin of a gemstone. Much has been done to stop the trade in so-called blood diamonds. This includes gemstones that are mostly illegally mined and sold in conflict areas in order to finance parties to the conflict.

At the beginning of 2003, governments, the diamond industry and civil organizations agreed in the so-called Kimberley Process to prevent diamond smuggling by means of state certificates of origin. But the problem with this self-regulatory mechanism remains that it has no binding effect, hardly offers any sanctions and certificates of origin are difficult to check. It is therefore all the more recommendable to buy diamonds only from trustworthy specialist dealers.

From the laboratory

And last but not least, there is competition for diamonds in their own ranks. Today it is possible to produce inexpensive synthetic diamonds in the laboratory, which are mineralogically identical to natural diamonds. It is true that their market share is still small today. If synthetic diamonds, which lay people find difficult to distinguish from naturally grown stones, gain acceptance among buyers, they could become a viable alternative. This is also because, with some certainty, they do not come from conflict areas.

From an ideal point of view, however, a diamond that has grown in nature remains something special. Its rarity also protects it from falling prices, as is conceivable with synthetic stones that can be multiplied at will. The latter are not suitable for long-term value protection.

“A diamond is forever” - this insight has given mine operators, processors and jewelry manufacturers steady growth over almost the entire past century. That’s over now. It is questionable whether higher marketing expenditure alone, as the industry is planning according to the Bain study, will bring about a change for the better. That will hardly be enough to cope with the industry-wide upheaval.