The adage that a diamond can be a best friend has lost some sparkle in recent years.
Dampened by dollar appreciation, an increase in stocks of rough stones and weakened consumer demand, the global diamond market has hit headlines of late, thanks to tumbling prices. In fact, the average, inflation-adjusted price of top-quality stones has weakened by as much as 80 percent in the past 30 years, according to the Rappaport Index, an industry benchmark, suggesting that the free fall in a material once considered a timeless store of value has been in effect for some time.
The prospects for gold, also long considered a haven for investors, are not glittering either.
Despite a 13-month high for the gold price this month on the back of interest rate cuts and a rise in global equity markets, periodic rallies in recent years have failed to halt a long-term downward trend, primarily stemming from dips in demand from emerging markets, following a long bull run at the beginning of the 21st century.
With costs relating to raw precious materials in a constant state of flux, many of the big name purveyors — luxury groups such as fine watches and jewelry houses — are under constant pressure to second-guess the market when stocking their inventories for the year ahead, trying both to protect bottom lines and to improve gross margins.
“Changeable prices have a big impact on many major players like Swatch Group, Tiffany and Chow Tai Fook,” Jon Cox, head of European consumer equities at the financial consultant Kepler Cheuvreux, wrote in an email this month.
“Typically they engage in financial hedging to smooth volatility, but the impacts of any volatility can be delayed as it takes time for shifts to trickle down and onto balance sheets,” he said. “And given the industry’s pricing power, lower precious metal and stone prices are rarely passed onto consumers.”
Gaia Repossi, creative director of the fine jewelry house Repossi, in which LVMH bought a minority stake last year, elaborated on the process this month: “We have a number of ways in which we negotiate these changes. We have expert in-house teams who have navigated these cycles many times before. So when the market is slower, we buy gold in bulk — sometimes stones but more often gold — and are really careful to always buy our materials at the right moment.
“It is the smaller artisans and one-man operations who can often really suffer from these value spirals,” she added. “If they mistime a gamble with their stone inventory, they can be really stuck.”
Other players say the effect of these tectonic shifts in pricing is minimal. The Swiss giant Richemont has said it avoids speculation and stocking ahead for its brands, which include Cartier, Van Cleef & Arpels and Vacheron Constantin, buying only upon need and thus insulating manufacturing from short-term fluctuations. And executives at other houses, such as Hélène Poulit-Duquesne, chief executive of the Kering-owned jewelry maison Boucheron, stress that the value of the craftsmanship is the primary driver of production costs, rather than the raw materials.
“Of course we pay attention to market vacillations, as it inevitably impacts on the day-to-day running of our business, but what we are selling goes far beyond price,” she said last month. “We don’t just sell diamonds, or emeralds or gold. We sell works of art and that’s what our clients are paying for.”
Ms. Poulit-Duquesne added that there were competitors in the global marketplace more likely to feel the strain — those primarily focused on lower-ticket items, geared toward middle-class purchases in emerging markets, many of whom have been hit in recent years by economic slowdown.
“In parts of the jewelry business where margins are far lower, like low-carat white diamond engagement rings, or retailers in China who sell gold pieces at the value of the market that week, then sure, these fluctuations are a problem,” she continued. “But not for players operating at the top of end of the market where demand — as you can see from sales — is still very strong.”
François Graff, chief executive of Graff Diamonds, was another luxury executive eager to stress what he called the “extraordinary resilience of the premium end of the market.”
“The scarcity of top-grade diamonds allows them to decouple from economic volatility and enjoy consistent demand,” he said. “Prices for top-quality, larger diamonds are simply not volatile, as demand invariably far outstrips supply.”
Responding to customers’ appetite for more individual and rare pieces, some jewelers are breaking away from conventional materials and designs in a bid to stabilize costs.
Oliver Chen, luxury managing director at the financial services firm Cowen and Company, said that this strategy, coupled with others to drive top-line growth, should be a strategic priority for jewelers as new spending trends start to shape the industry.
“The gains and losses around prudent inventory management are minimal when compared to the need to continually boost sales demand for product, given the state of the current global trading environment,” he said. “The need to be best in class when it comes to what you can offer to clients has never been more important.”
Mr. Chen noted that the business traditionally has been based on gift giving. “But now,” he continued, “far beyond just the materials used, which make a sparkling purchase a valuable investment, it will be the brands who create designs that wealthy women will buy for themselves, rather than wait to have it bought for them by their husbands or fathers, that creatively and commercially will really stand out from the crowd.”