A historical perspective on diamond price inconsistency

[oldminer]

Back in the 1990''s a friend and fellow appraiser who has his offices in Miami, FL had the idea to publish diamond pricing research in a very bulky printed quaterly book form and to sell it to appraisers and diamond dealers. It was going to be based on "asking prices" of actual diamonds he had reviewed in his office, measured with his Sarin, and graded using my AGA Cut Class system. We both felt it would be more valid than Rapaort because the actual diamonds had been examined and would be reported on per stone. This was all before the Internet and the wider spread of diamond knowledge. By comparison to today, we were in the dark ages although we didn''t realize it. Since my friend, Joe Tenhagen, was an official in the Miami Diamond Club, he had immediate access to many, many diamonds. What he found made us wonder what was going on. I''ll share it with you.

The research was based on "asking prices", just like Rapaport. Neither publication can possibly know what the actual transaction prices are.
Strangely, the asking prices for average to poorly cut diamonds was greater than for the finely cut, best cut diamonds. This seemed crazy to both of us, but we got to the bottom of it. We found that the market well understands the value of finely cut diamonds. They are highly ciompetitive at these upper levels of cut quality. However, at the lesser levels of cut quality, "asking" prices were higher because negotiations always took place on such diamonds. You can''t get to the right price without beginning high, we found out. We had been very naive about this beforehand. If a dealer wanted to pay too much for a diamond, the seller would agree, of course. This doesn''t happen a whole lot in the real world.

After a couple years of finding out that quality and asking prices had little to do with one another, or, at best, had some sort of perverse-inverse relationship, Joe abandoned his publication.

This story still has a relationship to what is going on today with "asking prices"; UV fluorescence, face-up versus actual body color, cut quality and other factors to do with diamonds. The widest range of asking prices are still associated with the outlier stones, the 2% which don''t fit the norm, and the average to poorly cut ones. This inverse relationship of asking price to quality often gets in the way of anyone researching the relative value of a particular diamond. This includes gemologists, appraisers and consumers. We all have to keep mentally aware of the circumstances when making the leap from asking price to a transaction price or to a "value".

 

[the tree sees]

Wow, very interesting. Thanks for sharing!

 

[Garry H (Cut Nut)]

it''s a funny old world Dave!

 

[glitterata]

That is really interesting!

So for example, do strongly fluorescent diamonds start out with a high asking price but actually sell for a lower price than a comparable diamond with no fluorescence?

 

[oldminer]

Fluorescent diamonds tend to trade for a bit less money than inert ones. The stronger and more visible the fluorescent effect, the more the discount. Dealers tend to ask prices with some reference to the individual diamonds cost and also to the diamonds individual value. It is a mix and each diamond is re-evaluated by each seller after it is bought. Since fluorescence is so broadly known and reasonably understood, the prices asked tend to make sense concerning this effect. it was, and to some lesser extent today, still CUT which is less well grasped by the players and the consumers. This leaves more room for a broader, less sensible range, of asking prices in a partially inverse relationship to cut quality. More likely than not, there are a few "average" cuts being sold for as much or more then the finest cuts on a daily basis. It would not be a large percentage, but if we could trace asking prices and transaction prices with precision, we''d see that the market is perfect in the overall yet strangely imperfect one stone at a time. Diamonds are not a pure commodity or there would be a tight consistency relating to the exact details of each diamond, asking price and its transaction price.

 

[strmrdr]

How much has that changed today with drop shippers and virtual lists?
If a diamond is listed high it may sit for a long time compared to aggressively priced stones.

 

[Rockdiamond]

Interesting points David!

Storm- I believe that drop shippers and virtual lists have made this a far more deceptive problem than it ever was.
If we do a search on Blue Nile for a 1.00 G/SI1 we find prices ranging from about 4k to $7100 per carat.
Even if we eliminate the "Ideal" and Signature Ideal" we see prices range from $4300 to $4900 per carat- still a pretty wide range.

I believe this is very confusing to a lot of shoppers.
I believe there''s a few reasons for these variations.
If all things were equal, the $7100 stone is waaaay overpriced.

Or the $4000 stone is a real bargain.
Or one is actually worth far more than the other......

Or the lists are not completely up to date and some stones with old prices remain.....

Or maybe it''s the fact that not all G/SI1''s are created equal- and that it''s just not possible to quantify some of the aspects that make one more desirable then the next.

I also agree with David that the "fringe" stones have a far greater differential between asking, and actual price paid.

 

[musey]

This is all fascinating. Thanks for sharing your thoughts, David et. al.!