Weaker Diamond prices predicted

“Recession in the major diamond markets will ripple back to the cutting centers and will almost certainly lead to weaker prices for rough and polished diamonds,” RBC precious metals analyst Des Kilalea wrote in a research note about the sector.

Kilalea said some predicted diamond prices would fall by more than 20 percent including the larger high-quality diamonds, “which have seen remarkable strength in the past year.”

“The party is over for diamonds, at least for the next two years,”.

He explained that demand for diamonds by the jewellery trade was starting to slow as the U.S., Europe, and Japan, where consumer disposable income was being squeezed and jobs have been lost, accounted for 70 percent of world demand.

“More pain is likely in the months ahead as major financial companies and manufacturers lay off staff,” he said.

RBC showed that while the sharp downtrend in the U.S. consumer confidence index – which more than halved between January 2006 and June 2008 – had been broken in July, August and September, the downtrend was expected to return in October “given the major uncertainty in financial markets.”

In addition, Kilalea added that cutting center debt was another factor in assessing the strength of the industry as debt had nearly tripled to $15 billion since 2000. Liquidity is further expected to be constrained by banking turmoil, with the partial nationalization of Fortis, which owns ABN Amro Diamond Bank.

He also warned of the prospect of some recycling of diamonds, particularly diamonds sold as investments which could lose value or diamonds bought by wealthy individuals who face major margin calls.