Looking Rough For Diamond Industry, Go For Gold

Diamonds may not be a girl’s best friend during the next four years thanks to rising prices. The increase is expected to surpass gold (NYSEARCA:GLD) prices.

According to analysts, with the increased spending on luxury goods in China (NYSE:FXI), India (NYSE:IFN) and the Middle East, this could outpace the supply of this high-priced gem.

Average diamond prices for either rough or uncut ones are likely to rise 9% to $145 a carat next year, 1.4% in 2013 and 4.8% in 2014, according to Edward Sterck, BMO Capital Markets analyst.

Looking ahead to 2015, they could raise 2.6% in 2015 and then 3.2% in 2016, Sterck added.

Gold Prices to Decline

Gold (NYSEARCA:GLD) on the other hand is estimated to drop for the next three years beginning in 2013 after a 2012 estimated 19% increase, according to Bloomberg.

This year, gold spot prices rose 12% from investors looking for a safe haven away from volatile market conditions. Just this week, prices declined along with February futures prices. The five-day consecutive drop represented the longest one for the most-active contract since the five days through Oct. 28, 2009, according to Bloomberg.

Looking at the current gold prices, it reflects, “an artificial demand for gold as a hedge and as a store of value against inflation. That means the market is prone to a pretty substantial correction sometime in the future,” said Rob Henderson, Chief Economist at National Australia Bank Ltd.

Global Demand on the Rise

In addition to higher prices, the demand for diamonds will also rise, growing at twice the supply through 2020 from China and India’s growing middle classes, noted a Bain & Co. report. Global demand has an estimated growth of 6.4% per year to almost 247 million carats by 2020.

In 2010, output was 133 million carats according to Bain, with a demand for diamond jewelry likely to reach more than $100 billion by 2015, up from $73.6 billion in 2010.

By 2015, the two countries along with the Middle East will represent 40% of global diamond consumption, rising from about 8% in 2005, according to Anglo American Plc.

So who’s driving the demand?

“We expect emerging nations, first and foremost India and China, to drive demand for diamonds in the upcoming years, while consumption among developed nations is likely to moderate,” said Vladimir Sergievskiy, an analyst at Moscow-based Finam Investment. “On the supply side, the commissioning of new mines should be largely offset by depletion of mature ones.”

According to DeBeers, the U.S. demand for diamonds increased 7% in 2010, while China leapt over Japan to come in second with its demand rising 25%.

With the increased demand, came increased prices. According to Rapaport Diamond Trade Index, prices of top-quality diamonds jumped 23% in 2011, representing its biggest rise since at least 2006. The Index, which calculates the average price for the top 25 best quality one-carat diamonds, increased 14% in 2010 but dropped 0.5% in 2009.