Ray DiGiovanni remembers the moment it hit home just how much diamond prices have risen.

He was appraising a 1-ct. stone much like one he’d bought last year for approximately $4,500. This year, he found a similar stone wholesaling for $5,600—only slightly less than what his stone is retailing for.

“That was a real wake-up call,” says the gemologist for Greenfield Jewelers in East Brunswick, N.J. “To go up so much in one year, that’s crazy.” And things have been even worse for a shape that’s always popular in his store—princesses. “The discount off the [Rapaport price] list has dropped significantly,” he says. “Every month, you go: ‘How much now?'”

It wasn’t supposed to be this way. Many figured that if De Beers lost market share, the world would choke on diamonds, and prices would plummet.

Instead, the opposite happened: The market is suffering from a serious drought of sought-after stones—this in spite of two new Canadian mines coming on stream and De Beers’ selling off most of its stockpile and no longer acting as “market guardian.”

Rough rises. DiGiovanni and other jewelers say the jump in price hasn’t really cost them sales, since the increases are across the board.

“We’re all drinking from the same well, so consumers will have no choice but to accept those prices,” he says.

That’s true: All major rough suppliers—including Rio Tinto, BHP, and De Beers’ Diamond Trading Company—have upped prices by around 15% since the beginning of the year, although the DTC’s rough is considered cheapest. Prices have been boosted even further by traders speculating that the shortages will continue.

At a recent press conference, De Beers managing director Gary Ralfe said the trade must get used to rising prices.

“If we don’t have more diamonds to sell, and our competitors don’t have more diamonds to sell, and there is a demand for them, inevitably that means that there must be further price increases,” he said, adding that he hopes the increases “will be orderly and steady, [so] that we don’t in any way deter the end consumer.”

The rough increases are filtering down to the polished market. “Little by little prices are heading higher,” says Ronnie Friedman, the recently installed president of the Diamond Manufacturers and Importers Association. “What looked like a high price four weeks ago is not a high price today.”

Yet, much to the dismay of manufacturers, retailers have been able to resist at least some of the increases. Ralfe estimated that polished prices have climbed only 10% this year—quite a way behind rough-price increases.

“There has always been a big lag between rough and polished prices,” Ralfe said. “But it seems to be particularly the case now.”

This means that those who make their living transforming one into the other are once again getting squeezed. And with a lot of manufacturers (including ex-sightholders) chasing not a lot of rough, some pay high prices just to keep their businesses going. The situation has gotten so out of whack that commentator Chaim Even-Zohar felt compelled to beg manufacturers not to pay unsustainable rough prices during an otherwise lighthearted fashion event in India.

Supplier of Choice has little supply. How did things get this way? Many believe it’s the result of lack of supply on the rough end combined with more action on the polished side. The growth in demand reflects better economic news from the United States, Asia, and Europe, although De Beers also would credit Supplier of Choice, its program designed to stoke demand by increasing industry advertising.

In fact, Supplier of Choice may have worked too well: Demand is so high that even the DTC can’t meet it. The DTC says worldwide retail sales jumped 7% in the first half of 2004—but the overall value of DTC rough sales for the same period grew only 2.6%. And when you factor in the 15% price increase, it’s clear the DTC sold far fewer diamonds this year (in volume) than it did in 2003—even though sightholders surely would have bought whatever was offered.

Ralfe admits the company has fallen short, as production has been disappointing at its mines. And with its famed stockpile mostly depleted, there is even talk that the DTC may not fulfill its clients’ ITOs (intentions to offer), the allocations it agreed to at the beginning of the year. (Spokeswoman Lynette Hori says: “The ITO for our clients for this year is broadly in line with the second half of last year, and we fully intend to sell as many, if not more, diamonds in 2004 than we did in 2003.”) Of course, De Beers has been saying for some time that it has fewer diamonds—most notably when it cut some 30 sightholders at the launch of Supplier of Choice—but now, in the words of one sightholder, “People finally believe them.”

And while the DTC is no longer the only game in town, the other suppliers are not necessarily filling in the gaps. There is considerable competition to buy from the mines in Canada. In fact, some of their best stones already have been pledged to local cutters, and—in the case of Diavik—Tiffany. There’s also some nervousness about the possible closure in 2008 of Australia’s Argyle mine, the principal supplier to India and the small-goods market. Executives at Rio Tinto, the mine’s owner, haven’t made a decision yet, but even if the mine remains open, its production will likely fall by half—meaning the price of those goods will likely rise as well. (See “Argyle’s Fate Could Affect Small Diamond Industry,” JCK, August 2004, p. 42.)

At the recent Rough Diamond Seminar in Israel, the big talk was of exploration and the need for new sources. Paul Samson, vice president of business development for BHP, owner of the Ekati mine in Canada, says diamond mining is so profitable that BHP is devoting nearly 40% of its exploration budget to it. “We as an industry need to redouble our efforts at exploration,” he said. “The industry requires an Ekati every two years to keep up with the growing demand.”

There is even speculation that the ultimate beneficiary of all this may be synthetic diamond manufacturers, although for now they, too, have problems with supply.

Supply-side economics. What’s worrying to some is, as Friedman notes, “Prices are very high because there is a lack of supply, not necessarily because there’s a demand.” And that is not a good omen for an industry that’s supposed to become more “demand driven.”

Some, eyeing some of the recent price increases in the Rapaport Diamond Report, have uneasy flashbacks to the diamond speculation frenzy of the late 1970s. But when asked at the conference call about the possibility of another “bubble,” Ralfe pronounced himself pleased with market fundamentals. Even so, industry leaders like Maurice Tempelsman have criticized the rough producers for initiating price increases that are not necessarily sustainable. But some are more understanding.

“If you were a mining company, and you only had goods for five customers and there were 20 knocking on the door, what would you do?” says Antwerp manufacturer Stephane Fischler. “You have people paying high prices just to get their foot in the door and to show how strong they are. The mining companies are enjoying the ride.”