The old adage of what goes up must come down does not always apply when it comes to economics, but it does sometimes. Or so several of the clients of the Diamond Trading Company thought before this month’s sight in London. What they discovered was, despite gathering evidence in the rough diamond market that prices are moving southward, the cost of DTC goods had been raised by as much as 8 percent.

Speaking to Rapaport after the sight, DTC spokesperson Louise Prior said: “The long-term fundamentals in terms of supply and demand remain strong, and we certainly don’t take a knee-jerk reaction in our pricing policy.”

The situation was very different at BHP Billton’s August tender, where prices reportedly dipped by 18 percent. It appeared to vindicate statements by BHP Billiton’s general manager of Diamonds Marketing, Martin Leake, at the Antwerp Diamond Conference in May, who had staved off criticism that his company’s sales system was actually driving process higher by insisting that the tender was a fairer method and provided a more accurate picture of market demand.

For the record, it is worth noting that, whereas BHP Billiton’s prices had risen by about 50 percent during the first half of the year, De Beers’ average price rise was a more moderate 35 percent. This would suggest that, right of now, they are running about even.

All of this begs the question – where are diamond prices going?  And the answer, as it usually is when it comes to crystal ball gazing, is speculative. But most probably, while the tendency for prices to rise, even quite strongly, will continue over the long term, in the short and medium a downward correction may be in order.

And what is happening in the rough diamond market is being reflected in the polished diamond market as well. IDEX Online reported this week that its Polished Price Index fell below 146 for the first time in seven weeks. The Index had held steady since July 9, remaining between 146 and 147, which IDEX said was a record high for diamond prices. But, since the start of August the average price of five-carat round cut diamonds fell by 4.6 percent while one-carat princess cut diamonds declined by 2.6 percent. The prices of run of the mill items, such as one-carat and 0.75-carat goods, dipped by 1 percent and 0.2 percent respectively.

One of the first indications of a new mood in the market came at the India International Jewellery Show in Mumbai at the beginning of the month, where relatively strong price resistance was reported for polished goods. In India as well, reports emanated that a 10 percent premium that was being paid on DTC boxes had disappeared, and they were now being sold at a 3 percent discount.

Writing several days ago in Diamond Intelligence Briefs, the noted industry analyst Chaim Even Zohar suggested that that, while there are likely to be differences in the price fluctuations in different categories, an average fall in prices of between 15 percent and 20 percent is inevitable.  This, he stated, would correct to an imbalance in supply and demand. For while some $21 billion of rough diamonds will be distributed into the pipeline during the course of 2011, demand for rough from the industry will total about $18.5 billion.

But there are other factors at play as well. The psychological impact of the turmoil in the financial markets is clearly taking its toll, in the luxury products sector as well as other parts of the economy. A new Associated Press-GfK poll shows that 86 percent of adult Americans see the economy as "poor," which is up from 80 percent in June. Also 49 percent of those surveyed said that the economy had worsened over the past month, compared to 27 percent in June.

And if one was depending upon affluent consumers to keep prices steady, don’t hold your breath. A report by luxury consumer specialist Unity Marketing noted that its measure of affluent consumers’ confidence, the “Luxury Consumption Index”, took its steepest quarterly plunge in July since the onset of the recession between the fourth quarter of 2007 and the first quarter of 2008.   

Then there is the gold price, which briefly passed the $1,900 per ounce mark earlier this week, before settling back in the mid-$1,700 range. It may seem good for jewelers, but this not necessarily the case, because customers are being priced out of their stores. In Turkey, for example, where gold jewelry has traditionally been used as means for hoarding wealth, stores owners report falls in the monthly business volume tumbled as much as 70 percent.

And, while the reaction in gold-hungry countries like Turkey may be exaggerated, the impact of the gold price is being felt across the board. Jewelers in the United States, desperate to maintain price points during tough economic times, are being forced to consider diamond content in their jewelry and are less likely to be large price-wise when it comes to resupply. This is especially true in respect to smaller companies and Internet retailers, who do not hold significant amounts of goods in stock. Unlike the larger high-end jewelers, they are forced to pass price increases almost immediately onto their clients.

Taken together, all of this provides credence to the forecasts that, over the coming few months, diamond prices are likely to remain flat and even slip back somewhat. But Wall Street and the burgeoning price of gold do not change the longer-term fundamentals of the market. There, almost all signs point to a consistent rise in the prices of both rough and polished diamonds.

Demand for polished diamonds from China and India is expected to reach 10-15 million carats per annum by 2015, and an additional 5 million carats will be required by the United States even if slow growth in diamond jewelry sales is assumed. This means that the world industry would require at least 15-20 million carats more per year than what was required in 2010.

But, most analysts agree, the supply of rough will not be forthcoming. Over the course of the coming decade the growth in the volume of rough diamond production will be flat at best, and in fact may fall. No new major mines are coming on stream and many of the existing large mines are seeing resources depleted.

Over the long term, more demand and lower supply suggest higher prices. Some things which go up, ultimately continue climbing.