The Retired Investor: Natural Diamonds Take Back Seat to Lab-Grown Stones

There was a day when a man's love for his bride was measured by the clarity and size of a diamond ring. That notion is as outdated as believing that "artificial" or lab-grown diamonds are second-class stones.

 

Chances are that if you purchased a diamond this year, it may have been manufactured in a laboratory. Lab-grown diamonds account for roughly 46 percent of the U.S. diamond jewelry market. What is interesting is that while the quantity of diamonds sold is almost neck and neck with the natural market, as a percentage of revenue, lab-growns only account for 23 percent of sales.

 

There are two trends at work here. Natural diamonds are getting more expensive and as they do, lab-grown diamonds, which are much cheaper to manufacture have become increasingly popular.

 

Lab-grown diamonds are just as real as the diamonds dug up by miners in Africa or elsewhere. The difference is that the laboratory can make them perfect while mother nature will usually produce stones with several beautiful and even romantic flaws.

 

There are two methods of growing diamonds. In the chemical vapor deposition process,  a small diamond is placed in a chamber and exposed to carbon-rich gas and high temperatures. The gas ionizes and carbon particles stick to the diamond, eventually crystallizing into a diamond. An alternative process exposes a diamond seed to extremely high pressure and temperatures (like Mother Earth) and a metal catalyst helps convert pure carbon into a diamond.

 

Both methods create diamonds indistinguishable from the natural kind, at least to the naked eye. The growing period ranges from weeks to months and the final product is cut and polished into a gemstone. The result is a diamond that is considerably cheaper than the natural stone. The downside is that it is not as rare or unique.

 

For several years, the average cost of an engagement ring with a natural diamond was between $3,200-$3,600. However, between inflation and consumer taste, diamonds are getting larger in size and cost. The average size of a natural diamond engagement ring today is just under 2 carats, 50 percent larger than before lab-grown stones came on the market. Today, the average natural diamond ring is now selling for $6,628.

 

It is one of the main reasons that the lab-grown variety has become so much more popular. The price differential between the two types of diamonds is substantial. Four years ago, the average lab-grown diamond was about 1.2 carats and cost $3,887. This year, the average size is about 1.9 carats, just like the natural diamond, but the average price has fallen by about 30 percent to $2,657. 

 

Many aging Americans still prefer natural diamonds while younger generations are drawn to the lab-grown market. As someone who grew up believing the long-lasting marketing campaign that "diamonds are forever," I still lean toward that market despite the price differential. But I also know that many younger consumers have no idea what that means. 

 

Times have changed in other ways as well. Younger American men are now going ring shopping with their fiancees rather than with a sister or female friend. It turns out that today's bride-to-be is much more frugal in selecting rings. She prefers to save money in that department and use the money elsewhere. 

 

A young friend of mine, for example, just announced his engagement last week. His bride-to-be went shopping with him to select the ring. She settled on a black diamond ring, which is quite dramatic and different. Most black diamonds are superheated or irradiated to an almost black color. These stones do exist in their natural state but are extremely rare.

 

Natural diamond U.S. salespeople also like to remind younger shoppers that lab-grown diamonds have no resale value because they are so cheap to manufacture. It is one reason why so many overseas consumers of engagement rings continue to stick with natural diamonds. But that does not seem to faze the young-and-in-love, here at home.

 

The prices of natural diamonds have fallen by 6.4 percent this year, while the world's largest diamond producer, De Beers, has had its worst year in 20 years. Lab-grown diamond sales hit $12 billion in 2023, and volumes are expected to double from 9 million carats to over 19 million carats by 2030. And prices will get even cheaper.

 

This week, to stem the slide in sales, Signet Jewelers, which owns Kay, Zales, and the Jared chains, have just launched a marketing campaign with De Beers dubbed "Worth the Wait" to promote natural diamonds as "the ultimate symbols of love." Whether that will work in a country where no one waits for anything and equating money with love is unpopular remains to be seen.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.