Demand for rarest diamonds outstrips supply

LONDON (Reuters) - Polished diamond prices are likely to be volatile this year due to a squeeze on middle America, but demand for larger, rare diamonds is booming as the number of multi-millionaires grows, a top diamond broker says.

Martin Rapaport, one of the world's leading diamond consultants and entrepreneurs whose price list is used as a benchmark for wholesale trade in polished diamonds, says a fall in the value of the dollar, in which diamonds are priced, has increased investment in diamonds as a hedge again inflation.

The wholesale diamonds market has seen sharp increases of up to 25 percent in extremely rare gemstones and Rapaport has adjusted his price list to catch up with big premiums that dealers were paying above his price list.

The price of an extremely rare, almost colorless "D", high clarity VVS1 round diamond weighing 10 carats has soared to $170,600 per carat, according to the latest Rapaport data, up 25 percent from a month ago.

Last month Rapaport took the unusual step of issuing a special notice to the trade urging them not to raise prices.

"The higher prices published in the May 23, 2008 Rapaport Price List do not reflect a sudden change in diamond prices, but rather adjustments made to reflect the level of premiums in the trading markets," the special notice read.

"We do not believe there is any reason for suppliers to raise prices based on these adjustments."

But Rapaport said the buoyancy of rare diamond prices may not be sustainable due to volatile economic conditions, such as the risk of rising U.S. inflation, combined with the credit storm and squeezed incomes in the American middle classes.

"MIDDLE CLASS IS TOAST"

"The U.S. middle class jewellery buyer is toast -- he doesn't have the money. He is living off pay checks," Rapaport said in a telephone interview.

However, at the top end of the market, demand for the rarest diamonds is surging as the number of multi-millionaires rises, especially in commodity-rich emerging markets such as the Gulf, oil-producing South American countries, Russia and east Europe.

"Demand for big stones is going up consistently," Rapaport said. "These prices are no longer speculative. They have been accepted by the market. The weakness of the dollar created a situation where the cost of diamonds in euros went down."

But Rapaport doesn't see the rally in prices of top tier diamonds running out of steam soon.

"The bubble is years away from bursting," he said.

"Diamond prices are getting very high. Diamond prices can go down, like gold," he added.

Gold prices have slipped from recent record highs as the dollar has strengthened. Gold typically benefits from a softer dollar, as it is bought as a hedge against currency weakness.

While prices of wholesale polished diamonds traded among dealers has soared, the auction house market has achieved record prices per carat, as the super-rich appear to have an insatiable appetite for the rarest gemstones as a status symbol.

Billionaire Laurence Graff, who has a store on Bond Street in London and in many other chic spots around the world, regularly appears at magnificent jewellery auctions and snaps up diamonds at ever more dazzling prices.

At a Sotheby's auction in Geneva in May, he bought a pear-shaped 3.73-carat blue diamond for 5.2 million Swiss francs ($4.93 million), setting a record per carat for any gemstone.

The wives and girlfriends of the world's wealthiest people are piling on the pressure.

"The higher the price, the more she wants the diamonds," Rapaport said. "The fact that there are very hard to get, makes them more desirable."

(Reporting by David Brough; editing by Christopher Johnson)