Demand for rarest diamonds outstrips supply

By David Brough

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.