Digest: The Strange Reason Diamond Prices Are Collapsing

Plus, Britain Sets Off a Mortgage Bomb.

Welcome to the Sunday digest… my breakdown of the things we’re thinking about and talking about in the Global Intelligence world. 

First up this week… the collapsing price of diamonds. 

In February 2022, diamond prices hit an all-time high amid the pandemic consumer products boom. Since then, however, they’ve fallen by around 18%. This year alone, they’re down 7%, according to data from the Global Rough Diamond Price Index. 

That’s a pretty dramatic decline… but that’s not what’s interesting about this story. 

What’s interesting is the reason for the fall—the rise of “lab-grown diamonds.” 

As the name suggest, lab-grown diamonds are created in laboratory conditions using extreme pressure and heat… in essence recreating the geological conditions in the Earth’s crust that forge natural diamonds. 

These lab-grown diamonds are chemically, physically, and visually identical to natural diamonds. And it turns out, a lot of consumers actually prefer lab-grown diamonds to the natural kind. 

Diamond mining has a notorious reputation. Many buyers are happy to hear that they’re getting a lab-grown product, since it precludes the possibility that they’re buying a so-called conflict diamond, or blood diamond. It also means the diamond was produced under more environmentally sustainable conditions. 

Moreover, lab-grown diamonds are much cheaper to produce since you don’t have to open a dangerous, expensive mine. This means they also cost a lot less to the consumer… a price advantage that is growing year on year as the technology for producing lab-grown diamonds improves. 

According to Ankur Daga, CEO of Angara Jewelry, “Three years ago, you would be able to buy a lab grown equivalent [for] 20% to 30% off of the natural price. Now it’s anywhere between 75% and 90% off natural prices.” 

This price advantage means lab-grown diamonds are capturing an ever-growing share of the market, rising from just 2.4% of diamond sales in 2020 to over 9% year-to-date in 2023. 

These growing popularity and cost advantages are leading many analysts to predict that diamond prices could further collapse from here, with Daga forecasting a 40% decline from the 2022 all-time high. 

The age of diamond mining could be coming to an end… 
 

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Next up, the U.S. sends mixed messages on crypto… 

If you’re a regular reader, you’ll know I’ve been writing extensively in recent weeks about the Securities and Exchange Commission’s war against crypto. (Read more about this in recent Field Notes columns here and here.) 

In early June, the SEC sued both Coinbase and Binance, the two most important crypto exchanges on the planet. The agency accused the pair of selling unregistered securities, among other alleged regulatory violations.  

This is part of a long-term pattern, in which the SEC has pointedly refused the crypto industry’s pleads for clarity on which regulations apply to it, while simultaneously punishing the industry for supposedly violating the rules. 

It’s a frankly bizarre approach, especially given that SEC head honcho Gary Gensler noted—back when he was a blockchain professor at MIT—that 75% of the crypto market “is non-securities. It’s just a commodity.”  

Well, this week another of the most senior mandarins of the U.S. economy waded into this fight… 

On Wednesday, Jerome Powell, chair of the Federal Reserve, told the House Financial Services Committee that crypto is here for the long haul, saying it “appears to have staying power as an asset class.”  

He added that the government should be working to regulate the industry, specifically mentioning stablecoins, which he said the Fed sees “as a form of money” that should be overseen by the U.S. central bank. (Stablecoins are cryptos that tightly track an underlying asset, like the U.S. dollar, on a 1:1 basis.) 

So, we have one federal agency attacking the crypto sector, while another calls the industry an issuer of money.  

It’s chaotic messaging… to say the least. And it explains why crypto companies are fleeing the U.S. to set up shop in other major economies like the EU, which has already enacted clear and comprehensive crypto legislation. 

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Finally this week, England sets off a mortgage bomb… 

On Thursday, the Bank of England, the U.K.’s central bank, raised interest rates by 0.5 percentage points. This bigger-than-expected hike was the bank’s 13th consecutive interest rate rise in a bid to tame inflation. 

Britain’s inflation rate was a stubbornly high 8.7% in May, unchanged from the previous month. That significantly exceeds the 6.1% rate in the EU and the 4% rate in the U.S. Moreover, the Organization for Economic Cooperation and Development forecasts that Britain will post the highest inflation rate of any major global economy in 2023. 

After the Bank of England’s 13 hikes, interest rates in the U.K. are now at 5%, and the financial markets expected rates to hit 6% by the end of the year. 

That’s a potential disaster for mortgage holders who need to refinance this year or next. 

Mortgages in the U.K. work differently than the U.S. Most people have a fixed rate for between two and five years, after which they need to accept a new fixed rate or move onto a variable rate. 

A few years back, interest rates were in the 1% to 2% range. This week, the cost of the average two-year fixed-rate mortgage rose above 6%. 

So, borrowers who are coming off their fixed rates in the coming months are looking at a massive spike in their mortgage bills. In fact, if rates remain above 6%, households will need to spend around $350 more on their mortgage each month on average, compared to March 2022, according to the Institute for Fiscal Studies.  

That’s a lot of added expense. And this problem is going to affect huge numbers of families. 

Some 2.4 million mortgage holders in the U.K. are due to come off their fixed-rates in the next 18 months… leading to warnings of a “mortgage bomb,” or a massive spike in mortgage defaults.  

This could weaken Britain’s already struggling housing market, and further depress its moribund post-Brexit economy 

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website. 

Enjoy the rest of your Sunday.