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DIAMONDS MARKET REVIEW DESKTOP

FANCY COLOR AT AUCTIONS

In this chapter, we offer a concise overview of fancy color diamonds in the auction arena and analyze their performance on this important platform. Our primary aim is to understand why the prices of fancy color diamonds, often underperform at auction when compared to retail prices. Additionally, we explore whether the prices of these diamonds can function as a benchmark in any way.

General

Whether a low-quality fancy color diamond at an auction fetches a high price, or a truly charming diamond secures a low price, private collectors and even retailers often struggle to comprehend these inconsistent pricing outcomes. This confusion is intensified as collectors place significant importance on auction results. These unexpected results frequently become a topic of discussion during sales interactions between jewelers and collectors, creating unease for both parties.

For those who understand the auction mechanism thoroughly and are familiar with the psychology of buyers and sellers, these price irregularities are clear. Auction houses provide a welcoming and transparent platform, granting those aiming to cash out from luxury items a distinct sense of control and clarity. Selling fancy color diamonds is no exception. Sellers enjoy the opportunity to have their diamonds showcased in a beautifully curated catalog, often presented in a manner that idealizes the diamond. They can also attend the sale and witness their diamonds being auctioned in real-time, with the hope of fetching a sum far greater than the auction minimum price. Occasionally, it does happen.

According to auction house staff, roughly 70% of their jewelry buyers are professional traders intent on realizing a profit from their auction acquisitions, while the remaining ~30% are private buyers eager to incorporate another colored diamond into their collection at a favorable price. This ratio remains consistent for fancy color diamond submissions. When introducing a fancy color diamond to an auction, the house naturally sets a minimum price in line with the wholesale buying price to attract as many traders as possible. The initial bids from traders play a crucial role in reaching the minimal selling price. For many sellers, a low starting price isn’t perceived as a disadvantage, given their optimism to potentially achieve much more. Diamond wholesalers who choose to auction their fancy color diamonds are mainly driven by the need to offload the diamond from their inventory. At the same time, private individuals, who are in need of cash or have little emotional connection to the diamond, are similarly motivated to sell. Both groups may consider the wholesale buying price as a minimum, especially when other reliable exit strategies are scarce. Sellers are always hopeful that a modest minimum price will attract more interest and potentially spark competitive bidding, particularly if buyers recognize a compelling opportunity.

The Buyer’s Premium Paradigm

In high-value lots, the auction house commission (buyer’s premium) typically ranges from 17% to 20%. Collectors planning to purchase a significant item at auction, carefully calculate the buyer’s premium they need to add to the hammer price. Essentially, the money that moves from the buyer to the seller will always represent ~80% of the published price as the remaining ~20% remains with the auction house. Generally, sellers who submit a diamond to the auction house, forfeits 20% from the potential sale in advance.

Market Representation

In this analysis, our objective was to determine the percentage of fancy color diamonds that are represented in auctions compared to the total number of diamonds entering the market annually. To arrive at this figure, we centered our attention on the annual inflow of diamonds on the market that weigh one carat and above. Collectively, this results in an approximate total of 45,000 color diamonds entering the market annually, an estimate taken from our large database generating the rarity report. Next, to filter out diamonds that do not reach the auctions, we excluded all diamond categories that do not fit the typical auction diamond profile, such as diamonds graded as faint or very light, yellow diamonds that are fancy light and fancy between 1-3 carats, diamonds with a brown body color, and diamonds with very low clarity. After this filtration process, we were left with approximately 10,000 diamonds. For the purpose of our calculation, this number serves as the baseline from which we determine the relative proportion of the market represented in auctions.

Auction Data

The numbers presented in these charts are of most diamonds offered for sale between 2017 and 2022, placing them in the context of the yearly number of stones. The data in the tables specifically represent fancy color diamonds above 1 carat, encompassing all saturations, excluding stones with a brown body color. However, we did include a few rare diamonds ranging from 0.50 to 0.99 carats, which are valued with a very high price per carat.

The tables, categorize fancy color diamond as follows:
The Pink category includes all diamonds with a pink appearance, including Pink, Purple/ish-Pink, and Pink/ish Purple.
The Yellow category includes diamonds without a modifier.
The Blue category includes diamonds without a modifier.
The Other Colors category comprises diamonds with colors that have modifiers or fall outside the Pink, Yellow, and Blue categories mentioned above. such as Red, Grayish Blue, Yellow Green etc,.

Analysis

According to the findings, the total number of fancy color diamonds appearing at auction in a single year out of the 10k diamonds, constitute for less than 1% (closer to 0.8%). It’s worth noting that, while most fancy color diamonds enter the auction with a wholesale buying price for wholesalers, 27% went unsold. These findings are unexpected, especially when considering the importance given to auction prices. They often serve as benchmarks for appraisals and savvy private clients in search of a price reference.

Auction Prices as a reference

Considering the diverse preferences of collectors and the variable quality of diamonds, relying on auction prices as a reference seems to be irrelevant, especially without understanding the unique circumstances behind each sold fancy color diamond out of a 1% market sample.

For instance, a diamond of low quality may fetch a high price due to intense bidding among two proud private buyers or because wholesalers recognize its potential for saturation improvement, promising a significant upside. In other cases, a diamond of high quality might be sold at a low price if it went unnoticed by private clients, perhaps due to its placement in an unattractive piece of jewelry or because it was inspected by an insufficient number of wholesalers during the short viewing period. In both cases the result can be misleading and unrepresentative. When traders and private buyers stand side by side bidding on color diamonds, we inevitably encounter an inconsistent pricing anomaly.

Wholesale Buyers at Auctions

The group of wholesalers who regularly visit the auction houses is a diverse mix of diamond dealers and independent jewelers. Many of these dealers are well-acquainted and possess a deep understanding of auction dynamics. From time to time, they forge partnerships with the goal of mitigating competitive pressures. They find it more beneficial to own a shared portion of a rare fancy color diamond within a group at a lower price, than to own it individually at a steeper price, or, risk not owning it at all. In other cases they just lower the financial burden when dealing with particularly very high-value fancy color diamonds. Generally, wholesalers attend auctions with the intention of purchasing diamonds at prices that do not surpass those in the wholesale market. Above all, they are looking for diamonds from old private collections that have potential for color upgrading. Color diamonds from private collections often show signs of outdated polishing styles and age, such as outdated facet alignment that results in a lower inner grade, or significant chips due to improper storage or careless handling. These diamonds usually don’t meet the quality standards of modern jewelers and end up mostly with wholesalers, as they are the only ones knowledgeable enough to re-polish these diamonds, thereby improving their clarity or saturation. In some cases, if wholesalers identify a fancy color diamond with potential for a color upgrade, they may outbid a private buyer who is willing to pay full price for that diamond.

Private Buyers at Auctions

Fancy color diamonds private buyers at auctions having already studied retail prices and understand that compromises may be necessary often approach the auctions with an opportunistic mindset. Private collectors understand that they might not find a diamond that perfectly matches their preferences at the exact time they want it, and in most cases, they erroneously prioritize on quality criteria of colorless diamonds, such as high clarity, Type IIa (in pink diamonds), excellent polish, and symmetry, rather than the important features, focusing on the diamond’s visual assets. Sometimes, these private buyers feel they’ve landed a good deal because the fancy color diamond they purchased is set in a branded piece of jewelry. However, it’s worth noting that in some instances, diamond professional traders place a color diamond in a preowned empty branded mounting they own to create the illusion of an original piece. When one private buyer is bidding against wholesalers on a lot, they need to bid just one price bracket above the highest wholesaler bidder with whom they share the room. For example, if a wholesaler decides to bid up to $1,000,000, a private buyer could purchase it at $1,100,000, which will reflect a lower price in comparison to a diamond at retail with a similar GIA report. Auction houses offer diamonds in their “As-Is” condition, without imposing specific quality criteria, and they provide limited information about their origin, and in some cases, with an old GIA report. In case a need to resell the diamond arises, one needs to be aware that the accompanying pictures, as well as the diamond’s price and the initial valuation will be accessible online indefinitely. This may potentially pose a psychological challenge for potential future buyers who will carry the digital “scar” for many years. Nevertheless, despite these challenges, private buyers at auction find it worthwhile to acquire a fancy color diamond embedded in a piece of jewelry. They are driven by the excitement and thrill of the auction, as well as the potential to obtain a favorable deal.

Record-breaking prices

Record-breaking prices and the promotion of fancy color diamonds in the media have a significant impact on the diamond ecosystem. They raise awareness and generate enthusiasm for diamonds of similar colors, leading to increased demand in the market. Retailers have reported heightened interest in similar fancy color diamonds within their inventory after witnessing record-breaking prices at auctions. It is important to maintain perspective and understand that record-breaking prices at auctions make headlines and occur only when several private collectors bid against each other. However, despite the rush of adrenaline, in most cases, these record breaking prices only reach retail prices.

To conclude

In conclusion, our review has shed some light on the auction arena and the performance of fancy color diamonds within this trading platform. Despite their general popularity, these diamonds often underperform in comparison to retail, raising questions about using auction prices as a reference and their negligible representation in the overall market. The unique circumstances behind each sold diamond and the diverse profile of collectors make it challenging to draw definitive conclusions from auction prices. Factors such as intense bidding, potential for saturation improvement, low quality diamonds or a low amount of wholesale buyers attending the sale can lead to inconsistent and misleading price results.

Wholesalers, who are willing to invest in re-polishing and anticipate saturation upgrades, may outbid private buyers seeking favorable deals. However, private buyers at auctions find value in acquiring fancy color diamonds, driven by the excitement of the auction and the potential for obtaining unique pieces at a low price.

Record-breaking prices in auctions have a significant impact on the diamond ecosystem, raising awareness and generating demand for similar diamonds in the market. It is important to maintain perspective and recognize that these record-breaking prices often reflect merely retail prices achieved through competitive bidding among private collectors.