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Are cheaper diamonds a sign of something bigger?

Diamonds
Mark Evans | Getty Images

The world of diamonds might become more interesting beyond the scope of engagements and weddings.

Diamond prices have tumbled almost 15 percent over the past 12 months and that has Nicholas Colas, chief market strategist at Convergex, eyeing a larger trend. (Tweet this)

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"The reason all this intrigues me is not as a prospective shopper, but rather because the price of 'Commodity' diamonds is a very good case study in macroeconomic deflationary pressures," Colas said in a report for clients.

The decline in diamond prices can be attributed to several factors, he said, including reduced consumer demand from China, India and Japan. But companies that turn raw stones into polished gems are also facing financial pressure as banks are less willing to lend. Slower demand, tighter capital requirements and too little inflation "is causing a slow-motion inventory shrink and pushing prices lower," Colas said.

How does Colas get from falling diamond prices to a case study in global deflation?

Colas said demand from China has fallen in 2015 with reduced buying-for-inventory among mainland jewelers. Part of that could be tied to the government's anti-corruption campaign. There are still no numbers to show just how much that market has fallen this year.

The companies that turn raw stones into polished gems have also taken a hit and are working on thin margins, according to Bain Consulting. So they have to manage their inventory carefully and watch capital expenditures, Colas said. He questioned whether that could be linked to decreasing Chinese demand.

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Last September the Antwerp Diamond Bank closed its doors to new business, shutting one of the major sources of capital in the diamond industry. In addition, reports have been circulating about how De Beers, the largest supplier by value of stones, is asking clients to meet tighter credit standards.

All of this is contributing to downward deflationary pressure on diamonds that Colas said is hauntingly similar to other industrial commodities, like crude oil.

"A diamond might be forever, but let's hope the recent price action doesn't augur anything too permanent about global deflation," he said.