The cost of diamonds per carat

Here's little graph I whipped up to show the per carat price of engagement ring diamonds, for each carat size. I should emphasize that this graph does not show the price per diamond at a given size, it shows the price per carat for a given-sized diamond. So, for example, if a 4 carat diamond costs $13,250 per carat, the total diamond cost would be 4 × 13,250 = $53,000.

Diamonds do not cost a constant price per carat. Because large diamonds are far rarer than small diamonds, a larger diamond costs more per carat than a smaller diamond. That is what this graph shows.


To come up with this graph, I used prices from Zales.com. I measured prices of round diamonds, because they are the most common shape. I focused on a cut, color, and clarity that appears nearly perfect to the unaided human eye. I looked at diamonds that had a clarity of SI2 or better, a color of I or better, and a cut of Good or better. To minimize the potential impact of price outliers, the graph measures the per carat price of the second cheapest diamond at a given carat size.

Apparently, the median size of newly-purchased engagement ring diamonds today is 1 carat. However, if someone is considering springing for a slightly larger rock, the actual price per carat of a 1.5 carat diamond is slightly cheaper than the trend line says it should be—at least at Zales.

For those on a budget, the half carat diamond is by far the best deal of all the diamonds measured by this graph. Not only do you buy half as much diamond as someone buying a 1 carat diamond, you also spend less than half as much per carat, resulting in a diamond price that is less than a quarter of the price of a 1 carat diamond.

Harvard economist: "The global economy is a runaway train"

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard and former chief economist at the IMF, says rising commodity inflation is a sign that global economic growth is out of control.

The global economy is a runaway train that is slowing, but not quickly enough. That is what the extraordinary run-up in prices for oil, metals, and food is screaming at us. The spectacular and historic global economic boom of the past six years is about to hit a wall. Unfortunately, no one, certainly not in Asia or the United States, seems willing to bite the bullet and help engineer the necessary coordinated retreat to sustained sub-trend growth, which is necessary so that new commodity supplies and alternatives can catch up.

Instead, governments are clawing to stretch out unsustainable booms, further pushing up commodity prices, and raising the risk of a once-in-a-lifetime economic and financial mess. All this need not end horribly, but policymakers in most regions have to start pressing hard on the brakes, not the accelerator. ...

I am puzzled that so many economic pundits seem to think that the solution is for all governments, rich and poor, to pass out even more checks and subsidies so as to keep the boom going. Keynesian stimulus policies might help ease the pain a bit for individual countries acting in isolation. But if every country tries to stimulate consumption at the same time, it won’t work.

A general rise in global demand will simply spill over into higher commodity prices, with little helpful effect on consumption. Isn’t this obvious? Yes, there is still a financial crisis in the US, but stoking inflation is an incredibly unfair and inefficient way to deal with it. ...

The historic influx of new entrants into the global work force, each aspiring to Western consumption standards, is simply pushing global growth past the safety marker on the speed dial. As a result, commodity resource constraints that we once expected to face in the middle of the twenty-first century are hitting us today. ...

This runaway-train global economy has all the hallmarks of a giant crisis in the making – financial, political, and economic. Will policymakers find a way to achieve the necessary international coordination? Getting the diagnosis right is the place to start. The world as a whole needs tighter monetary and fiscal policy. It is time to put the brakes on this runaway train before it is too late.

Just so readers aren't confused, even though the U.S. economy is currently slowing, it is the exceptional growth in emerging markets that is causing global commodity inflation.

Newsweek: Speculators not causing rising commodity prices

Robert J. Samuelson of Newsweek weighs in to say that financial speculators are not causing the increase in commodity prices. Instead, he properly puts the blame on increased global demand and harmful government policies.

Tired of high gasoline prices and rising food costs? Well, here's a solution. Let's shoot the "speculators." ... Gosh, if only it were that simple. Speculator-bashing is another exercise in scapegoating and grandstanding. Leading politicians either don't understand what's happening or don't want to acknowledge their complicity. ...

A better explanation is basic supply and demand. Despite the U.S. slowdown, the world economy has boomed. ... When unexpectedly high demand strains existing production capacity, prices rise sharply as buyers scramble for scarce supplies. That's what happened.

"We've had a demand shock," says analyst Joel Crane of Deutsche Bank. "No one foresaw that China would grow at a 10 percent annual rate for over a decade. Commodity producers just didn't invest enough." In industry after industry, global buying has bumped up against production limits. ...

But "speculators" played little role in the price run-ups. ... These extra funds might drive up prices if they were invested in stocks or real estate. But commodity investing is different. Investors generally don't buy the physical goods, whether oil or corn. Instead, they trade "futures contracts," which are bets on future prices in, say, six months. ...

Futures contracts enable commercial consumers and producers of commodities to hedge. Airlines can lock in fuel prices by buying oil futures; farmers can lock in a selling price for their grain by selling grain futures. What makes the futures markets work is the large number of purely financial players—"speculators" just in it for the money—who often take the other side of hedgers' trades. But all the frantic trading doesn't directly affect the physical supplies of raw materials. In theory, high futures prices might reduce physical supplies if they inspired hoarding. Commercial inventories would rise. The evidence today contradicts that; inventories are generally low. World wheat stocks, compared with consumption, are near historic lows. ...

Politicians now promise tighter regulation of futures markets, but futures markets are not the main problem. Physical scarcities are. Government subsidies and preferences for corn-based ethanol have increased food prices by diverting more grain into biofuels. ... Restrictions on offshore oil exploration and in Alaska have reduced global oil production and put upward pressures on prices. If politicians wish to point fingers of blame for today's situation, they should start with themselves.

Hat tip to Greg Mankiw.

Commodities speculation: A comparison of oil with onions

Fortune Magazine compares oil and onions to show how commodities speculation is not responsible for volatile prices:

Before the U.S. Commodity Futures Trading Commission starts scrutinizing the role that speculators may have played in driving up fuel and food prices, investigators may want to take a look at price swings in a commodity not in today's news: onions.

The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders (and not the new farms sprouting up in Wisconsin) were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April.

The volatility has been so extreme that the son of one of the original onion growers who lobbied Congress for the trading ban now thinks the onion market would operate more smoothly if a futures contract were in place.

In fact, the entire reason commodities speculation exists is to reduce volatility and allow farmers to guarantee the future price of their crops.