Gemstone Supply and Demand
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| Australian Black Opal |
The economics of the gemstone market would seem to be the same as for any commodity. The price in the market will be a function of the supply and the demand. If demand for a particular kind of gemstone is low, prices will fall. But when prices fall, producers tend to cut back on production since their profits are small or nonexistent. Conversely, when demand exceeds supply, prices rise. And this encourages producers to increase production, since there are good profits to be made.
Economists express this fundamental law in terms of a tendency to equilibrium -- in a competitive market, price will function to equalize the quantity demanded by consumers, and the quantity supplied by producers. This results in an economic equilibrium of price and quantity.
The law of supply and demand applies well in mature markets where there is an established supply and demand. But if supply is unreliable and sporadic, as it is in some sectors of the gemstone trade, then prices and demand are unpredictable as well.
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Natural Pinkish Red Spinel |
It is one of the paradoxes of the the gemstone business that in many cases you need supply in order to have demand. A steady supply, especially when combined with good marketing, serves to increase demand and thus push prices higher. Economists call this induced demand, where increased supply actually serves to increase demand. It's a well known phenomenon in the transportation sector, for example, where building new highways results in increased traffic.
We saw this happen in the diamond business over a period of several decades. DeBeers controlled the supply of diamonds so that there was always a steady and reliable, but not excessive, supply. At the same time they mounted a concerted advertising campaign to associate diamonds with love, courtship and marriage, under the now familiar slogan "Diamonds are Forever." The result was increased demand and higher prices for diamonds.
In the case of many colored gemstones, uncertain supply has made it difficult for the jewelry industry to promote certain gems. There is no point spending resources trying to promote a product that you don't have available to sell. This means, for example, that the prices for scarce gems like natural spinel are not nearly as high as one would expect. If the supply were greater, spinel would be promoted more and demand and prices would go up.
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| Natural Tanzanite |
Is this situation likely to change? In the case of many gemstones, the production is geographically dispersed. Sapphire, for example, comes from Sri Lanka, Madagascar, Burma, Tanzania, Australia, Thailand, Nigeria, Kenya and Cambodia. It is very difficult to control the supply from so many diverse sources. Where a gemstone comes from a single location, the task is much easier. Thus much of the tanzanite supply and distribution has been controlled by TanzaniteOne, and prices have risen dramatically. The opal industry in Australia may be next to distribute and market their gems in a coordinated way; with 95% of world opal production in Australia, they may well succeed.
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