The diamond market has enjoyed a strong run in the past two months which has softened slightly in recent weeks. Positive sentiment reigns as polished prices have increased significantly since the start of the year (see April 2011 Research Report: Positive & Cautious), which has eased manufacturing margins even as rough prices have continued to rise.

It appears that the slight pull back in May trading was a welcome relief as many in the industry viewed with caution the hype that emanated from the March Hong Kong show. Their concern was justified as buyers sought stability to avoid an overheated market. Still, demand remains positive and price levels high, although driven by dealer demand, rather than overwhelming consumer trends.

With the immediate supply-demand factors clearly at play, as well as seasonal aspects affecting the industry, May is generally a quieter month as Indian dealers take their summer vacations. Yet, there are surely deeper factors influencing the market in 2011. In short, the world is changing — again. Indeed, if 2010 was an eventful year, but somewhat devoid of iconic moments, 2011 has already produced a number of timeless images and game-changing developments.

There is no doubt, for example, that last week’s royal wedding was a once-in-a-generation occasion that will be replayed in much the same way Prince William’s parents’ big day has been since 1981. With the loss of such jewelry and fashion icons as Elizabeth Taylor this year, Kate Middleton may well have provided the fairytale story that pop-culture has long craved, while the fashion world is likely to follow her every move and outfit.

On the political and military front, images of America’s leadership watching their troops gun down Osama Bin Laden, and the subsequent U.S. celebrations for having got him, add another chapter to the iconic yet tragic pictures from the 9/11 terror attacks on the World Trade Center in New York.

The horrific events of the earthquake and tsunami, which engulfed Japan in March were equally unforgettable and emotive and may have further signaled the country’s diminishing influence as an economic superpower.

However, the most significant game-changers to emerge so far this year have been the political uprisings which continue to sweep the Middle East. Starting in Egypt and spreading through Libya, Tunisia, Yemen, Syria, and Bahrain, protestors have finally drawn the line after decades of dictatorial abuse. To view these events in political or social isolation would be naïve. They bear major consequences for all markets, countries and economies.

An enlightened Arab world will bring investment and development to the region while a suppressed one pressures commodities, quashes consumer demand and weakens currencies. The longer the uprisings continue, and perhaps the longer these respective dictators remain in power, the more vulnerable the global economy is to rising oil prices and inflation.

All of this occurs at a time when the global economic recovery has yet to prove itself truly sustainable. The U.S. economy, still the world’s largest, it should be stressed, grew just 1.8 percent in the first quarter, the U.S. Commerce Department reported. The slowdown from the 3.1 percent growth experienced in the previous quarter came as high gas prices cut into consumer spending. Federal Reserve chairman Ben Bernanke was among those who believe this to be a temporary setback as he expects gas prices to stabilize and the pace of growth to rise.

Diamond merchants certainly should bear these factors in mind as they assess market conditions. They may also need to be reminded that the positive growth in the retail space is still being pegged against weak recessionary numbers. Furthermore, sales values have been boosted more by price increases rather than stronger trade volumes. Adjusting for inflation, sales are probably close to flat.

That’s not to recognize the positive trends in the market or the upbeat mood. The outlook remains a positive one for the diamond industry for the remainder of 2011, driven by strong consumer demand in China and India and steady improvements in the U.S. Additionally, there is a rising investment demand for diamonds that resulted from the global and political uncertainties.

The diamond market has been buoyant in 2011 and the May lull could well be a matter of the industry taking a step back to review the landscape. Taking that assessment into account and given the lessons of the recession, it is perhaps better to be more cautious than confident. While the diamond industry will be pleased at the progress made so far, the iconic images that have emerged in the past few months should serve as a reminder that more might be in store that could still prevent 2011 from being the memorable year for diamonds that the industry has sought.