Prices for both rough and polished diamonds are expected to grow at an average annual rate in excess of 5% over the next five years.

The reason for this forecast is simple - a shortage of rough supply as a result of global production remaining constant and continued increases in demand.

As it is, diamond prices are between 5% and 10% above the highs reached in mid-2008, before the global economic downturn saw rough diamond prices fall by about 60%.

According to the Rapaport Group, average prices of certified polished diamonds rose by 10.3% in 2010, while rough prices rose about 21%. The Rapaport Group is an international network of companies providing services that support the development of diamond and jewellery markets

"For the foreseeable future, five years, it seems to be the demand for diamonds is going to exceed the supply," said De Beers chairman Nicky Oppenheimer last week in a speech at the Council on Foreign Relations in Washington.

"That is simply because there are no new mines," Oppenheimer said.

The majority of diamonds are sourced from Africa, Canada, Russia, Australia and South America, with an estimated 65% of the world's diamonds being produced in African countries. About US$8.5 billion worth of diamonds a year come from African countries.

When measured by value, Botswana is the biggest producer of diamonds in the world. Diamond experts first sounded the alarm over falling diamond supply last year.

De Beers, the biggest miner and marketer of diamonds, was among those warning that the supply of diamonds in the world was declining.

In the past 20 years, the diamond industry has not yet found new diamond deposits to rival the two biggest mines in Africa owned by De Beers, or the Russian mines of Alrosa.

This shortage of new mines and the depletion of those in existence have prompted predictions that diamond production could fall further in the next 10 years.

It also means that the deficiency of rough supply is a key challenge facing the diamond industry, particularly in light of surging demand.

De Beers late last year predicted that diamond demand would rise 20% annually in India and China, with half of global growth coming from those two nations in the next few years.

Together, India and China might rival the US as the world's biggest gem buyers in the next decade.

Rapaport stated in its "Diamond Markets in Recovery Mode" report released earlier this year that prices were expected to continue their uptrend throughout 2011 and supply might periodically tick up as mining companies seek to capitalise on the strong market.

In general, the market is seen as favourable for at least five years for any company bringing successful new projects onstream.

After a five-year run, the market is expecting a slight short-term correction in rough prices and the current moderate growth of polished prices to continue.

This will partly close the gap that has opened up between rough and polished diamond prices over the past few years, although the market expects margins in the polished pipeline to continue to be squeezed.

Rapaport said the rough market could soften if supply was significantly increased - that is if De Beers ramped up production to its new full-capacity levels and there was an influx of goods from Zimbabwe's Marange fields.

However, even with a short-term increase in production, the risk of declining supply to the industry's long-term future threatens to make this scarce commodity even rarer.

"We think that rising diamond prices are likely as scarcity increases and as consumers in developing economies see prosperity and consumption improving," a Deutsche Bank analyst was quoted by Interactive Investor as saying.

"Diamond prices are more an emotional luxury buy than other commodities whose price is a function of scarcity, marginal cost and incentive for new production," the analyst said.