Fears of bubble as polished prices struggle to keep up with soaring rough.

Diamond manufacturers are finding it harder than ever to turn a profit as they are squeezed between spiraling rough prices and less than robust consumer demand. Indeed, Ronny Friedman, president of the Diamond Manufacturers and Importers Association of America, warned in an interview with New York Diamonds that there is danger of a bubble developing.

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"Polished prices are extremely high, rough is crazy high and it looks like it's not abating," he said. "As a buyer of rough, I'm amazed at where rough is being transacted. It's at unprecedented levels. I'm concerned about speculation. Governments are pushing banks to lend money so people can buy rough. It's a dangerous cycle. Some people think, they understand this market, but others are not comfortable with it. Based on my presidency of the DMIA, I'm telling people to be very careful, this could be the next bubble."

Diamond trader and publisher Martin Rapaport is sounding a similar note of alarm, warning the trade to be vigilant. "There are a lot of very tough suppliers and selective buyers out there. But you don't make money manufacturing diamonds, you make money finding buyers. The real name of the game is to find distribution channels to retailers."

The inflationary pressures are being felt at the retail end of the jewelry pipeline, analyst Ken Gassman …