Prices for large white and colored diamonds was on fire until the financial panic hit world markets. Since then, the market has all but paused. Gem experts are holding their breath waiting to see how the market shakes out.

On Wednesday, Christie’s will test the market again in London with the Wittelsbach diamond (below), a very large stone once owned by King Phillip of Spain and given as a wedding present. The Bloomberg story below outlines the debate over these diamonds:

The 35.56-carat fancy grayish-blue stone, mined in India and owned by the same private collector since 1964, is included in Christie’s Dec. 10 London sale. It will be the most valuable stone offered by the auction house this year.

“It’s a very subtle stone,” said Keith Penton, head of Christie’s jewelry department in London. “Connoisseurs really love the way it hasn’t been re-cut since the 17th century. But they’re also looking at the size and the color, and the historic provenance. There are so many angles to this one.”

“If someone buys it for 9 million pounds, it’ll be because of the history,” said Francois Graff, managing director of the London-based jewelers, Graff Diamonds. “It’s not a stone we’ll be looking to buy. It was cut a long time ago without the benefits of modern technology. Buyers of extremely rare diamonds expect excellence in all aspects,” said Graff in a phone interview. [ . . . ]

(More, including Graff’s plans to cut a 200ct. diamond after the jump.)

“There’s been a cooling off at the middle and lower end of the diamond market,” said Graff. The price of commercial stones between 0.5 and 1 carat has “stabilized” after falling 10 percent to 15 percent. “But people are still investing at the top end,” he said.

On Dec. 2, www.miningweekly.com reported that Graff Diamonds had paid $18.4 million for the 478-carat rough-cut “Light of Letseng” diamond, mined in September in Lesotho. The purchase was confirmed by Francois Graff, who said the price was thought to be a record for any rough-cut diamond. “We’re hoping to be able to cut a D flawless stone of at least 200 carats out this,” he said.

“The middle market is weaker, but we’re finding that confidence in special things is maintained,” said Penton. “It’s a great way of storing wealth.”

Penton said the 9 million-pound estimate for the Wittelsbach Diamond had been set while considering recent prices in the jewelry market.

“We think the estimate is a fair reflection of its rarity,” he said.

Diamond May Fetch 9 Million Pounds at Christie’s, Defying Slump (Bloomberg)