Diamonds as an investment

An uncut diamond, not showing the prized optical properties of cut and polished versions.

The popularity of diamonds has steadily risen since the 19th century as a result of successful marketing strategies. Approximately 30% of mined diamonds are used in jewelry and 70% for industrial uses (such as lasers, drill parts and surgical equipment).

Price fluctuations

In the second half of the 20th century, substantial diamond discoveries were made in Russia, Australia and Canada, making it more difficult for De Beers to purchase all global production and influence diamond prices. The De Beers monopoly officially ended in 2001, following several lawsuits filed in U.S. courts alleging De Beers “unlawfully monopolized the supply of diamonds, conspired to fix, raise, and control diamond prices, and issued false and misleading advertising.” From 2000 to 2004 diamond prices declined as the last remaining De Beers stockpiles were depleted by new demand coming out of Asia. Diamond production is now shared between Rio Tinto, Alrosa, De Beers, Dominion Diamond Corporation, Petra Diamonds, and several smaller players.

Polished diamond prices vary widely depending on a diamond's carat, color, clarity and cut, sometimes referred to as the 4 C's. In contrast to precious metals, there is no universal world price per gram for diamonds. The industry refers to price guides such as the Rapaport Diamond Report, PriceScope, Ajediam Antwerp Diamonds Monthly and The Gem Guide, which are published weekly, monthly or quarterly. Gemstone specialty organizations have varying standards which can be used to aid in diamond identification and pricing, including GIA, HRD and IGI. These organizations focus on research and education, which they pass on to their members and the public.

Financial feasibility

On August 7, 2012, the USPTO patented a process that classifies Investment Grade Diamonds for commercial trading and financial investments, the precursor for diamonds being a publicly traded asset class. As a result, a Physically Backed Diamond ETF is currently under US Securities and Exchange Commission Registration and is anticipated to be available on the NASDAQ Stock Market by 2014.

Polished diamonds

An alternative example of such a price fall caused by introduction of a new simulant strongly undermining prices was the permanent fall in natural pearl prices with the introduction of cultured pearls. The mechanism by which prices were affected was complex. In part because of the social acceptability of wearing cultured pearls to much of the market, customers migrated from the natural to the lower priced cultured product. This altered the supply and demand situation for natural pearls and perhaps the overall prestige of pearls in general was lowered. In cases where synthetic stones have been much less socially acceptable to the market as a replacement for the natural version, the prestige of the natural stones has been retained. Thus increased availability and lowered prices of synthetics may or may not have major implications for the future price of natural diamonds. In addition, the introduction of synthetic rubies in the late 19th Century did not appear to have a permanent effect on the price of natural rubies.

There are several factors contributing to low liquidity of diamonds. One of the main is the lack of terminal market. Most commodities have terminal markets, and some form of commodities exchange, clearing house, and central storage facilities. Until recently this did not exist for diamonds. Diamonds are also subject to value added tax in the UK, EU, and sales tax in most developed countries, therefore reducing their effectiveness as an investment medium. Most diamonds are sold through retail stores at very high profit margins.

As diamonds in larger sizes become increasingly rare and valuable, any easily visible and readily understood pricing system has been difficult to establish. Martin Rapaport produces the Rapaport Diamond Report, which lists prices for polished diamonds. The Rapaport Diamond Report is relatively expensive to subscribe to, and as such is not readily available to consumers and investors. Each week, there are matrices of diamond prices for round brilliant cut diamonds, by colour and clarity within size bands, and also other shapes. The price matrix for brilliant cuts alone exceeds 1,400 entries, and even this is achieved only by grouping some grades together. There are considerable price shifts near the edges of the size bands, so a 0.49 carats (98 mg) stone may list at $5,500 per carat = $2,695, while a 0.50 carats (100 mg) stone of similar quality lists at $7,500 per carat = $3,750. This may appear such a large difference as to defy logic, but in reality stones near the top of a size band (or rarer fancy coloured varieties) tend to be uprated slightly. Some of the price jumps are related to marketing and consumer expectations. For example, a buyer expecting a 1 carat (200 mg) diamond solitaire engagement ring may be unprepared to accept a 0.99 carats (198 mg) diamond.

There are numerous diamond grading laboratories, with each offering investors, consumers and dealers similar diamond-grading and verification services. The standards are high, and when they ever slip, immediate ramifications are felt throughout the diamond industry. When the market-leading Gemological Institute of America (GIA) saw a number of large, important and valuable diamonds overgraded some time ago, this resulted in legal action by one dealer against another dealer who had submitted them to the GIA for grading. A number of GIA employees left after the scandal emerged, and the GIA immediately changed a number of its procedures to prevent such occurrences from happening again. There are also a number of laboratories affiliated to CIBJO (Confédération Internationale de la Bijouterie, Joaillerie et Orfèvrerie), also known as the World Jewellery Confederation).

The non-linear, exponential pricing of different sizes (weights) of diamonds means that it is not realistic to exchange, for example, two quarter-carats (50 mg) for one half-carat (100 mg). With commodities such as gold, it is clear that one twenty gram bar is worth the same as two ten gram bars, assuming the same quality. In most terminal markets, there needs to be a readily available standard quality, or limited number of qualities, available in sufficient quantity to be tradeable. This is a major factor which affects liquidity. The large number of variables in diamond quality makes commodity-like pricing difficult, especially with rarer stones that merit special handling above standard-issue diamonds.

There are also fashion and marketing elements to take into consideration. De Beers expends marketing efforts to encourage sales of diamond sizes and qualities which are being produced in relatively large quantities. They have also been known to take steps to discourage investment, primarily because they perceive that bubble prices which are followed by sharp falls are bad for long term consumer confidence in diamonds as a long-term store of value.

The investment parameter of diamonds is their high value per unit weight, which makes them easy to store and transport. A high quality diamond weighing as little as 2 or 3 grams could be worth as much as 100 kilos of gold. This extremely condensed value and portability does bestow diamonds as a form of emergency funding. People and populations displaced by war or extreme upheaval have utilised this portable asset successfully.^{[citation needed]} In 2009 an exchange was launched by DODAQ to trade categories of polished diamonds. The DODAQ exchange is intended to be a terminal market for round polished certified diamonds (which is the most liquid part of the market) and hosts its centralised storage facility in a Freezone. The exchange is an attempt to overcome the traditional investment barriers of sales tax and low liquidity on the resale market.

In 2012 DODAQ nv and the Antwerp World Diamond Centre joined forces to create DIAMDAX. It is the first online diamond exchange to report the actual transaction price.The exchange provides its users with a fully automated trading platform and acts as counter party to both buyer and seller, offering anonymity to its users.

Rare "Fancy Colored Diamonds" such as Yellow, Pinks, Blues and Greens have proved to be a secure investment over the past five years. This is based on the principles of supply and demand as well as new economies entering the market. Rio Tinto has announced that they intend to close the Argyle Mine in Western Australia in 2016-2018 which will impact the dwindling supply.

Funds

In July 2007, Diapason Commodities Management delayed listing a new investment company called Diamond Circle Capital, which aimed to invest in large polished diamonds worth more than $1 million each. As of 2008, the fund offering was postponed until further notice.

In June 2012, Finanz Konzept AG launched the worldwide first actively managed physical diamond fund, which invests in natural physical polished diamonds and coloured diamonds.

In November 2012, PureFunds launched an Exchange Traded Fund listed on the New York Stock Exchange that invests in companies engaged in the diamond industry, rather than invest in physical diamonds.

Mining companies

See also: Category:Diamond mining companies

These do not represent diamonds at all, but rather are shares in companies that mine diamonds. Rockwell Diamonds, located in South Africa, which is also listed on Toronto Stock Exchange, is an example of a mid-tier established diamond producer.

The largest diamond company in the world is Alrosa, which surpassed De Beers in carat production in 2008. Alrosa is currently government owned, so is not listed on the stock market. De Beers is privately owned by Anglo American (85%) and the Botswana government (15%), so its shares are not traded on the stock market. The Oppenheimer family had previously owned a 40% stake in De Beers, but this was sold to Anglo American plc in 2011. Rio Tinto and BHP Billiton are the next largest producers, but diamond mining is a small part of their commodity portfolio.

Recycled diamond market

Diamond, because of its hardness, is one of the only gemstones that has a truly robust, vibrant recycled market. Recycled diamonds are diamonds that have been polished and set into jewelry, then removed, sorted and re-cut for sale back into the diamond industry. This sector now generates sizable revenue for suppliers and buyers alike. Whether it is releasing capital to re-invest in more liquid stock, or generating greater margin on re-purchased diamond jewelry, recycled diamonds is part of an ongoing strategy for many member of the jewelry industry. In 2012, Tacy Ltd. stated that it expected $1 billion worth of recycled diamonds to be put back into the market. . In 2013, its estimation was $1.2 billion. [2] Companies such as White Pine Trading LLC, Danforth Diamonds or Rick Shatz Inc. specializes in recycled diamonds.

Diamonds of a certain size, generally half a carat and above are traded and processed by the industry individually. Each has its own unique attributes and a corresponding unique market place. Diamonds of this size, whether recycled or not, have a similar market price – it is impossible to tell the difference between a recycled one-carat diamond (as long as it is undamaged) and a “freshly-mined” one-carat diamond with the same characteristics, and the market does not differentiate them in terms of their price.

Diamonds of smaller sizes are traded in parcels of similar stones, called ‘melee’, after the French word for mix. Generally diamonds of exactly similar size, cut, shape, color and clarity are used in a single piece of diamond jewelry. If not, the stone would not match and the piece would not sell. Small-recycled diamonds are treated differently to large individual stones. A single small diamond has limited value by itself. It is only of use if it can be matched with other similar diamonds, reset into jewelry and sold to a customer, thereby creating value. Small recycled diamonds need to be sorted, recut and resold to manufacturers in large enough parcels to allow them to pick matching stones to set in jewelry.

See also

• Gold as an investment
• Platinum as an investment

External links

• Diamonds are an Investor's Best Friend, AOL March 2012
• China revs the diamond market, WSJ blogs, China RealTime, February 2012
• PriceScope Diamond Price Chart, 1 Aug 2012 update
• The diamond engagement ring: Necessary expense or high value investment?, Benzinga, 12 Dec 2012