Diamonds as an investment

From Wikipedia, the free encyclopedia
Jump to: navigation, search
An uncut diamond, not showing the prized optical properties of cut and polished versions.

The value of diamonds as an investment is of significant interest to the general public, because they are expensive gemstones, often purchased in engagement rings, due in part to a successful 20th century marketing campaign by De Beers.[1][2][3] The difficulty of properly assessing the value of an individual gem-quality diamond complicates the situation. The end of the De Beers monopoly and new diamond discoveries in the second half of the 20th century have reduced the resale value of diamonds.[citation needed]

Price fluctuations[edit]

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, the Troy Diamond Report, PriceScope,[4] Ajediam Antwerp Diamonds Monthly[5] 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[6] and IGI. These organizations focus on research and education, which they pass on to their members and the public.

Rough diamond prices have historically been impacted by the mining companies controlling supply, most notably De Beers. However, post the dismantling of the De Beers cartel in 2001, the industry is now more fragmented resulting in a higher percentage of diamond sales taking place in the form of auctions and other forms of open-market sales.[7]

Financial feasibility[edit]

Synthetic diamonds[edit]

Further information: Synthetic diamonds

Although it was originally impossible to produce diamonds artificially, techniques to do so have been around since the 1950s and have become routine in recent years. Modern techniques can produce diamonds of essentially any desired chemistry or size [8] and can even be made more perfect than naturally occurring ones, synthetic diamonds are genuinely diamonds albeit not naturally occurring. Although some manufacturers do label their synthetic diamonds with serial numbers there is no guarantee that a given diamond is not man made, although sometimes an unnatural chemical composition or pattern of flaws may suggest a diamond is synthetic. It is much cheaper to produce diamonds through artificial synthesis than to mine them[citation needed], although currently the cost of synthesis is still significant. The inability to guarantee that a diamond is naturally occurring could undermine the premium price still currently charged over synthetic diamonds [9] However, new technological advances have allowed some independent gem labs such as GIA (Gemological Institute of America) to issue a specific Synthetic Diamond Grading Report which identifies a diamond as laboratory-grown and laser inscribes it with “laboratory grown”.[10]

Polished diamonds[edit]

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[citation needed] . 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-price cultured product[citation needed] . This altered the supply and demand situation for natural pearls and perhaps the overall prestige of pearls in general was lowered[citation needed] . 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[citation needed] . Thus increased availability and lowered prices of synthetics may or may not have major implications for the future price of natural diamonds[citation needed] . 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[citation needed] .

There are several factors contributing to low liquidity of diamonds. One of the main factors 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[citation needed] . 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.[citation needed] 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.[citation needed]

There are numerous diamond grading laboratories, with each offering investors, consumers and dealers similar diamond-grading and verification services.[citation needed] The standards are high and, when they ever slip, immediate ramifications are felt throughout the diamond industry.[citation needed] When the market-leading Gemological Institute of America (GIA) saw many large, important and valuable diamonds overgraded some time ago,[when?] 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 some of its procedures to prevent such occurrences from happening again[citation needed] . There are some 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 20-gram bar is worth the same as two 10-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 many variables in diamond quality makes commodity-like pricing difficult, especially with rarer stones that merit special handling above standard-issue diamonds.[citation needed]

There are also fashion and marketing elements to take into consideration.

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 used this portable asset successfully.{{[11]Citation needed|date=October 2009}}

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 (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.[citation needed]

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.[citation needed]

Rare "fancy colored diamonds" such as yellows, pinks, blues and greens have proved to be a secure investment over the past five years.[12][13] 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[edit]

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.[14]

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.[15]

Mining companies[edit]

Mining companies produce and sell rough diamonds. Given the very high expense of operating a diamond mine, many diamond mining companies are public and/or owned by governments.[citation needed]

The largest diamond company in the world is Alrosa, which surpassed De Beers in carat production in 2008.[16] Alrosa is 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.[17] The Oppenheimer family had previously owned a 40% stake in De Beers, but this was sold to Anglo American plc in 2011.[18] Rio Tinto and BHP Billiton[citation needed] are the next largest producers, but diamond mining is a small part of their commodity portfolio.

Recycled diamonds[edit]

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 as it could account for 5%-10% of market supply.[19] 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 members 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.[20] In 2013, its estimation was $1.2 billion.[21] Companies such as White Pine Trading LLC, Danforth Diamonds or Rick Shatz Inc. specialize in recycled diamonds.

The market[edit]

Diamonds of a certain size, generally half a carat and above, are traded and processed by the industry individually. Each has 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. The market does not differentiate between them in price.[citation needed]

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 stones would not match and the piece would not sell. Small recycled diamonds are treated differently from large individual stones.[citation needed] 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 parcels to allow them to pick matching stones to set in jewelry.[citation needed]

See also[edit]

References[edit]

  1. ^ Howard, Vick (2008). Brides, Inc: American Weddings and the Business of Tradition. University of Pennsylvania Press. p. 49. ISBN 978-0-8122-2045-2. Retrieved 4 November 2013. 
  2. ^ Stanwick, Peter; Stanwick, Sarah D. (20 February 2013). Understanding Business Ethics. SAGE Publications. p. 327. ISBN 978-1-4522-5655-9. Retrieved 4 November 2013. 
  3. ^ http://www.bain.com/Images/PR_BAIN_REPORT_The_global_diamond_industry.pdf
  4. ^ Price Scope Diamond Prices and Ratings
  5. ^ Ajediam, Antwerp World Diamond Center Prices Ratings
  6. ^ HRD - Hoge Raad Diamant (High Diamond Council)
  7. ^ "A Diamond Market No Longer Controlled By De Beers". Kitco. 6 June 2013. 
  8. ^ http://www.newscientist.com/article/dn16036-artificial-diamonds--now-available-in-extra-large.html#.U_3feUh4qX0
  9. ^ http://www.diamonds.net/News/NewsItem.aspx?ArticleID=40156&ArticleTitle=IGI+Finds+Hundreds+of+Undisclosed+Synthetic+Diamonds+at+Labs
  10. ^ http://www.onlinediamondbuyingadvice.com/diamond-education/lab-created-diamonds/
  11. ^ http://www.amazon.com/Blood-Stone-Quest-Life-Diamonds/dp/0765307952
  12. ^ The Wall Street Journal http://online.wsj.com/article/SB10000872396390444868204578062690038515254.html |url= missing title (help). 
  13. ^ http://www.diamonds.net/news/NewsItem.aspx?ArticleID=42801
  14. ^ Finanz Konzept AG Website
  15. ^ World's first diamond and gemstones ETF makes its debut, Mining.com, December 3, 2012
  16. ^ "Russia's Alrosa shaping up for flotation". Financial Times. December 19, 2010. 
  17. ^ "De Beers goes private in $19bn deal". BBC News. May 18, 2001. 
  18. ^ AFP (November 4, 2011). "Oppenheimers leave the diamond race with $5bn sale". Mail and Guardian. Retrieved November 5, 2011. 
  19. ^ The Impact of Synthetic and Recycled Diamonds, MiningFeeds.com, May 23, 2013
  20. ^ [1], Reuteurs
  21. ^ [2]

External links[edit]