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A New View of Diamonds as Assets, Not Expenditures

A New View of Diamonds as Assets, Not Expenditures

We have already reviewed the existing method for buying diamonds, which is based on the 4 Cs (carat weight, color, clarity, and cut), using a magnifying glass (loupe) with 10x magnification and relying on asking prices benchmarks. We developed a new system based on my vision that diamonds should be bought according to a price list based on market transactional prices. This list is supported by some 400 irregularities which have a material impact, beyond the well-known 4 Cs, on regularly updated diamond prices.

There can be huge price differences between the two valuation approaches. These differences not only undermine the ability of buyers to set a price when they wish to realize the value of the diamond which they spent good money on (resale), but the discrepancies also make it harder for financial institutions to precisely value diamond stock. A transparent and precise valuation method can serve financial institutions wishing to extend credit to their customers using diamond stock as collateral. Price differences also erode the level of much-needed financial transparency required for licensing, taxation and accounting with various authorities, and even accounting between partners. The goal of our system is to reflect the value of the diamond using all of its unique components (irregularities) and to arrive at precise diamond pricing with a transparency that is not inferior to the pricing of gold bars, for example.

Below is a graph showing two carat diamonds F VS2, which can be used as an example to show the significant price differences between diamonds that seem to be identical when based only on the current 4 Cs grading system, and yet whose true value is so different given very different sets of irregularities.

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Let’s change how this works

The goal of this vision is to change the perception that a diamond is a financial expenditure and to facilitate the perception of a diamond as an asset. 

Currently, the diamond is perceived as an incomprehensible abstract product to most of the public and its price will likely be valued differently each time.  

The perception of a diamond as an expenditure is likely to deter buyers from purchasing the diamond – which is a very expensive product – because they cannot see or understand the reasoning for its price, while they can purchase other luxury items or services for which they can understand and compare prices. 

Many people shy away from a large financial expenditure on diamonds because of the differences in prices between one diamond and the next, which when based on the traditional 4 Cs grading scale usually look like identical diamonds. They are not aware that these differences are due to a different set of irregularities and therefore they do not understand why they must pay such huge different prices. It’s not just that the price structure is unclear to them, they also cannot assess the investment values that the diamond offers them; a valuation that can allow them to realize their investment at any time they wish to do so. 

For example, a Rolex watch or a leather Hermès bag has a guaranteed resale value at nearly 100% for many years after the initial purchase. 

Consumers’ preferences, in many cases, tend towards buying these products instead of diamonds which have an abstract value and involve an expenditure of a considerable sum. 

Only with a presentation of a price list based on transactions and filtered according to irregularities and a table containing discounts and premiums for each one of those irregularities that impact the diamond’s will we receive a clear, updated and transparent price. With the help of such a price list, we will be able to change the perception and make it clear to potential buyers that a diamond has an up-to-date resale value. This transparent system, accompanied by explanations, such as how to realize the investment, will change potential buyers’ attitude towards buying diamonds from seeing it as an expenditure to relating to it as to an investment. 

Imaginary account balance. 

Every affluent person has an imaginary account balance.

Let's take, for example, a person with a million dollars.

In his perception, he is a millionaire.

He knows how much of his imaginary balance is invested in assets and how much is in cash.

 Let's say that in this same imaginary balance this individual has split his capital equally: $500,000 in cash and $500,000 in assets. If he considers buying a diamond for $100,000, for him, the diamonds’ value is abstract and non-liquid and he does not have a clue or a clear plan that will allow him to realize his investment in the future (which wouldn't be the case had he considered a piece of art, for instance). 

Such a poorly informed individual will surely hesitate; he will not be interested in spending $100,000 when the expense will make him less than a millionaire. $900,000 is not a million.

I wish to completely change this perception by applying resale value to diamonds. We can clarify to such a potential buyer that he is not in any way spending money, but rather investing in an asset and if in the future he would like to convert this asset to cash, he can do so while updating the value of his specific diamond on any given day.  

If we will add to the provided information, a few examples of different diamonds with different irregularities or different sizes and clarities, and even present the behavioral value of different diamonds over the last few years, this will act as an initial demonstration of the diamond as an asset. The potential buyer will be able to evaluate whether the presented diamond maintains a slight but stable increase in price or any other level of appreciation and how it will behave compared to the stock market. This transparency and objective understanding of the diamond price model will help the buyer perceive the diamond as an asset and he will be able to make a decision based on the level of risk that he is interested in taking. 

The following graph shows the value of three different diamonds from 2009 to today, with the documented, transparent and comparable behavior of the asset, which can be examined by both buyer and seller. 

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The change in perception detailed above is dependent on the creation of a uniformed criteria to the ensemble of elements impacting the price of a diamond. This ensemble should be analyzed and reported by one diamond laboratory under one umbrella, with one certification and one regulation, along with the entire industry's sweeping assurance that natural diamonds are mined and traded ethically. 

This is the only way that will allow a change in the way one relates to buying diamonds. Our imaginary millionaire will be able to continue and hold to his million Dollars. The $100,000 which he pays for a diamond will just be moved from the cash column in his imaginary balance to the asset column. He will have now $400,000 in cash and $600,000 in assets while he and his loved ones enjoy the beautiful and rare diamond in his possession.  

This significant change in perception will widen the circle of diamond buyers in the world, while turning their attention towards an enjoyable acquisition that maintains its value throughout the years. 

Like many commodities, diamonds are mined, but as opposed to other mined commodities, they are not designated for the industrial market which changes when economic factors fluctuate. The diamond is a mineral with a different market, and if we manage to understand it and give it a resale value, it is likely to be used to disperse assets as diamonds as unrelated and uncorrelated to other investments in the financial markets.   

With the increase in synthetic diamonds, which when placed in jewelry are no less beautiful than natural diamonds, we must highlight the financial value of natural diamonds. I believe that synthetic diamonds are here to stay but their existence and usage in the jewelry industry can only boost the notion of natural diamonds as an asset with potential wealth preservation value. This value of natural diamonds is derived from their economic rarity: the difficulty involved in locating them underground and in mining them, and not just their beauty. If we fortify diamonds’ resale value, we will create a new attitude towards the value of diamonds, a value beyond their use in jewelry. Buying diamonds must be seen as an investment in an asset and not as an expense. 

We must begin this discussion immediately and market diamonds with this new philosophy! 

There is an exit strategy for diamonds. Their value can be realized if the owner so desires. 

The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser. 

 

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