From Tulips to Diamonds – Putting It All Together

For the past several weeks, I have discussed the creation of a market of polished diamonds as an asset for possible wealth preservation. I examined the idea from several different angles, describing it from a perception point of view, a technical point of view, and from a strategic point of view, attempting to provide a holistic overall perspective.

Last week I had a chance to see an interview on TV, where an industry insider discussed the diamond industry with a sharp-tongued interviewer and the editor of a financial newspaper. The interview proved to me why we need a market for diamonds as an asset for possible wealth preservation. Starting from the less-than-favorable aspects of the interview, the interviewer hinted that maybe the industry has a reputational issue.

Later, the financial newspaper editor expressed doubt that the decline in resources is real. Perhaps it is a ploy on the part of the diamond industry, he argued, in an attempt to create a false sense of scarcity. We all know that the diamond industry has a certain reputational problem in some quarters, which is why some express doubt regarding its activities. However, the diamond industry today is facing a real decline in resources. As the insider pointed out, with the aid of satellite global mapping, we know where all possible diamond resources are located, and the fact that diamond companies such as De Beers and ALROSA are decreasing their exploration budget is an indication that there are fewer resources to be mined. Add to that the fact that all of the major diamond mines except Argyle are past their prime, and are in declining production, and clearly we are looking at a real drop in supply. Diamonds are becoming even more rare. As to the comment that the decline is a ploy, De Beers and ALROSA are public or controlled by public companies, and their focus is purely on diamonds, and not on any other resources. Therefore, a decline in resources is bad news for them, and it does not make any sense for them to play make-believe on this issue.

On a deeper level, because of these perceptions (which sadly are not as rare as I would like them to be), we need to address this gap in knowledge about the industry, and bring people up to speed through education. Education should start early, as early as science classes at elementary schools, where kids discuss volcanic eruptions, which is a pre-requisite for diamonds appearing on the surface of the planet. Kids should know that diamonds are rare natural creations, formed at the depth of the planet over hundreds of millions and even billions of years, and pushed to the surface by volcanic activity.

Education may include museum programs that display diamonds, and discuss how they are formed, polished, traded and used. The rarity of diamonds and their unique characteristics can be explained and demonstrated. When I gave the 110.3 carat, vivid fancy yellow Sun Drop on loan to the Natural History Museum in London, it was a sensation. It created a buzz in the press, people flocked to the museum to see it, and the museum produced a lot of educational material around it, including a video clip with model Jerry Hall.

Once we have educational programs that bridge the knowledge gap, we need to continue to change people’s perception of diamonds through marketing. For decades, the "a diamond is forever" by De Beers was the generic diamond marketing campaign. Generations grew up on it, and learned that diamonds are beautiful, durable, natural, and a symbol of enduring love. Over the years, hundreds of millions of dollars were poured into this campaign, mainly in the US, but also in Japan, Europe, the Arab Gulf states, and other places. De Beers also promoted specific diamond jewelry designs, brands, or occasions. But these efforts have dwindled. Although De Beers retired the "a diamond is forever" campaign in 2009, marketing is still essential. The financial newspaper editor noted at the end of the interview that when corn growers suffered from a declining market, they started to promote corn-based cereals as an essential component of a healthy breakfast to boost their business.

The diamond industry does not need to shy away from such an effort. I’m suggesting that we start to promote diamonds as an asset, creating a market and growing our business, just as corn farmers came up with cereals to save their business. One direction to take is to address a need on the part of our target clients. Just as parents looking for healthy alternatives had a real need addressed by corn farmers, investors, financial firms and everyday folk all need an alternative asset to put their money in as a hedge to other investments. The diamond industry can address this need with diamonds as an asset.

If done properly, with the aid of education and marketing we will reach the necessary critical mass of people who believe in diamonds as an asset, and are willing to invest in them. They will have to know that fungibility in diamonds is possible and we, in turn must be fully transparent with them about every aspect of the diamonds we offer. This full disclosure must go beyond the 4Cs. It should disclose the impact of comment on price, and the discounts and premiums that various aspects of a diamond have on the value of a diamond. We must show price history, and anything else needed to make an informed decision on purchasing a diamond. Then, and only then, will we have the full confidence of the general public in what we have to offer, and will be able, over time, to combat the skeptical sentiments that persist in some quarters.

Once we have all of this in place, we will have the ability to set up spot markets to trade diamonds. These markets will have a listing of diamonds available to buy. They will also create transparency, by providing full details on each diamond. This will include the gemological report with all its details, the diamond’s irregularities if it has them, and any other characteristic that impacts its value. This is a prerequisite, because transparency is a must, as is each diamond's price history. This proposed spot market will be a place where diamonds are sold against immediate payment – on the spot, just like a stock exchange. At this spot market, a list of goods available for trade will be published regularly, traders will be able to buy and sell openly, and non-traders interested in buying or selling their diamonds will be able to do so via brokers, just as we use banks to buy and sell shares.

As trade develops, a database of spot prices will be created, prices will be updated instantaneously as trading takes place, and goods will be delivered immediately to buyers. This diamond spot market will have a full banking envelop, starting from clearing transactions, to providing financing against these assets. Just like any other exchange, the local authorities will need to license it, and perform trading oversight of the kind the Securities and Exchange Commission provides for the New York Stock Exchange. The banking envelop and the oversight are essential components to forming confidence in asset trading of any kind, including in diamonds. After a period of running, additional non-spot trading activities can be created. For example, financial instruments such as a diamonds futures market, a derivatives market, or securities, all bought and sold based on a diamond spot market.

With a spot market backed by large banks and supervised by an appropriate authority, think of the impact on the structure of the revenue stream that international diamond spot markets can have on the diamond pipeline. Instead of +$20 billion in polished diamonds that today go almost exclusively to jewelry, $8 billion can potentially be allocated to spot market trading. This means that spot markets won’t just track prices of traded goods; they may even set prices of polished diamonds that are set in jewelry. Further, the goods that go to spot market trading (remember, they are not many, only 0.5% by volume) can be replaced by lab-grown goods, which look just the same, but are worth less.

Looking beyond, such a market will have an important impact on rough diamond prices. With polished diamond prices becoming so clear and known, the prices of rough diamonds will be dictated by the real trading price of polished diamonds. On the consumer side, the increased exposure to diamond trading as a financial instrument, as well as the known prices, will increase confidence, and possibly generate additional demand for diamond jewelry. This is a classic win-win situation for diamond miners, manufacturers, traders, and consumers.

Today we are facing a decline in demand for diamond jewelry. Consumers are more rational in their decision-making, and less inclined to make a large purchase on an emotional basis. Times are changing, and with them, social norms. We are seeing the rise of a consumer generation that does not buy diamonds as a status symbol, at least certainly not as widely as before. Nor do they buy diamonds as a symbol of love as much as before. This change in perception leads them to ask why they should spend so much on an object such as a diamond. They don’t see the return on the expense. This is true for women as well as for men. And with a decreasing expectation from women to receive a diamond ring, or a desire to have diamond jewelry, overall purchases of mid-range diamonds are in decline.

Because of this, we need an alternative. One lesson comes from very high-cost diamonds, which are purchased nearly entirely (if not completely) on a rational basis. These buyers rely heavily on information that allows them to make a rational decision. The success we see with selling the highest-cost diamonds is an excellent test case for diamonds that are more accessible economically. With access to full and detailed information on diamonds, those with smaller budgets can still enjoy access to high-quality data to make very rational decisions on diamonds. The key is to keep in mind that these buyers are not spending money on buying a gift, but are instead purchasing an asset with the potential to serve the purpose of wealth preservation.

This is to say that we are facing a growing issue that is harming our business, and we need to act smartly and strategically to fix it. We need to address the decline in interest in diamonds, the ongoing skepticism about the rarity of diamonds, battle the rise of lab-growns, and do this in such a way that creates a certain level of diversification as well, so that we can grow our capital in a meaningful way. That is why I’m suggesting that diamonds as an asset, used as capital preservation tool, and traded on a spot market, is the direction we take. It will require several steps and coordinated efforts to educate, market, and change people’s thinking, but it is achievable. If we choose this path, we have plenty to gain – including the ability to satisfy a real need in the global financial market.

     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.