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From Tulips to Diamonds – Rarity

From Tulips to Diamonds – Rarity

How rare were tulip bulbs in the 1630s ? Were there ways to reproduce them quickly? Or were they, perhaps, difficult to grow? These are questions for historians. What I do know is that diamonds are rare.

It is important to know that diamonds are rare. In the past few weeks, I've been discussing how to create a market for diamonds as a wealth preservation asset. So far, I’ve discussed the need to reach a critical mass of believers. A group of people interested in diamonds, and confident that whichever diamond they buy, they will find a buyer who will purchase the asset from them, paying them a premium, as is already the case for other assets. This group needs to be large enough to create resell value, which will in turn create demand, and form a market. For this to happen, we need a critical mass of believers who will keep the value of traded diamonds sustainable.

Next, we need education. Education that starts in science classes at the elementary level. Kids should know that diamonds are rare natural creations. That diamonds are formed at the depth of the planet over millions of years, then pushed to the surface by volcanic activity. Museum exhibits are another important venue. They describe how diamonds are formed, polished and traded.

Auction houses are yet another great source of information. They already provide information on fancy color diamonds to educate potential buyers.

Last week, I added another component to this idea: transparency. Informing potential buyers of the characteristics of a diamond is essential. Knowing what the 4Cs are is a mere start. They should also know about irregularities and how they can significantly influence a diamond's price. That is a good enough reason to make this information available to those interested in making an informed decision on purchasing a diamond.

A commitment to transparency extends beyond providing the consumer with details of a diamond’s characteristics. It also includes giving them the diamond’s pricing history. Educated buyers would also want to know how a diamond’s price fluctuated in the past.

The case for diamonds - rarity

Rarity creates value. That is an old economic adage. A collection of antique cars is valuable because of its rarity., Art likewise fetches higher prices because of rarity. After an artist dies, the value of their works tend to rise. That is the economy of rarity in action.

Diamonds are rare as well. About 82 percent of the world's diamond production is from just five countries. They are Russia, Botswana, Democratic Republic of the Congo, Australia, and Canada. Together, they exported 104 million carats in 2015, according to the Kimberley Process.

Together with the next top five countries (Angola, South Africa, Zimbabwe, Namibia, and Sierra Leone), the top ten largest diamond-producing countries exported 99 percent of the world’s diamonds in 2015.

About 85 to 90 percent of all diamonds are found in kimberlitic pipes. There are some 10,000 known kimberlite pipes in the world. Only about 1,000 of them are diamondiferous (have diamonds in them). Of these, only 100 are (or were) actually economically viable to mine –  approximately a mere one percent of the kimberlite pipes. Of these 100, today there are only 26 operational diamond mines, and about half of them are past their mid-life. Billions of dollars were invested in exploring for new resources, with very little success. And the up-and-coming diamond mines won't compensate for the depleting reserves of the old mines.

Diamonds are found in very few regions. In those regions, very few potential resources are viable. In 2015, about 127 million carats of diamond were mined. You may feel that is a lot, but only 15 percent are gem quality. A carat is a fifth of a gram, so of the total 127 million carats, only  19.05 million carats are gem-quality diamonds, or about  3,800 kilos annually. You should know that about 65 percent of a rough diamond's weight is lost in the polishing process. Therefore, the 19.05 million carats of gem quality diamonds results in about 6.6 million carats, or about 1,330 kilos, of polished, gem-quality diamonds. Of those, only 40 percent are polished diamonds weighing one carat or larger. That is about 2.7 million carats, or 533 kilos. About a quarter of the one-carat gem-quality diamonds and larger, or 133 kilos, are fit for wealth preservation. That is, they are larger than 1 carat H color and better, in VS qualities and above.

That means from the 127 million carats of rough diamonds mined in 2015, we got only 665,000 carats of diamonds fit for use as wealth preservation assets. That comes down to just 133 kilos annually.

Between 1999 and 2008, expenditure on exploration increased by 26 percent. The motivation was declining reserves, and a desire to find new diamond sources. This ended, and exploration expenditure fell by an estimated 64 percent in 2009. Today, the top miners focus on optimizing existing resources instead of exploring. Diamonds are hidden deep under the face of the earth. Locked in a very deep safe, if you will. Unlocking this safe requires special skills not easily developed, and very deep pockets, so only a handful of companies can do it. On the flip side, this means that we cannot expect that just anyone will show up and start mining diamonds, and by doing so increase the supply all at once. So, with diamond mine resources depleting, and the few miners that specialize in diamonds decreasing their expenditures on exploration overall, the quantity of diamonds fit to serve as wealth preservation assets will only decline over time.

All this is to say that diamonds are an unusual creation of nature. This very long process means that we can’t expect nature to form more diamonds in our life time. Or during the lifetimes of any of our descendants, at least those to whom we can imagine leaving an inheritance.

We cannot produce diamonds on demand either - like some countries print money. So inflationary forces treat diamonds differently.

The only conclusion that we can draw from all of this is that diamonds fit for use as a wealth preservation asset are rare. And rarity is an economic quality that is commonly used in asset trading. The category of diamonds as a wealth preservation asset can include diamonds weighing two carats and above, H color and better, in VS qualities and above. They may include even smaller diamonds, such as D / FL, 1-carat diamonds. With high quality information, the right education, regular marketing, and an understanding that diamonds are rare, we can get the message out and show the uninitiated the opportunity that lies with diamonds as a potential asset for wealth preservation.

As I said before: buying an asset is a link in a chain. It starts with basic knowledge achieved through regular education, and continues with interest, which is achieved through marketing and understanding of the uniqueness and rarity of this asset. It develops with consideration, which is met with transparent information on diamonds and their prices. Then we need a place to buy, the ability to continue to track price changes, and finally, a place to exit. Buying and selling requires platforms. These additional components – marketing and platforms – will be discussed further in future articles.

 

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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