From Tulips to Diamonds – Transparency

If I had to guess, I would say that those who bought into the Tulip Mania of the 1630s in the Netherlands had some information on the tulip bulbs they bought. However, in the era of Big Data, there is a lot more available information, and that makes buying an asset a very different kind of affair. 

In the past two articles, I argued that to create a market of diamonds as a wealth preservation asset, we need a number of things to happen. First and foremost, we 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, just as we do already with other assets. This group needs to be large enough to create resell value, which will in turn create demand and form a market. For all this to happen, we will need a critical mass of believers who will keep the value of traded diamonds sustainable.

Another essential component is education. Education may include museum programs that display diamonds, and discuss how they are formed, polished, traded and used. Another venue is schools, where science classes at elementary schools 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 millions and even billions of years, and pushed to the surface by volcanic activity.

I also pointed out that auction houses provide information on fancy color diamonds on sale to educate potential buyers, and called on the industry to expand this educational effort. Without widespread education, there would be no widespread appreciation for art, and without that, a critical mass would not have been formed to create an art market – the same goes for diamonds.

The case for diamonds - transparency

When considering the purchase of a diamond, knowing that many buy them (critical mass), or that they were formed in the depths of the earth millions of years ago (education) is not enough. To make an informed decision on a specific diamond, transparency is essential too. 

The first step is the 4Cs of a diamond: Carat, Cut, Clarity and Color. They are the most basic characteristics of a diamond. They consider:

·         The weight of a diamond (carat),

·         The quality of the polish workmanship (cut),

·         How white the diamond is or what other hues are in it (color),

·         The inclusions and other internal features of a diamond (clarity).

Knowing the 4Cs (carat, cut, color, and clarity) is a start, but it is not enough. There are many more diamond characteristics that may influence the price of a diamond, and those must be at the very least presented to a buyer. I call these characteristics irregularities. A diamond grading report accompanying a diamond may include this additional information. Florescence, for example, may be of varying degrees of pronouncement – from none to very strong – and also appear in different colors: blue, yellow or white, for example.

In addition, a grading report also has a comments section that often offers additional information about the diamond. A comment may point out a characteristic of a diamond that will not lower the clarity grading of a diamond in its report. However, the existence of the comment may decrease its value. The reason is that each grade is actually a range. A diamond could be closer to the higher or the lower end of the range. Most non-professional buyers will not likely have the skill to notice these minute differences, but they must not be ignored.

A buyer should pay attention to this information, because when comparing two diamonds with the same 4Cs, there may be a difference in value that is explained by these irregularities. Irregularities can have a considerable impact on the price of a diamond, and that is a good enough reason to have them made available to those interested in making an informed decision on purchasing a diamond. 

Transparency extends beyond the characteristics of the diamond. It also includes pricing history. Just as we may bid on a work of art based on prices paid for it in the past, or asses a share traded on a stock exchange based on its historic price fluctuations, educated buyers would also want to know how a diamond’s price fluctuated in the past. Once again, this is an essential component of an informed decision-making process when considering a wealth preservation asset.

In other words, transparency is needed for all aspects of diamonds: transparent prices must be accompanied by transparent information on irregularities. When this happens, diamonds will evolve from being components in jewelry to constituting an asset class with resale value. We already have this with large white diamonds and fancy color diamonds.

Diamonds as a wealth preservation asset can include any diamond 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 and regular marketing, we can get the message out and demonstrate to an uninitiated crowed that there is an opportunity to consider with diamonds.

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. 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.