In the past few weeks, we have been talking a lot about the fundamentals of diamonds as a potential wealth preservation asset, and about what it would take to form such a market. This week, I want to touch on the why, specifically from the perspective of buyers.
To recap, in this article series I detailed what I think is needed to create a market of diamonds as a widely accepted asset for wealth preservation. I have shown that diamonds are rare, and that with the right tools, they have fungibility – two underlying requirements for creating a commodity market. For a commodity market to operate, it must have transparency and be widely accepted, which is why we must reach a critical mass of supporters. The first step to reaching a critical mass is to educate people on diamonds. With all of this in place, we will need an actual market – a spot market. Last week I also discussed marketing, stating that marketing is thinking about customer needs and their satisfaction, and showing them that your product fulfills them. So, let us look more closely at what these needs might be.
The case for diamonds - needs
The diamond market I’m envisioning, a spot market for polished diamonds, does not exist in a vacuum. To be viable it must satisfy a need, otherwise buyers, traders, financial firms, banks, and private individuals won’t buy diamonds as a wealth preservation asset. These needs must be met because we are not simply looking to generate a sale. We want to discover, create, arouse, and satisfy customer needs.
There are three main needs that can and should be addressed. The first need is wealth preservation. No one wants to lose his or her hard-earned money. Which is why buying a diamond should not be an expense, but the purchase of an asset. While an expense is the act of buying a product for consumption, an asset is a resource with economic value that is owned with the expectation that it will provide future benefit. There are different kinds of assets. Some can generate a cash flow immediately or in the future. An asset can also be something that is owned with the intention of it appreciating over time. In the context of wealth preservation, the goal is to use accumulated funds in order to buy an asset, preserving the original value or increasing it. That is our hope for diamonds. You take a current economic resource, such as cash sitting in a bank account, and buy an asset to beat inflation, for example.
Diamonds are tangible assets when they are purchased for a sum of money, and held with the intention of maintaining the original value of the money used to purchase those diamonds. The diamonds would thereby serve as an asset for wealth preservation. This fulfills a need of both individuals that want to protect their wealth, as well as of financial institutions that are in the business of developing value by purchasing assets.
Another need is diversification. Putting all of your eggs in one basket is risky, as the idiom goes. So if you put all your savings in the stock market, and the market falls, value is lost. Diversification is intended to mitigate that risk. So if some money is in the stock market, which is considered risky, some would be used to buy bonds, which are considered low risk. One could further diversify through real estate. Many individuals put their funds mainly in these three places. But there is more. Additional options range from commodities such as oil, grains and coffee, to collections of cars, art, wine, coins, stamps, and more.
Diamonds, are a good fit within this arena, and provide an asset that may behave value-wise in different ways to other assets, creating the type of diversification that many individuals and institutions seek. This brings us to hedging, the practice of trying to reduce the risk of investing in one asset by investing in another. Hedging goes hand in hand with diversifying.
To work well, an investor may want to hedge the risk of a very volatile investment that may be high risk by investing in a very stable asset. For an individual this balances their portfolio and decreases risks, a necessity for almost any investor.
The third need that could be addressed by diamonds as an asset is enjoyment. It may seems as an odd need, but that is far from the case. It is a real need, and it can be addressed within the realm of investing in a tangible asset. For example, some invest in a collection car to enjoy the occasional ride, or in art to enjoy its beauty. This is not the sole reason for an investment, but is at times an important one. Diamonds, traditionally worn as an adornment, perfectly fit the need of enjoyment.
Set in jewelry, diamonds – high-value and high-end diamonds – do not need to be hidden in a safe, just as a collection car does not always have to be in a garage, or art tucked away in storage. Diamonds can easily be worn on a night out or at a special occasion.
Protecting wealth, diversifying and hedging wealth, as well as enjoyment, are all real needs that should be addressed, and diamonds as an asset can satisfy these needs. With the right education, transparent and in-depth information, and a regulated place to trade, diamonds can meet a real need in the market place and satisfy it. We started this article series asking if the tulip bulb mania in the Netherlands in the 1630s is a cautionary tale when thinking about marketing diamonds as an asset. I think that this series addressed this question in full and came back with a clear answer: diamonds are clearly fit to serve as an asset – if the conditions detailed in these articles are met.
Now, I want to hear from you, and learn what your thoughts are. Do you think it is possible to promote diamonds as an asset, what market place do you envision, and how would you approach this?
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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Diamond industrialist Ehud Arye Laniado is a man passionate about diamonds. From his early 20s in Africa and later in Belgium honing his expertise in forecasting the value of polished diamonds by examining rough diamonds by hand, till today four decades later, as chairman of his international diamond businesses spanning mining, exploration, rough and polished diamond valuation, trading, manufacturing, retail and consultancy services, Laniado has mastered both the miniscule details of evaluating and pricing individual rough diamonds and the entire structure of the diamond industry. Today, his global operations are at the forefront of the industry, recognised in diamond capitals from Mumbai to Tel Aviv and Hong Kong to New York.