A small but important segment of the natural diamond market is the concept of diamonds as a potential asset for wealth preservation. Using diamonds as an asset is not a new concept. Just ask anyone who has inherited her grandmother’s diamond jewelry.
Many people see natural diamonds as an indulgent gift. An expensive extravagance, but also a romantic and symbolic purchase worthy of spending good money to make a loved one happy. We take a wider view, and believe that as well as being a gift that has a strong emotional impact, purchasing natural diamonds also as an opportunity for wealth preservation that has lasting sentimental value.
The Early Days of Diamonds Purchased as an Asset
Prior to the 1970s, diamonds showed a steady and consistent pattern of price appreciation going back many decades. Diamonds caught the eye of investors in the late 1970s when prices began to skyrocket and a speculative bubble quickly developed.
Diamond prices followed the trend of many other commodities, including gold and silver that saw unprecedented price spikes. Unfortunately however, global commodity prices soon dropped, and polished diamond prices, along with the prices of gold and other commodities, to decrease sharply.
In 1985, mining at the Argyle diamond mine in North Western Australia began. This unique and massive diamond deposit would produce most of the world’s supply of pink and other fancy color diamonds, and continues to do so to this day. This unique mine would soon create a market for fancy colored diamonds, especially pinks. This market had not existed previously, and now constitutes an interesting segment of the diamond investment market
Broadly speaking, consumers in the 1980s continued to view diamonds as a high-cost gem used in jewelry alone. The idea of diamonds as a potential means for wealth preservation was far from gaining widespread appeal. For anyone with the foresight to see the potential in diamonds, there would have been limited options available to source diamonds for those outside of the industry, and even fewer options available to collect meaningful information on pricing or quality evaluation.
Since the early 1980s, diamonds have continued their upward price trajectory. With the exception of the global economic crisis of 2008-2009, diamond prices have not seen massive valleys and have tended to increase at a reasonable and steady rate. Diamond prices have been more stable than those of gold or silver, especially in the most recent 5 years. A 1-carat round D color, IF clarity natural diamond valued at $6,100 in 1978, currently sells for $15,000-$16,000.
Prominent auction houses have ventured into diamond sales and are routinely setting new price records. Some of the world’s wealthiest investors seem to increasingly desire physical diamonds as a wealth preservation asset to complement their investment portfolios.
Today, the internet has given consumers much better access to information, which should allow for a much more efficient market for buying diamonds. Electronic banking, efficient and secure transportation, readily available security and insurance products should make use of natural diamonds as a means for wealth preservation an easy process.
Despite all this, the use of natural diamonds as an asset remains somewhat elusive to the mainstream consumer. With exceptions for very large stones, and high-quality, fancy colored natural diamonds, investing in this physical asset seems limited to a choice of a select few, and has yet to take off on a broader scale.
Once again, the financial community has taken notice of natural diamonds and there have been numerous attempts to develop investment products based on the price of natural diamonds. These products have taken on many different shapes and have achieved varying levels of success.
In the past decade, a number of wealth management companies have purchased natural diamonds as part of their portfolio diversification strategy. They purchased high-end, large, white natural diamonds or fancy color diamonds with the understanding that those goods have a steady value with limited fluctuation.
Another approach, taken by a number of Wall Street investment firms, included attempts to launch initiatives to create Exchange Trade Funds (ETFs) based on polished natural diamond prices. These initiatives are currently in the application process and under review by the Securities and Exchange Commission (SEC) awaiting approval.
Other approaches include ETFs tracking natural diamond company shares. However, to date, none of these approaches has gained particular prominence. The most common venue for purchasing wealth-preservation-grade natural diamonds remains either via auction houses, most notably Christies and Sotheby’s, or buying privately directly from diamond traders specializing in these goods. This means that the “common person” has no access or ability to invest in natural diamonds, whether directly or indirectly.
What is missing?
So if natural diamonds offer investors an opportunity, then why has the market for diamond backed investment products not developed? After all, investors can buy a futures contract on gold, crude oil or even sunflower seeds. So why not natural diamonds?
Firstly and most fundamentally, because of fungibility: diamonds are not as standard as most other commodities. In addition to the 4 C’s, which are commonly known to consumers and investors alike, diamonds have many more attributes that have an impact on their value.
These attributes include: the quality of their polishing, fluorescence, location of inclusion and its color, and symmetry—more than 400 irregularities that each weighs on the value of a polished natural diamond. Comments on grading certificates can contribute to significant differences in prices between diamonds with the same 4C characteristics. Diamonds can only truly become a commodity if buyers understand the importance of these characteristics and their role in final price.
Secondly, any kind of investment product requires that an investor be able to buy and sell the asset, thereby locking in his or her gains. Diamonds do not have such a trading platform – a spot market. They are easy to buy retail, but much more difficult to sell because the retail philosophy is “one way”: moving product from wholesaler to consumer. It is not built to perform trade in the opposite direction.
Perhaps most importantly, there is no widely recognize price-setting mechanism. With so many outlets selling natural diamonds, how is the price of a natural diamond settled in a financial market such as Wall Street?
Without a recognized spot market exchange arena for natural diamonds, no clearing house to settle trades and no agreed price settling at the end of a trading day, natural diamond backed futures and derivative contracts are far away.
The Path Forward
Transparent pricing is needed to attract investment capital. Diamond pricing is complex, and this is not going to change. As mentioned above, unlike with other commodities, each diamond is unique, presenting significant challenges to valuing diamonds as such. However, we can close the gap so that some of the similarities and dissimilarities in diamond pricing can be properly understood, quantified, and factored into a diamonds price system.
This is where Mercury Crystal Clear™ comes into play. We discussed this in length in past articles. This unique approach to pricing transparency is the way, we believe, to restore confidence in diamond pricing in the eyes of consumers, Wall Street investors, and diamond buyers. When adopted, it even has the power achieve the goal of increasing demand for natural diamonds.
Diamonds have a long record as an inflation hedge and a physical store of value. However consumers often don’t see this and continue to view natural diamonds as an expense, and often one with less utility than electronics, luxury handbags, or other goods. We must educate consumers on the wealth preservation potential of polished natural diamonds so that they see their purchase for what it is: the purchase of an asset that makes their loved one feel special.
This all begins by establishing a transparent system of pricing natural diamonds, one such as Mercury Crystal Clear™.
The views expressed here are solely those of the author in his private capacity. None of the information made available here shall constitute in any manner an offer or invitation or promotion to buy or to sell diamonds. No one should act upon any opinion or information in this website (including with respect to diamonds values) without consulting a professional qualified adviser.
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.