The rarity of natural diamonds is a factor of the economics of diamonds. What continues to propel diamond prices is a combination of the cost of production, the cost of polishing, demand in the market and limited supply. But is that all there is to it?
In my previous article on the rarity of natural diamonds, I demonstrated this rarity by detailing that while 100,000 kimberlitic pipes exist, only about 30 are working kimberlite diamond mines. Meanwhile, each tonne of ore yields only a few diamonds and about two thirds of a rough diamond’s weight is lost in the polishing process.
Alongside the economics are two more factors. One is the emergence of lab-grown diamonds. The second is the fact that diamonds are coming back from consumers and being resold as recycled diamonds. Lab-grown diamonds will have their own niche as a gem for low-cost fashion jewellery - low-cost, because as a product that can be made on demand, the supply of lab-grown diamonds can be adjusted to growing market demand. As a result their price will decrease accordingly, just as printing money results in inflation.
Since the end of the Second World War, and maybe even before it, the US has been the leading consumer market of diamonds and diamond jewellery. There are currently more diamonds in - and on - the hands of Americans than consumers from any other market. Over the years, many diamonds have been passed down from generation to generation as inheritance and this process is set to accelerate.
According to a study by the Center for Retirement Research at Boston College for the MetLife Mature Market Institute from 2010, Baby Boomers will inherit $8.4 trillion at 2009 values. Per person, the median figure is $64,000. By 2010, $2.4 trillion had already been received and since then only increased. This includes real estate assets, stocks and bonds, cash and jewellery.
Some of this jewellery remains in the hands of the family, but much of it is sold to jewellers, pawnshops or privately. As Baby boomers themselves start reaching retirement age, this transfer of assets will increase the movement of jewellery and diamonds out of the hands of consumers and back into retailers and wholesalers before returning to consumers.
This is slowly becoming an interesting component of the diamond market. It benefits nearly everyone. Consumers receive payment for goods, retailers and wholesalers re-sell them for profit and even manufacturers get some of the action, because many goods need re-polishing.
When discussing recycled diamonds in the past, some people in the diamond industry have shied away from the term ‘recycled’ because it cheapens diamonds. They make a good point. The mystique, beauty and value of these diamonds remain high - even though they are pre-owned. But unlike cars or electronics, the wear and tear on diamonds is minimal and can be repaired to perfection. This is one of a number of important aspects of these diamonds and therefore the term recycled simply does not do them justice. They are in fact reclaimed. Reclaimed for their beauty, reclaimed as a gift, reclaimed because their value is not lost, but maintained.
The reclaiming process we have witnessed in recent years has another important aspect. It establishes the understanding that diamonds do not have to come straight from the mine to have a value. The consumer market is establishing that diamonds previously owned by consumers are also valuable. It is perfectly okay to buy a reclaimed diamond.
How do we know reclaimed diamonds retain their value? A recent study by global retail consultancy NPD Group found that retailers who bought diamonds back from the public re-sold them at full price back to consumers. These diamonds were not sold at a discount, but at the same price as comparable new diamonds purchased from wholesalers.
According to an estimate by industry analyst Chaim Even Zohar, the reclaimed diamond market supplied $1 billion worth of polished diamonds annually in 2012 and 2013. These reclaimed diamonds are probably a wide range of sizes, shapes, colours and clarities. As with any similar range of goods, such as run of mine, some of them are top quality and colour which are suitable for the purpose of wealth preservation.
The combination of the declining supply of diamonds from mines, past performance of steady to rising long-term prices, and the understanding among consumers that natural diamonds can be sold back to the market are the foundation of natural diamonds for wealth preservation.
The US, as the biggest consumer market for diamonds and the biggest source of reclaimed diamonds, is an excellent market for diamonds as wealth preservation. The mindset and financial interest for diamonds as a means of wealth preservation exists there. There is every reason why this will work in additional markets as well, such as China, India and Japan. This is especially true for India where buying and selling gold jewellery as a store of wealth is commonplace.
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 advisor. Nothing on this website can be construed or constitutes an offer or a recommendation to sell or to purchase diamonds or the solicitation of an offer to purchase any diamonds nor does it constitute an offer or a recommendation to sell or to purchase any security or financial product or the solicitation of an offer to purchase any security or financial product.
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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.