Rethinking Rarity

Previously in this column I discussed in broad strokes the need to rethink diamonds and how they are marketed. Now as I dive further into the details, I want to start with natural diamonds’ most important inherent quality – rarity. Rarity earns its importance from a combination of its role in value preservation and the enduring human desire to own a rare object. If it the rare item is beautiful, that is even better.

A brief recap on the rarity of natural diamonds:

·               There are an estimated 10,000 known kimberlitic pipes around the world

·               Of them, 1,000 are diamantiferous

·               Of the 1,000, only 100 are economically viable to mine

·               Just 30 kimberlites are presently active

·              Only 20% of the total production from these 30 mines ends up as polished diamonds fit       for jewelry

There is clearly no doubt that diamonds, especially gem-quality diamonds, are rare objects. There is also no doubt that finding, mining and extracting diamonds is a major scientific and economic challenge. Furthermore, of the mines that are currently active, many are past their prime, which means they are producing less diamonds.

Make no mistake, even 1-carat top color and clarity diamonds are counted among the exceptionally rare natural white diamonds. They are intrinsically luxury items, but their value is not limited to their luxury. Given their rarity, they can also serve as an asset that preserves value. Because they are luxury items they should be promoted and sold as such, as was discussed in this column last week.

The Economic Factor

In order to understand an item’s financial worth and whether it carries resale value, one must first assess its accessibility and presence in the market. The possibility of a flooded market could lead to devaluation. To illustrate the point, think of how printing money leads to inflation. The creator of Bitcoin used the term “mining” to refer to the production of additional digital currency. The term signifies that it is hard work and that supply must be limited to preserve its value. Their own limited supply is a value proposition that results in resale value.

The nay-sayers may state that diamonds are hard to valuate, are shrouded in mystery, and that only few are capable of deciphering a diamond’s value given the many and complex parameters involved (future articles will provide more clarity on this matter). Some even believe that diamond prices are “controlled” somehow. That is a meaningless cliché. The diamond industry today operates according to market forces of supply and demand.

While mining gold is cheaper than mining diamonds, people view the precious metal as a safe haven – a tool for investment and hedging. Ultimately, this is a matter of perception. Gold is much less rare than diamonds. Some 3,186 tons of gold was mined in 2015 compared to an estimated 125 million carats of diamonds, of which only 20% (25 million carats) were gem quality. After polishing, this figure is reduced to some 10 million carats. This is a small fraction of total gold production.

People have traded bitcoins since the digital currency gained acceptability of value of exchange, which means that the coins gained resale value. Shouldn't we be thinking of diamonds along the same terms?

Rarity of Naturals vs. Lab-Grown

Some say that lab-grown diamonds are identical to natural diamonds. This is correct only with regard to the chemical structure of the stone. Essentially, a diamond is a particular arrangement of carbon atoms. The atoms align in such a way as to refract light very well and create a beautiful crystal. However, the similarity ends there. While the one is created under the controlled and very exact conditions of a laboratory, the other is a wild, unpredictable, uncontrolled and rare occurrence in nature that takes millions of years, not a mere few weeks in a factory.

All speakers of a language use the same alphabet, and all that language’s words are available to all people who speak it. However, the particular arrangements of words by some are admired as masterpieces and valued by countless people throughout time, while those made by others pass quickly into obscurity. The rarity of the works of a genius are part of their appeal and value. That is why stating that lab-grown and natural diamonds are the same is only true in a small sense. Arranging the atoms in the controlled setting of a lab is very different to the unexpected and random creations of nature. This is what makes natural diamonds rare – something that is shared whatsoever by lab-grown goods.

The general public must be educated by the diamond industry about the story of a diamond’s creation and rarity, which goes far beyond the 4Cs. A different language and approach must be developed to make the public aware of the rarity of diamonds that they might appreciate it and savor these unique creations of nature. It is the diamond industry’s responsibility to spread this message!

The minute probability of nature slowly producing a diamond over millions of years, which may or may not rise to the Earth’s surface, which may or may not be discovered, which may or may not have a perfect color, which may or may not be free of inclusions, is so tiny that the economy of rarity should propel the value of such rare stones skyward. How can we even dare to compare this rarity to something mass-produced in a factory?!

Layers of Rarity

In addition to the natural rarity described above, high-end diamonds are rare for other reasons. Lab-grown goods are produced under carefully controlled and constant pressure and heat, which provide the exact condition to form the carbon structure to reflect light perfectly. This is not unlike a Photoshop image, photographed and later adjusted to be made flawless. But is such an item rare if it can be easily replicated and produced limitlessly? It is highly unusual, if not nearly impossible, for a natural diamond to enjoy such ideal conditions in the process of its creation. Such conditions allow for small adjustments in temperature and pressure at the turn of a dial for fine tuning. Stones produced in this way, though perfect, share none of the wild beauty of nature, which makes the exquisiteness of natural diamonds so much more special. Educating consumers about the miracle of each natural diamond’s creation will add an additional level of rarity.

Nitrogen is common in nature and therefore it’s not unusual for nitrogen to get trapped in a diamond during its creation. This is the source of the yellow tint in diamonds. In a factory, nitrogen can be added at carefully measured quantities or fully removed to create white diamonds. The chance that nitrogen won’t be trapped at all in a natural diamond is very slim. This lack of control and the chaos of chance occurrences add another layer of rarity to natural diamonds.

Nature takes millions of years to create a diamond. This in itself is another layer of rarity. That such an exceptionally long process, during which so many things can go wrong, might result in a perfect diamond so unlikely that it is near miraculous.

Finally, the depths of the planet are as an impenetrable safe that stores rough diamonds. Finding the right combination to unlock it takes time, great skill and capital. Diamond exploration and mining are extremely costly, complex processes. The cost of exploration is supported by the value of diamonds sold – that is if any are found. If diamond prices drop, it would not be economical to initiate new exploration projects. In such situations, it may not even be worth producing from existing mines, as we have seen over the past year in which several companies stopped extracting diamonds from uneconomical mines, which were placed on care and maintenance instead. If prices drop even further, then even fewer mines will be active. This will lead to a rise in diamond prices – and constitute another level of rarity.

Taking it forward

The public must understand that a natural diamond is not controlled or mass produced. Each natural diamond is unique, has its own story, is a special and exceptional formation. That is why I have stated again and again that the select high-end examples of these exceptional natural occurrences are rare creations that will never repeat themselves. I have closely examined countless diamonds over the course of my career. Each one is different. The high-end gems among them will retain their value over time because of the economy of rarity. That is, if their real value will be explained in a transparent and effective educational campaign.

In the wake of the disastrous year from which we just emerged, we must explain the rarity of diamonds to the public around the world. We must create a large group of people, a club of sorts, who appreciate these one-off miracles and their immense resale value. After all, gem-quality polished diamonds already have a value. However, bringing it to the public at large, through an educational process that provides full, accurate and transparent information about diamonds, will expand the circle of people who better understand the logic of diamonds’ true value.

Such a process would strengthen the resale value of natural diamonds, just as knowledge, information and transparency have done to the art world. Over the past few years, a number of paintings by Paul Gauguin, Vincent van Gogh, Pablo Picasso and most recently Amedeo Modigliani, have sold for more than $100 million each. Gauguin’s When Will You Marry? sold for $300 million. It was the understanding and appreciation of art, coupled with knowledge of past sales, that provided the buyers with a reason to buy these works of art. However, the resale value of fine art gives them the confidence to actually do so. Without the resale value, less fine art would be purchased.

If the public can understand the rarity of high quality 1-carat and larger natural diamonds, I believe such items will become an asset and not an expense, which is how they are perceived today. In the future, when enough people gain an appreciation of the benefits of investing in natural diamonds, they will sell for more than $100 million, thanks to demand from well-educated end-consumers.

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.