Symbol of Love, or a Commodity Too?

Let’s be frank. Polished diamonds do not hold their price. They haven’t in years. Not only that they don’t hold their price, they don’t even beat inflation, the most basic requirement of any investment tool. By definition an investment must at least serve the purpose of wealth preservation. This state of affairs is not good for the diamond industry.

As the following graph shows, diamond prices have fallen more than 15% in the past three years. They have fallen 15.8% to be precise. Inflation in the US, on the other hand, has increased 5.5% in the period. Investor who would have simply held on to their cash instead of buying a basket of polished diamonds that represented the average price trend, would have lost only 5.5% of the value of their cash. Sadly, that should have been their preferred choice.

 b2ap3_thumbnail_DIAMONDS-VS-INFLATION---2014-2017.pngPolished diamonds are marketed as an enduring symbol of love. Something that lasts forever. For decades, that was an excellent way to promote diamonds and diamond jewelry. It worked so well that the advertising world considers it one of the best marketing campaigns ever. The promotion program worked so well that even those who criticize De Beers for it, claim that the company invented diamond engagement rings, despite their being around for several hundred years.

Society is dynamic, marked by changes in standards, culture, and more. A marketing campaign that worked exceptionally well in the 1950s won’t work today. It needs to be adjusted to the changing times. The same is true for diamond promotion. The leading diamond producers are aware of that. The current diamond promotion campaign slogan is now “Real is rare. Real is a diamond.” The video clips show people in their 20s, wondering about their life. No longer the purposeful people in their 30s or 40s who were featured in the “A Diamond is Forever” videos of yesteryear.

Are diamonds still aspirational? Are the aspirations of today’s middle class the same as those of a decade or two ago? Not really. It used to be that most diamonds were sold to a relatively small group of people that included movie stars, tycoons, successful business people, royalty, and the like. For this group of people, buying high-cost diamond jewelry was an expenditure that they could easily afford. Few others bought such jewelry.

As the Western economy grew and the financial state of Westerners improved, offering diamond jewelry, especially diamond engagement rings, was promoted as something that the stars and very successful people did – but at a cost that a middle-class family could afford, if it saved and put its mind to it.

Over the years, diamonds became more and more democratized. The world became more affluent, and the relative cost of diamonds slowly came down. This combination meant that a greater number of people could afford to buy a diamond. Today, practically anyone can afford diamond jewelry, because over time the economy developed to provide more at a lower cost, making once-inaccessible items much easier to obtain. What was once available to only the few has become accessible to the many.

The wealthy, those who made their fortune mainly in first half of the 20th century, did so through industry. There, you had to add value and you did it by taking parts and building a machine, by mining a resource and providing commodity, or creating a service that is built on hardware. If they lost a few million, they could afford it and moved on. For them, the purchase of a diamond was something exclusive, a status symbol of their wealth that they could flaunt. Under such conditions, an emotional sales pitch worked well. That was the old world.

And what about today’s wealthy, in the new world? Today, you might call them the one percenters, the higher income households are very different than those of the 1950s and even the 1980s. Today there are many more millionaires than ever before. Most of these millionaires are not exceptionally wealthy as their predecessors of the 50s and 60s. They are also very mindful of their expenditures, not only when considering the total dollar value of an item, but also when considering the social and ethical costs of what they buy.

This growing consumer group does not want to spend. They would rather use their capital wisely. They want to be sure that the purchase they are making does not come at the expense of, or exploit, hard-working people. They want to know that the environment was not harmed or that the harm is mitigated. They want assurances about the integrity of the process that generated their product. On top of that, they want their purchase to be more than just a purchase: ideally, it will be a value-preserving item that can later be sold. Most importantly, they must see the economic sense of spending a few million.

Without a deep desire to flaunt their wealth, their way of life and lifestyle is very different, and with a perception that a large expense should have a resale value, I do not see much of a future for large diamonds. Definitely not in the West. Currently, most of the purchases of large diamond are in the Far East, and I fear it is only a matter of time before the sentiment there will change to reflect the Western sentiment described above.

To cater to wealthy Westerners requires a major shift in marketing. This is true for most, if not all, industries. It seems to me that most industries have either made the required adjustments or are in the process of doing so. So does the diamond industry. It must adjust its marketing pitch to this consumer segment or risk losing it. As I see it, the most important step to take is to prove that diamonds have a resale value. We need to prove that resaleability is possible.

In order to make diamonds resalable, we need to improve transparency. We are already meeting higher ethical, labor and moral standards, and we can do some more to improve even further. Now we need to be transparent in the process of mining and polishing, more transparent in disclosing the way we price diamonds (including the components of diamond price setting) and we need to offer an easily trackable value timeline and pricing system that will allow sophisticated consumers to decide if selling a diamond at a given point is a sound move.

It is possible, and the proof is in fancy color diamonds, such as blues and pinks. With those diamonds, we have all the above components already working. This financial trend is already working well in Asia, and we need to extend it to large white diamonds and into the West.

Large diamonds are not fit for retail sales, because of the high overhead cost that would diminish the return on investment. In general, you do not want to shop for investment vehicles at retail outlets. This is an important point to keep in mind when considering how to market these exceptional creations of nature to potential end buyers: fewer hands between mining and final sell, more useful data.

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The decline in the MDGT™ index mainly reflects the decline in the prices of large size white diamonds, as the following graph demonstrates.

b2ap3_thumbnail_Round-3-5--10-cts-indexed-Dec-2017.pngSo what should we do? Diamond marketing has to be adjusted to today’s consumer, a different consumer than the one we catered to in the past. We cannot rely on old perceptions, and old traditions are not “doing it” for today’s consumer, especially in the high-end market. It requires us to use a very different language. Transparency throughout the entire diamond pipeline is very important. By providing education on diamonds’ rarity, exposing the components of a diamond’s price, and outlining the price trend over time, we will build trust and bring potential customers closer.

We should make consumers feel comfortable spending their hard-earned money with us, and give them an excellent reason to do so. The way to achieve this is by approaching them correctly, and by keeping their reservations, needs and concerns in mind.

 

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.