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The Case for Transaction Prices - Evolution

The Case for Transaction Prices - Evolution

Mercury Diamond™ launched a polished diamond price list that is a little unusual in the diamond market. First, it is based on transaction prices and not on asking prices, as is common in the diamond industry. Second, it explicitly takes into account all characteristics of a diamond, not just its size, shape, color and clarity. This may be unusual in the diamond industry, due to the unusual nature of diamonds, but specific and detailed price lists are common in most other industries.

Recently, I broke down a number of areas where a detailed, transaction-based price discovery tool could help transform the diamond industry, and help it evolve and reach new heights. I discussed how in my view the price discovery tool could improve our relationship with the banks, aid in filing tax returns and assessing inventories, and, most recently, the impact on consumer confidence of having access to deeper and more detailed information. In each one of these areas, we can resolve issues and make improvements with the help of the Mercury Diamond Price List™. The diamond industry is close to my heart, and I want to see it succeed even further. To that end, I would like to go beyond improving the existing diamond market, and see if we can create a new source of revenue for the industry.

During the past decade and more, we have witnessed the rise of purchases of high-end diamonds by individuals and financial firms. These purchases were economically motivated. They purchased these diamonds because they were beautiful, but mainly because of the diamonds’ expected resale value, as well as for other economic reasons. I’m talking about diamond purchases for wealth preservation purposes. If you are a regular reader of these articles, you know that I’ve discussed this idea numerous times. However, please bear with me, because I want to approach this from a different direction.

There are a number of economic motivations for buying a high-end diamond. The first is an expected return on investment. As with buying any asset, the hope is that the value of the asset will appreciate, thereby increasing the buyer’s capital. Another reason is wealth preservation. In this scenario, the buyer is aware of the relative price stability of diamonds compared to other assets, and hedges other investments with an asset that does not tend to experience significant price fluctuations. This is especially true for diamonds. In an era when assets are often large (real estate, antique cars, paintings) some want an asset that is small enough to fit in a safe. Some high-end diamond buyers are thinking long-term, and intend to leave a diamond as part of an inheritance, while other types of assets they own will be bought and sold several times during their lifetimes.

The market for high-end diamonds is well established. We are talking here about two groups of diamonds: white diamonds that in addition to being top items for any of their characteristics (color, clarity, make, fluorescence, etc.) are also very large, usually five carats or larger. These diamonds represent the greatest rarity of any of the characteristics, and combined represent an exceptionally rare diamond. The other group of high-end diamonds is fancy color diamonds. Here the size is also a component of price, but the main driver of price is the color. A better color, and a more rare one (green, red and blue) are the components of rarity that make them special and in turn, an asset.

I have bought and sold many such diamonds during my career in the diamond industry, and have successfully sold diamonds for record prices. One thing you always see with buyers is how they study the market. They know a lot about the diamonds they are thinking of buying, and have intimate knowledge of the price trends of these diamonds, even though they are not diamond industry professionals. This is not surprising considering the amount of the purchase, yet there is an important lesson here: making these large transactions requires having detailed information to make an informed decision.

Now, let’s take this type of trade to a different group of diamonds: white goods, one carat and larger, VS and better clarities, F color and better, excellent make, and no florescence. These diamonds are not often bought at auctions at Sotheby’s or Christie’s, yet offer a very interesting opportunity for buyers that are interested in the benefits of buying diamonds for economic reasons, but don’t have the financial means to purchase a 5-carat D/FL triple X diamond. This is an untapped market that we can develop. Among the various aspects that we will need to provide for such a market (regulation, a place to trade in these diamonds, and education, to name a few), there is a clear need to have readily-available information on the diamond that will empower the buyer to make an informed decision. So, in addition to information about the specific diamond being considered, we also need to make available information about much simpler diamonds, in order to to provide perspective, specifically regarding price history. Just as understanding price history is an essential component in the decision-making process for buying real estate, stocks, commodities, as well as high-end diamonds, this is essential for buying any other diamond for economic reasons.

Having a transparent, regularly updated, transaction-based price list that takes into account the many characteristics of a diamond, not just its 4Cs, and demonstrates how to take into consideration the diamond’s irregularities. is the kind of data that would allow such a market to come to life and thrive.

Now consider the market for such goods. These are still very rare diamonds, they are part of a depleting supply, they address the needs in the financial market for return on investment with a chance of appreciation, have relative stability of price that can serve as a hedge on other investments, and are a physical asset in a compact form that fits in a safe. They are the kind of asset that many people want to have – not because they are diamonds, but because they possess the financial traits spelled out above. There is an opportunity here for the diamond industry. Using the tool will help us improve our standing with the banks, provide a better way to review the value of our assets for tax reporting purposes, and determine economic rough prices, but it will also enable us to widen our client base. And so, while focusing on reviving the consumer market, adding another class of costumers will decrease our dependency on one type of client, provide demand for items that, for whatever reason, are in decreased demand by traditional consumers, and improve our revenue stream by creating more transactions. Why more transactions? Because currently there is very little second-hand business for diamond jewelry – once bought it is usually kept. With an economic-based purchase of diamonds, diamond will be bought with the expressed intention of being sold at a later date. In addition, the creation of such a market may also encourage a recycled diamond business among diamond jewelry consumers.

Let’s not sit back and wait for this to happen. Let’s go forward and make it happen. The opportunities are there: we need to bring them to fruition. Doing so will have many benefits for an industry that has been yearning for great change and growth for many years. 

    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. 

 

April 2017 Market Report
Technology in the Diamond Industry: Manufacturing

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