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What We Should Learn From Diamond Auction Houses

Diamond auctions drive a lot of attention. When a diamond sells for a record price, it's not just the diamond industry talking about it. The general press tends to pay a lot of attention to these sales, fully exposing the public to the sale results. Beyond the attention, there is a lot we can learn from auction houses' selling methodology that we can apply to our day-to-day diamond selling. The auction model works not only for selling multi-million dollar stones: it's also a model we can use to get the wider public interested in investing in diamonds. 

Selling a diamond at an auction is a process. If the diamond is sourced from a trader, it usually has a lab certificate. If the diamond comes from anyone else, it usually won't have a certificate. Either way, the auction house will first want to see the diamond and assess it. Based on this initial assessment, the auction house will decide whether to take it in. It may then decide that the diamond should be sent to a gemological laboratory for a grading report. Sotheby's and Christie's have a clear preference for GIA's lab report. If a diamond is very special, the auction house may ask GIA to create a Monogram, a book that describes the diamond in great detail, including extensive relevant background information, and a series of high-quality photos. By doing so, they reveal, with full transparency, all the specifications of the diamond offered for sale.

An auction house will also valuate the diamond. For that, it goes through a delicate process that starts with trying to understand what such a diamond would sell for in the market, applying its vast knowledge of diamond industry pricing, and of historic and recent prices of similar diamonds. If the diamond was ever previously sold at auction, at what price was it sold, and when? These components help the auction house to determine the diamond's value. The valuation process is in no way automatic or computerized. It requires a person to look at the diamond, understand the market, and possess intimate familiarity with transaction prices. In short, this person is an expert. This expertise makes a significant contribution to transparency in transaction prices.

The valuation is a delicate process, because the auction house wants to provide potential buyers with an estimate range: something that reflects real prices. It will try to set a low estimate that is not too low, and a high estimate that won't scare away buyers. The range may also take into account where market prices are heading – up or down. The estimate serves as a guide, intended to appeal to a variety of buyers. The lower price range is fit for diamond traders, who buy at prices that allow them to resell and make a profit. If the bidding prices rise above a certain level, the traders stop biding, leaving the floor for private collectors and financial firms. In the mid-price range, those with smaller budgets compete for the offered diamond, and as the bidding price rises, the number of bidders decreases, until a final bid is made. This final price may be within the estimate range or above it, if the bidders find the opportunity still worthwhile.

How is this worthwhile? Because of resale value. It's not only diamond traders who buy in order to sell. Private investors and institutional buyers also have an eye on their return on investment. While traders usually buy for the purpose of reselling relatively quickly (and therefore tend to limit themselves to lower buying prices), investors are thinking long-term. They are willing to pay more because of the expected appreciation.

Ahead of the auction, the auction house looks for a story about the diamond. Does it come from the collection of a well-known person, such as an actress, royalty, or a famous collector? Did it belong in the past to such a person? Does it have an interesting history, or was it ever given a name? All of these elements are important to the diamond's story. It makes the diamond interesting and attractive, and may impact its desirability, and even its price. Ahead of the auction, the auction house prepares a catalogue. The catalogue is part of the auction house's marketing effort, and includes the above elements: the GIA report number, the 4Cs, and additional information about the diamond, including whether it is a Type IIa, and its background story. This way, the diamond gets a lot of exposure. A potential buyer can look up its report, and see the comments, the diamond's irregularities, a price guide relevant for an auction, and the diamond's background story, if it has one. This is to say that long before he or she sees the diamond, a potential buyer knows a lot about it, because the auction house is very transparent. This transparency is what provides a private client with crucial information, and not providing it can be a deal breaker.

The auction house also makes a serious effort at marketing. The preparations, certification and catalogue are only part of this. They do something else that is of great importance: they target the right audience. By identifying potential buyers, reaching out to them with relevant data, and continually wooing them, auction houses are doing an excellent service of explaining diamonds, and of building their desirability as items that are not just pretty, but that also offer a measurable return on investment. They put great effort into thinking about their customers' needs, and showing customers that diamonds fulfill these needs. They do so by viewing the entire business process as consisting of a tightly integrated effort to discover, create, arouse, and satisfy these needs. By focusing on the needs of the buyer, they are expertly promoting diamonds as a potential asset. In so doing, they create a critical mass of believers in the diamond story and its economics of rarity, creating a resale market among those believers.

In addition, auction houses put out press releases prior to the auction, shoot videos, and generally welcome the press. As such, they are reaching beyond their existing pool of exiting buyers who already have an interest in buying diamonds, helping create future buyers. Buyers who believe in diamonds.

The next stage is showing the diamonds. Auction houses bring in potential buyers, and take select items on roadshows. During these events, prospective buyers have a chance to get a firsthand impression of the diamonds, and assess the stones for themselves. This is also an opportunity to ask about the goods, their historic prices, and how they have appreciated in value. Buyers can break down the characteristics of the diamond, to see what may push the price up or down. The relaxed surroundings, no-pressure discussion, and in-depth informed answers provide an opportunity to compare, and to better understand the value proposition of each offer.

Anyone can register to participate in the auction and have an opportunity to bid. It is open to all. Once the bidding begins, the process is totally transparent, and literally anyone can follow the auction live, and track the bidding prices all the way to the final results. The process is fully transparent. Once the auction is over, the results are published. The critical part is to truly understand the offer. A prospective bidder studies the diamond with full awareness of not only the basic 4Cs, but also of the comments and irregularities. This information makes a huge difference, because it determines a diamond's value. They learn and consider the diamond's price history (if it has one) and recent prices of similar diamonds. These buyers arrive at an auction knowledgeable, and can make an informed decision. And that is a real value proposition!

The auction process tells the investors one other crucial piece of information: just as you were able to buy a diamond here, enveloped in transparent data, you will be able to offer your diamond for sale here as well. The auction house will again provide all of the information needed to make an informed decision about buying the diamond, and the seller will have a platform for selling it. This is an essential and inseparable component of the auction idea. There must be a way to resell a diamond. This creates the cycle of sale and resale, value and resale value, investment and capitalization.

After the auction concludes, additional information is provided, and the pool of available data on diamond prices grows a little. We believe that most high-end diamonds – large size, top color, clarity and make white diamonds, and high-quality fancy color diamonds – are sold by traders and manufacturers directly to collectors and investors. But auctions are a very important channel. The way to ensure that consumers understand the value proposition of diamonds is by being transparent. By providing every possible piece of information about the diamond: its characteristics, price history, and anything else that will help the buyer make an informed decision.

The headline grabbers are often the fancy color diamonds: blues, pinks, orange, and yellow. But if you look at the catalogues, or check auction results, you will find that white diamonds are always there too. The auction system works well both for fancy color and for white diamonds, and both are bought for investment purposes. The great service the auction houses bring to the market, are transparency, marketing, price disclosure, education, and a marketing narrative about the diamond.

The consumer market is shifting. Presenting diamonds as a symbol of love to be set in jewelry is not enough anymore. Many consumers have begun asking about the value of their potential purchase, including its resale value. This means they are not buying to keep forever, but thinking ahead about a day when they may want to sell the diamond. We need to create a mechanism for consumers to trade diamonds as assets. Clients need information on the return on investment, price tracking, a place to resell their diamonds, and an easily understood pricing system. When the diamond industry does not publicize selling prices of diamonds sold directly to buyers, it is missing a great opportunity. Publicly documenting this information will strengthen consumer confidence, which in turn results in more sales. This is a shift the diamond industry needs to make, and the sooner the better.

No one should act upon any opinion or information in this website without consulting a professional qualified adviser.

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