Diamonds As An Investment
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Diamonds As An Investment
An uncut diamond, not showing the prized optical properties of cut and polished versions.

The value of diamonds as an investment is of significant interest to the general public, because they are expensive gemstones, often purchased in engagement rings, due in part to a successful 20th-century marketing campaign by De Beers.[1][2][3] The difficulty of properly assessing the value of an individual gem-quality diamond complicates the situation. The end of the De Beers monopoly and new diamond discoveries in the second half of the 20th century have reduced the resale value of diamonds.[4] Recessions have engendered greater interest in investments that exhibit safe-haven or hedging properties that are uncorrelated to investments in the equities markets. Academic studies have indicated that investments in physical diamonds exhibit greater safe-haven characteristics than investments in diamond indices.[5]

Pricing formula

Tavernier's law (or Indian law) is used to determine the price of a diamond. The formula is for basic calculation and demonstrates how the price of a diamond increases along with its size. Larger gemstones are rarer and go up rapidly in price.[6] Diamonds of 25 carats and more usually have their own names.

${\displaystyle Price=W^{2}*C}$

where:

• W is the weight in carats
• C is the basic price of a one-carat stone

Example

Here is how the price of a diamond might go up with the formula applied to a \$1000-per-carat base price:

• 1ct = \$1,000
• 2ct = \$4,000
• 5ct = \$25,000
• 10ct = \$100,000

Diamond prices are influenced by global trends. The largest markets are USA (about half), China and India.[7] Since 2008, larger diamonds have appreciated better than smaller ones.[8][5]

Price fluctuations

Polished diamond prices vary widely depending on a diamond's carat, color, clarity and cut, sometimes referred to as the 4 Cs. In contrast to precious metals, there is no universal world price per gram for diamonds. The industry refers to price guides.

Rough diamond prices have historically been impacted by the mining companies controlling supply, most notably De Beers. However, after the dismantling of the De Beers cartel in 2001, the industry is now more fragmented resulting in a higher percentage of diamond sales taking place in the form of auctions and other forms of open-market sales.[4]

Financial feasibility

Synthetic diamonds

Since the 1950s, techniques can produce gem-quality diamonds of essentially any desired chemistry in sizes up to about 1cm. [9] Although some manufacturers do label their synthetic diamonds with serial numbers there is no guarantee that a given diamond is not man made, although sometimes an unnatural chemical composition or pattern of flaws may suggest a diamond is synthetic. It is much cheaper to produce diamonds through artificial synthesis than to mine them,[10] although currently the cost of synthesis is still significant. The inability to guarantee that a diamond is naturally occurring could undermine the premium price still currently charged over synthetic diamonds.[11] However, new technological advances have allowed some independent gem labs such as GIA (Gemological Institute of America) to issue a specific Synthetic Diamond Grading Report which identifies a diamond as laboratory-grown and laser inscribes it with "laboratory grown".[12]

Polished diamonds

There are several factors contributing to low liquidity of diamonds. One of the main factors is the lack of terminal market. Most commodities have terminal markets, and some form of commodities exchange, clearing house, and central storage facilities. Until recently[when?] this did not exist for diamonds.[] Diamonds are also subject to value added tax in the UK and EU, and sales tax in most other developed countries, therefore reducing their effectiveness as an investment medium. While most diamonds are sold through retail stores at high margin, investment diamonds are usually sold at auctions or privately.

Diamonds in larger sizes are rare, and their price is dependent on the individual features of the diamond. Fashion and marketing aspects can also cause fluctuations in price. This makes it difficult to establish a uniform and readily understood pricing system.[] Martin Rapaport produces the Rapaport Diamond Report, which lists prices for polished diamonds. The Rapaport Diamond Report is relatively expensive to subscribe to and, as such, is not readily available to consumers and investors. Each week, there are matrices of diamond prices for various shapes of brilliant cut diamonds, by colour and clarity within size bands. The price matrix for brilliant cuts alone exceeds 1,400 entries, and even this is achieved only by grouping some grades together. There are considerable price shifts near the edges of the size bands, so a 0.49 carats (98 mg) stone may list at \$5,500 per carat = \$2,695, while a 0.50 carats (100 mg) stone of similar quality lists at \$7,500 per carat = \$3,750. This difference seems surprising, but in reality stones near the top of a size band (or rarer fancy coloured varieties) tend to be uprated slightly. Some of the price jumps are related to marketing and consumer expectations. For example, a buyer expecting a 1 carat (200 mg) diamond solitaire engagement ring may be unwilling to accept a 0.99 carats (198 mg) diamond.[]

There are numerous diamond grading laboratories, with each offering investors, consumers and dealers similar diamond-grading and verification services, including the Gemological Institute of America (GIA) and the CIBJO (Confédération Internationale de la Bijouterie, Joaillerie et Orfèvrerie), also known as the World Jewellery Confederation.[] If the standards set by such organisations are called into question, ramifications are felt throughout the diamond industry.[] In 2005, the GIA was sued by a dealer who had supplied diamonds to the Saudi royal family after the accuracy of GIA-issued certificates was questioned.[13] As a result of a subsequent investigation, four GIA employees were fired for breach of the GIA's ethical codes.[14] The GIA also claims to have changed some of its procedures to prevent such occurrences from happening again.[14]

The non-linear pricing of different sizes (weights) of diamonds means that it is not realistic to exchange, for example, two quarter-carats (50 mg) for one half-carat (100 mg). With commodities such as gold, it is clear that one 20-gram bar is worth the same as two 10-gram bars, assuming the same purity. In most terminal markets, there needs to be a readily available standard quality, or limited number of qualities, available in sufficient quantity to be tradeable. This is a major factor which affects liquidity. The many variables in diamond quality makes commodity-like pricing difficult, especially with rarer stones that merit special handling above standard-issue diamonds.[]

The investment parameter of diamonds is their high value per unit weight, which makes them easy to store and transport. A high-quality diamond weighing as little as 2 or 3 grams could be worth as much as 100 kilos of gold. This extremely condensed value and portability does bestow diamonds as a form of emergency funding. People and populations displaced by war or extreme upheaval have used this portable asset successfully.[15]

In 2009 an exchange was launched by DODAQ to trade categories of polished diamonds. The DODAQ exchange is intended to be a terminal market for round, polished, certified diamonds (the most liquid part of the market) and hosts its centralised storage facility in a Freezone. The exchange is an attempt to overcome the traditional investment barriers of sales tax and low liquidity on the resale market.[]

In 2012 DODAQ nv and the Antwerp World Diamond Centre joined forces to create DIAMDAX. It is the first online diamond exchange to report the actual transaction price. The exchange provides its users with a fully automated trading platform and acts as counter party to both buyer and seller, offering anonymity to its users.[]

Rare "fancy colored diamonds" such as yellows, pinks, blues and greens have proved to be a secure investment over the past five years.[16] This is based on the principles of supply and demand as well as new economies entering the market. Rio Tinto has announced that they intend to close the Argyle Mine in Western Australia in 2016-2018 which will impact the dwindling supply.

In its Global Diamond Report 2014, Bain & Co reports that demand for investment diamonds accounts for less than 5% of the total value of polished diamonds.[17] It also reports that diamond prices have benefited from 1.6x lower volatility than gold. Characteristics of investment-grade polished diamonds are highest color (D, E, F) and clarity (IF, VVS1, VVS2), weights ranging from 1 to 10 carats, triple-EX grading (Excellent Cut, Excellent Polish, Excellent Symmetry), and no fluorescence.

Polki (unfaceted) diamonds

Sarpech (turban ornament), India, possibly Rajasthan, Mughal period, 18th century, gold, unfaceted diamonds, rubies, emeralds, enamel - Royal Ontario Museum

Old diamond jewellery in India, specially from the Mughal period, uses unfaceted diamonds. Mughal style jewellery has become popular in India recently featuring uncut diamonds termed "Polki" (which originally referred to a style of cleaving diamonds).[18][19] The diamonds used in modern polki jewellery are low grade[20] and do not have much investment value, even though polki jewellery can be expensive. The diamonds are backed by silver foil to allow light to reflect. The Kundan jewellery in India uses the same style, but it uses glass instead of diamonds.[21]

Funds

In June 2012, Finanz Konzept AG launched the worldwide first actively managed physical diamond fund, which invests in natural physical polished diamonds and coloured diamonds.[22]

In November 2012, PureFunds launched an Exchange Traded Fund listed on the New York Stock Exchange that invests in companies engaged in the diamond industry, rather than invest in physical diamonds.[23] The fund ceased trading on January 23, 2014.[24]

Mining companies

Mining companies produce and sell rough diamonds. Given the very high expense of operating a diamond mine, many diamond mining companies are public and/or owned by governments.[]

The largest diamond company in the world is Alrosa, which surpassed De Beers in carat production in 2008.[25] De Beers is privately owned by Anglo American (85%) and the Botswana government (15%), so its shares are not traded on the stock market.[26] The Oppenheimer family had previously owned a 40% stake in De Beers, but this was sold to Anglo American in 2011.[27] Rio Tinto and BHP[] are the next largest producers, but diamond mining is a small part of their commodity portfolio.

Recycled diamonds

Diamond, because of its hardness, is one of the few gemstones that has a recycled market. Recycled diamonds are diamonds that have been polished and set into jewelry, then removed and possibly re-cut before sale back into the diamond industry. This sector accounts for 5%-10% of market supply.[28] Many jewelers typically offer to repurchase diamonds at a 15-20% discount relative to their selling price.[28]

Whether it is releasing capital to re-invest in more liquid stock, or generating greater margin on re-purchased diamond jewelry, repurchasing diamonds is part of an ongoing strategy for many members of the jewelry industry. In 2012, Tacy Ltd. stated that it expected \$1 billion worth of recycled diamonds to be put back into the market.[29] In 2013, its estimation was \$1.2 billion.[30]

The market

Diamonds of a certain size, generally half a carat and above, are traded and processed by the industry individually. Each has unique attributes and a corresponding unique market place. Diamonds of this size, whether recycled or not, have a similar market price. It is impossible to tell the difference between a recycled one-carat diamond (as long as it is undamaged) and a "freshly mined" one-carat diamond with the same characteristics, and the market does not differentiate between them.[]

Diamonds of smaller sizes are traded in parcels of similar stones, called 'melee', after the French word for mix. Generally diamonds of exactly similar size, cut, shape, color and clarity are used in a single piece of diamond jewelry. If not, the stones would not match and the piece would not sell. Small recycled diamonds are treated differently from large individual stones.[] A single small diamond has limited value by itself. It is only of use if it can be matched with other similar diamonds, reset into jewelry and sold to a customer, thereby creating value. Small recycled diamonds need to be sorted, have their cut modified and resold to manufacturers in large parcels to allow them to pick matching stones to set in jewelry.[]

References

1. ^ Howard, Vick (2008). Brides, Inc: American Weddings and the Business of Tradition. University of Pennsylvania Press. p. 49. ISBN 978-0-8122-2045-2.
2. ^ Stanwick, Peter; Stanwick, Sarah D. (20 February 2013). Understanding Business Ethics. SAGE Publications. p. 327. ISBN 978-1-4522-5655-9.
3. ^ "The global diamond industry" (PDF). PR BAIN REPORT. Retrieved 2015.
4. ^ a b Zimnisky, Paul (June 6, 2013). "A Diamond Market No Longer Controlled By De Beers". Kitco Commentary. Kitco.
5. ^ a b Low, R.K.Y.; Yao, Y.; Faff, R. (2015). "Diamonds vs. precious metals: What shines brightest in your investment portfolio?" (PDF). International Review of Financial Analysis. 43: 1-14. doi:10.1016/j.irfa.2015.11.002.
6. ^ Allum, Marc (2013). The Antiques Magpie: A compendium of absorbing history, stories and facts from the world of antiques. Icon Books Limited. p. 92. ISBN 978-1-84831-619-5.
7. ^ Why Diamond Sales Have Been Weak and Gold Prices Are Rebounding, GRACE DONNELLY, Fortune, August 29, 2017
8. ^ DIAMOND PRICE CHART, PriceScope, Nov 2017
9. ^
10. ^ "Curiosity: Be Inspired To Learn Every Day". Curiosity.com. Archived from the original on 2013-06-22. Retrieved .
11. ^
12. ^ https://www.gia.edu/gia-news-research-latest-on-synthetic-diamonds-video-presentation. Missing or empty |title= (help)
13. ^ Zimmerman, Ann; Raghavan, Anita (8 March 2006). "Diamond Group Widens Probe Of Bribe Charges". The Wall Street Journal. Dow Jones & Company, Inc. Retrieved 2015.
14. ^ a b "GIA Scandal Makes News Again". JCK Magazine. 1 July 2006. Retrieved 2015.
15. ^ Svoray, Yaron and Richard Hammer, Blood from a Stone: The Quest for the Life Diamonds, Forge Books, 2003 ISBN 9780765307958
16. ^ "The New Color of Luxury: Yellow: Sunny Diamond Hues Are in Demand as Fashion Favors Brighter Jewelry; Deeper Shades Are Pricier". The Wall Street Journal. October 18, 2012.
17. ^ "Global Diamond Report 2014" (PDF). Bain & Co.
18. ^ William Hoey (Captain.) (1880). A Monograph on Trade and Manufactures in Northern India. American Methodist Mission Press. p. 54.
19. ^ Diamond sellers need to join the polki dots, ET Bureau, Jul 17, 2017
20. ^ Polki Diamonds: A 'New' Fashion Statement from Mogul India, Russell Shor, GIA, April 11, 2016
21. ^ Intricate kundan polki jewellery to capture the charisma, Deepa Gupta, The Statesman, February 6, 2018
22. ^ "Physical Diamond Fund". finanz-konzept.ch.
23. ^ World's first diamond and gemstones ETF makes its debut, Mining.com, December 3, 2012
24. ^ "PureFunds to Abandon Diamond/Gemstone and Mining Service ETFs | Investing News Network". investingnews.com. Retrieved .
25. ^ "Russia's Alrosa shaping up for flotation". Financial Times. December 19, 2010.
26. ^ "De Beers goes private in \$19bn deal". BBC News. May 18, 2001.
27. ^ AFP (November 4, 2011). "Oppenheimers leave the diamond race with \$5bn sale". Mail & Guardian. Retrieved 2011.
28. ^ a b Zimnisky, Paul (May 23, 2013). "The Impact of Synthetic and Recycled Diamonds". MiningFeeds.com.
29. ^ Gordon, Julie (13 March 2012). "'Recycled' diamonds come back to haunt industry". Reuters. Retrieved 2015.
30. ^ Tacy's 2012 Diamond Pipeline