Diamonds as investment

[Texas Leaguer]

Adamtal,
I think a good range of cautionary advice has already been well articulated here. So I feel comfortable saying some positive things about diamonds as “investment”. First, the challenge is not so much in the vehicle of exchange, but the fact that there is not a ready ‘exchange’ available to a consumer. Assuming you bought the right diamond at the right price and that the market for said diamond has increased over time, you still have to be able to exit the market at a price level commensurate to that you entered on, in order to enjoy any appreciation. ..............

..............You may be one of those people who takes such an interest that you end up doing enough homework and groundwork to invest in diamonds successfully. And after reading this thread, I am not concerned that you will go into it lightly.

Thanks Texas Leaguer for your imput too.

"Diamonds have been more subject to volatility in recent years than in the decades preceding."

This is why I think, if the trend continues we can see higher appreciation in value as we seen in the last years. But you are right, no one will put his hand into the fire that the price will as steadily grow as it was growing in the past decades. Interestingly it can be seen on pink diamond example in previous post. The p.a. appreciation is slowing down and who knows, if it will slow down even more or in the next few years it will start to accelerate even more.

Agreed. Being bullish on the potential of something to perform over time is one thing. Understanding that over time things may change and you may not have a ready exit to control your downside is a fact that should not be underestimated.

 

[adamtal]

I"ll let others tackle the fancy pink question. There are far too many variables there to get into it. We're having a tough time here with just one (Rap).

I put my magazines away but I have a few handy that are reasonably close to 5 year steps on Rap.

1.00/F/VVS1/round

July 2000 $8,400 per carat.
July 2005, 10,200
may 2011, 13,500
July 2015, 12,000

That's 117% in the last 10 year window. A scosh under 2%pa,

Ok, if we believe that the price will rise as in previous decades, then I take every round 10 years as one "season". And that there should be 3% p.a. every season. The problem is we are looking just for the last 15 years, so hard to calculate/play with these numbers. Will try to predict, but as everyone knows, this is only a guess game

2000-2010 (in this case 2011) - from 8.400 to 13.500 = 160%, 5% p.a., made almost double p.a. in that season. Should have been 11.300. But because of that pike a correction came in 2015.
2010-2020 (sticking to the 3% p.a.) - If it would be 11.300 in 2010, then in 2020 it should be 15.200. We will see

This is not like commodity as Texas Leaguer pointed out, this is pretty much a monopoly with some speculators. If the monopoly want to see steady rise for their "product" then there should not be too big p.a. in one decade. This is why I think they will do everything to see that 3% p.a. each decade and correct the supply accordingly. If lab grown diamonds can ruin this 3% p.a. then they will do everything to not promote them, but market them as "fake" diamonds to stop people buy them. If demand will outperform the mines production/supply by big margin and DeBeers will not be able to make a steady 3% p.a. on white diamonds, then they will probably market lab grown diamonds to not overly fasten the price growth of natural diamonds, because then it could get out of their hands and could loose control over the prices.

 

[John P]

Good continued perspective.

John, is it allowed to share which trading platform you looked at or not allowed on this forum? Then it is probably the same as on pricescope, some are +xy% and other -xy%, but it comes down probably only to dimensions of diamond and angles etc, if taking into account that everything else is same.

Everything else is not the same, though. Set angles and cut-differences aside and bear with me a moment...

You likely know grading reports do not disclose inclusions which are eye-visible - even running into VS levels. Did you know that there are SI and down diamonds with regular undisclosed transparency issues caused by pinpoint-clusters or clouds? There has been a recent rash of diamonds with undisclosed brown or green tint in the body color, which can happen with certain rough. Some diamonds can have a milky or oily appearance due to chemical compounds and natural characteristics where the diamond formed. Many of these things take expert/magnified inspection to detect but they're absolutely value-factors. With increasing frequency, suppliers must place NBGM (“No brown-green-milky”) in their wholesale notes because jewelers have been constantly asking about these issues when buying.

There are also “Lucky Certs” floating about. GIA takes in over 60,000 diamonds per week across 10 locations. Color and clarity are subjective and graders are human. Even if we presume an optimistic 90% consistency, there are more than 6,000 incorrect GIA reports issued per week. With low results the submitter will request a re-check, so many of the over-strict reports get corrected, but inflated grades typically go unchallenged.

Companies which buy diamonds for their own stock will typically guard against these things. The platform I was referring to is Rapnet, by the way. It's quite different from Pricescope because it's trade-to-trade sales only. As it relates to retail sales, the diamonds with inflated grades, undisclosed issues - and cut depreciation discussed before - do litter the bottom of internet searches, the streets of diamond districts and “deep-discount” jewelry exchange counters.

Now imagine: Seller A calls-in a supplier's diamond with a lucky cert for 75...Seller B calls-in a diamond with slight green tint for 80...Seller C owns his own stock and he has purchased a bonafide diamond with the same stats for 90. All of them offer those diamonds to the public for 100. A consumer dithers with all three...sellers A and B get into a discount-war, bringing their final prices to 87. Seller C (the only stand-up seller) withdraws because that's literally below his cost. The consumer winds up buying from one of the others, who laughs his way to the bank. Meanwhile the consumer thinks seller C was the villain, when he's actually the only hero who offered true value-for-money.

I'm taking the long way around to be sure you know how dramatically Rap moves as a target: Presuming that one diamond with discount-15 relative to Rap is a better deal than another with discount-10 is absolutely not reliable. In fact, when making purchases with an eye on future value, it's critical to have some level of expert assistance. What I'm trying to say is, don't rush blindly into a situation where someone says "Hey I'll getcha a dozen diamonds all at XYZ discount to Rap (mwa ha ha)." Who knows what you'll get?

By the way I'm a believer in the value-proposition of diamonds as long as they pass my rather strict rubric of standards. I also believe they will continue to appreciate, especially considering the coming years and demographics in the Asia-Pacific. But trying to invest at the consumer level has its challenges, not the least of which is some deliberate industry-opacity.

This report may have some interesting data for you. Especially as it relates to supply-demand projections.
http://www.bain.com/publications/articles/global-diamond-report-2014.aspx

 

[denverappraiser]

snip... then they will probably market lab grown diamonds to not overly fasten the price growth of natural diamonds, because then it could get out of their hands and could loose control over the prices.

DeBeers lost control of the prices a long time ago. At the very least with their 'supplier of choice' initiative in 2000 if not before. Their market share of the rough business is now well below 40%. That's still nothing to sneeze at but it's hardly the monopolistic control that people think they have. The rest of the value chain (cutting, jewelry manufacturing, retailing, labs and so on) happens almost entirely without them although they've started dabbling in all of this. Their Forevermark brand and the DeBeers retail stores are a clear effort to expand up the food chain from just being a mining company.

DeBeers is already the #1 synthetic diamond producer in the world and has been for decades but they are doing it with industrial goods, not gemstones. Industrial grits and such. The diamonds in your fingernail file are almost certainly synthetic, and they were almost certainly made by DeBeers. I'm just guessing, but my speculation is that they and the other big mining companies are going to be interested in promoting the additional value of mined goods for the simple reason of their own self-interest. They're some of the best marketers the world has ever seen so I'm not inclined to dismiss them lightly.

 

[Texas Leaguer]

snip... then they will probably market lab grown diamonds to not overly fasten the price growth of natural diamonds, because then it could get out of their hands and could loose control over the prices.

DeBeers lost control of the prices a long time ago. At the very least with their 'supplier of choice' initiative in 2000 if not before. Their market share of the rough business is now well below 40%. That's still nothing to sneeze at but it's hardly the monopolistic control that people think they have. The rest of the value chain (cutting, jewelry manufacturing, retailing, labs and so on) happens almost entirely without them although they've started dabbling in all of this. Their Forevermark brand and the DeBeers retail stores are a clear effort to expand up the food chain from just being a mining company.

DeBeers is already the #1 synthetic diamond producer in the world and has been for decades but they are doing it with industrial goods, not gemstones. Industrial grits and such. The diamonds in your fingernail file are almost certainly synthetic, and they were almost certainly made by DeBeers. I'm just guessing, but my speculation is that they and the other big mining companies are going to be interested in promoting the additional value of mined goods for the simple reason of their own self-interest. They're some of the best marketers the world has ever seen so I'm not inclined to dismiss them lightly.

I agree that the market today is nothing like the monolithic structure it was in the past with DeBeers pulling virtually all of the strings. And that is probably a good thing. But it is also one of the reasons for the volatility that we are seeing in diamond prices. We are starting to witness more true market forces at play.

Speaking of marketing, one of the things DeBeers contributed for decades was to pump huge amounts of money into marketing diamonds which was a benefit to the whole diamond food chain. That spend is no longer there so the question becomes how will that void be filled such that consumer demand doesn't erode in favor of other products? Who will grow the new potential markets in China and India and elsewhere?

The supplier of choice initiative was partly intended to build around strong companies ready, willing and able to promote diamonds effectively. I am not sure that aspect is working all that well.

 

[Karl_K]

Today's market is not yesterdays market:
http://www.jckonline.com/2015/07/27/diamond-industry-crisis-worsens-de-beers-allowing-large-deferrals-india-sees-defaults-suicides

The market is much more volatile than it has ever been in the past.

 

[adamtal]

Thanks again for the great inputs. Learning a lot from you guys.

John, I thougt that when carat size, cut grade, color grade, clarity grade, symmetry grade, polish grade is the same for two diamonds, then the difference in price is determined by angles and ratios of cut. And if two diamonds were same even on angles and ratios the price has to be exactly the same. But I was really wrong on this and did not even realized - however I should have, because seen images of diamonds in same clarity grade and one looked awesome, while the other one terrible. I totally agree that expert is needed to choose a right diamond which can have a good price in future. I thought it is easier to choose between diamonds.

I have also read that DeBeers is not the monopoly it used to be, but I thougt it does not really have to bother us, because they made a cartel with other large players and they also want to see a steady appreciation in prices. If the market will be driven by supply/demand as in normal market the diamond business can really crash.

Thanks Karl, I havle read that article before,but it was good to check again.