Summary: As global markets move sharply, some large super funds are considering allocating a small portion of their portfolio to precious metals such as diamonds. A number of forces could improve prices, such as De Beers stepping up its advertising and older mines closing down or reducing production. The diamond market is not homogenous like copper and gold – every stone is different.
Key take-out: Investors need to purchase diamonds before the margins are added for designing, making and selling jewellery, which add approximately 300 to 400 per cent to the cost of the investment.
Key beneficiaries: General investors. Category: Precious metals.
Let me explain to you how the action on global share markets led me to diamonds.
The gyrations in the global stock market global have been truly astounding in the last month. Unfortunately the share market, which is an important source of long-term investment and retirement wealth, has been taken over by a bunch of institutional gamblers who regard value as secondary. They are simply moving the market dramatically either way according to various whims that spread through the market, usually related to US interest rates. The institutional gamblers are being helped by stock exchanges that give them special ‘direct pipes’ into their market so the gamblers have an advantage over ordinary investors.
It is one of the world’s greatest scandals and Australia is a player in the market rigging.
It so happened that around the time of some really big market gyrations I ran into Rhys James who runs a business selecting diamonds for investment... but more of that later.
We all need the share market for part of our investment asset base but we are going to need to dampen the excitement that is generated by big rises and not allow ourselves to be depressed on the big falls – unless there has been a clear change in the global environment or the fortunes of a particular company.
And I have been worried all week that last Wednesday September 30 I declared this a bear market – it probably is, but it is no ordinary bear market because the gamblers are in charge and they will move it up and down as the whims take them (see Markets slide as trust declines).
For those investors that get too agitated by these big movements it is necessary to have a worthwhile percentage of your portfolio in assets that don’t fluctuate dramatically – property and corporate bonds are obvious areas and so are bank term deposits if you can handle the low interest rates.
In former times gold and silver were considered inflation hedges and occupied an area of stability in the market but they too have been taken over by the traders. And so I return to diamonds. Diamonds are certainly not an investment for everyone but they may suit some and I know a number of large superannuation funds that are toying with the idea of allocating a small portion of their portfolio to precious metals such as diamonds.
Most of us have diamonds which we purchased as rings or jewellery, rather than for investment. For the most part unless we are particularly skilled we bought the gems at retail prices which are substantially more than the base stone market value in a polished and cut diamond. If you are going to invest in diamonds you need to purchase before the margins are added for designing and making jewellery plus the retail charges. These add approximately 300 to 400 per cent to the cost of the investment. However the diamond market is very different to gold and silver because each diamond is different and so there is no completely generic market.
Historically the diamond market was dominated by De Beers and they controlled most of the diamond industry via the so-called central selling organisation. It was a massive cartel. But as new players entered the market that arrangement broke down and in more recent times there has been more stability. The largest producer of diamonds is still De Beers but the Russian company Alrosa is not far behind. The biggest market for diamonds is still jewellery and the investment market is not huge. India is a very large jewellery market but according to De Beers the biggest jewellery growth is in Japan and China.
In 2014-15 the top quality stone market has if anything fallen a little because diamond prices are in US dollars and many of the buyers including India and Japan were hampered by lower home currencies. In addition the anti-corruption efforts in China also lowered demand at the top end. I should emphasise that the diamond market is not homogenous like copper and gold. Every stone is different depending on the way it is cut and its quality. That makes the diamond market hard to assess and you need help. (To read a mining expert’s view see the complementary story from Tim Treadgold today: Diamonds: Easy to buy, harder to sell.)
On the other hand there are no huge stocks of diamonds and a number of forces are emerging that could improve the prices over the next five years. De Beers has stepped up its advertising of diamonds and has opened up shops. It uses the old slogan “diamonds are forever” which is proving successful. James Bond is back. But in addition luxury market retailers like Tiffany’s are producing their own jewellery and promoting diamonds.
De Beers and the Russian company Alrosa were the two largest producing groups in 2014 both in volume and value. Alrosa produced 26 per cent of diamonds by volume and De Beers 23 per cent. Rio Tinto was third with 10 per cent.
When we move up the value chain De Beers in 2014 produced 34 per cent of diamonds by value whereas Alrosa was 25 per cent. On a value basis Rio Tinto was only 4 per cent.
The two largest regions of production are Botswana for De Beers and areas around Russia. There are only two or three new mines establishing but at the same time we are looking at older mines closing down or substantially reducing production.
So as the accompanying graph from Bain shows in four years’ time there will be a considerable short fall in diamonds which will inevitably increase the price.
And if political instability continues in various parts of the world high quality diamonds are a good way for transporting wealth to avoid the problems at borders. As I explained Rhys James tells me that if you are going to invest in diamonds then you need to access the gems as close as possible to the point where the diamonds has been cut and put into a marketable condition. Carat is the term used to describe the weight of diamonds. One carat is 200 milligrams, or 1/5 of a gram. A two carat diamond is usually worth more than two single carat diamonds.
It is possible to buy a one carat really top quality diamond for around $US28,000 and a similar top quality two carat diamond for around $US90,000.
And as the diamonds get heavier so the price escalates dramatically depending on quality etc.
Of course many will prefer take the opportunity to use in jewellery the diamonds purchased for investment. There is nothing wrong with this but it does carry security risks and you pay a margin. But then there is the pleasure of wearing the diamond… A pure investor will want their diamonds locked away.
As I said before diamonds are not an investment for everyone but people can gain pleasure in investing in gems even though they might be in a safety deposit box. It is highly unlikely that there will be a collapse in the market because production and consumption are not far apart. And it is possible that these advertising campaigns that are being ramped up will swing a lot of people’s money into jewellery and benefit the entire diamond market. Then there is the looming shortfall in 2019. The biggest risk is that Russia will flood the market but there are no signs of that at present.