Are Investing in Diamond Worth The Risk?

Why buy a diamond? It’s a question most would answer quite simply: as a symbol of love, either to a special person in one’s life or as a beautiful reward to oneself. In the pursuit for a purchase that encapsulates the emotion of love, a diamond is one tangible way to express intangible qualities, such as beauty, rarity and eternity. That’s the way the diamond industry has operated for generations and also why diamonds have captured the imagination of consumers and their chequebooks. Yet increasingly, diamond is being marketed as an ‘investment’, particularly the rarest varieties in terms of size and colour. Diamond’s attractiveness to investors is based on the relative buoyancy and consistency of the diamond market compared to other investment channels such as shares and property. As headlines abound about record-breaking jewellery auctions, breathtakingly large bids at the Argyle Pink Diamond Tender and, more recently, panic about diminishing supply, it can be easy to lose sight of the unique risks of diamond as an investment.

A question of colour

When considering investing, it’s important to distinguish between the colourless (‘white’) diamond market and that of natural fancy colour diamonds. Unlike other gemstones, white diamonds can be likened to, and tracked as, a commodity; they are prone to fluctuations in supply, demand and price, and therefore prime for speculation. Exemplifying this, white diamonds have seen prices collapse across all sizes and grades over the past year. Alan Bronstein, president of the Natural Color Diamond Association, believes this does not make white diamonds an appealing investment option

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“A private individual has very limited options for selling or achieving liquidity on a downward cycle, which we are in now and that the trade is experiencing for the last two years,” he says. “No one can predict if and when this trend will change so how can you prepare for the moment of liquidation? And if traders, who make their living in this volatile market of fluctuations, get trapped in the unpredictable cycle, what chance does a private individual have?”

In order to halt the current downturn of the market, Bronstein believes the industry will tighten supply in order to stabilise prices. Indeed, this trend that has already begun with De Beers.

The diamond behemoth recently slashed its production targets for the second half of 2019 following a 50 per cent drop in rough diamond sales for its sixth cycle compared to the same period last year. Russian mining giant Alrosa, which is the world’s largest diamond producer by volume, has also begun reducing supply. Bronstein also points out that certain extremely large diamonds have not been absorbed into the market as quickly as in previous years.

“There is, relatively, more availability and the demand at this moment cannot keep up with the supply,” he explains. Indeed, as technology has improved – both in diamond discovery and excavation – increasing numbers of large diamonds have flowed into the market.

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Canadian company Lucara Diamonds has unearthed two diamonds of more than 1,000 carats in just the past four years at the Karowe mine in Botswana, while Australian miner Lucapa has unearthed 13 diamonds of more than 100 carats since 2015 at its Lulo alluvial mine in Angola. Both miners used Tomra XRT optical sorting technology. Despite the uncertainty in the market, pricing authority Rapaport includes an Investment Diamond Certificate as one of its advertised services. The company claims the certificate “provides absolute confidence and assurance of quality and added value” and that “Rapaport certified diamonds maintain their market value, making them ideal for investors, looking for portfolio diversification.”

Portfolio diversification is a trend noted by Ari Taibel, gemmologist and director of Australia’s leading fine jewellery and gemstone auction house First State Auctions. “Many auction buyers have an investment angle when buying diamonds as well as fine gemstone jewellery. I believe they see diamonds as a very compact and tangible store of wealth,” Taibel explains. “One big diamond investor told me he has become a big investor in diamonds and coloured gemstone jewellery since the GFC [global financial crisis of 2008].

“Over the last 10 years, we have seen fancy colour diamonds as the best-performing class of diamond,” he adds. “Diamonds with a reputable laboratory report like GIA or GSL are always preferable as these are very highly regarded by investors.”

Yseult de Crombrugghe, project manager Langerman Diamonds, which deals in natural, fancy-colour diamonds of all hues, says that colour diamonds are appealing due to the low volatility in the market. “High-quality diamonds are more and more considered by savvy investors as a strong and wise long-term investment. Scarred by the Financial Crisis and fearful about volatility, Millennials are looking for unique and alternative sustainable investments. Fancy colour diamonds are one of those – they are amongst the least volatile investments possible. Additionally, we have noticed a new trend for fancy colour diamond collections.”

The incredible price rise of pink diamonds is impossible to ignore. According to the Fancy Color Research Foundation, which tracks pricing and auction results for natural fancy colour diamonds, pinks have averaged price-per-carat growth of 12.1 per cent per year from 2005 to 2019; however, this figure is an average and includes outlier auction pieces that have fetched up to $US2 million per carat. Arnaud Soirat is chief executive of copper and diamonds at Rio Tinto, which owns Argyle in West Australia, the world’s largest pink-diamond mine. Soirat told The Age, “If you look at the evolution of the price over the past 20 years the price has increased by 500 per cent. Every year the price increases by a double digit number; if you compare that to the stock market that’s significantly higher.”

Those prices are predicted to rise even further with the imminent closure of the Argyle mine in 2020, which is reported to account for 90–95 per cent of the world’s pink diamonds, as well as a significant portion of yellows and ultra-rare reds. Less than 1 per cent of all diamonds mined globally have colour. As a result, it’s no surprise that specialist companies such as the Sydney-based Australian Diamond Portfolio have emerged to assist prospective buyers in acquiring pink diamonds “like any other traditional asset”. The service provides “sourcing, buying, storage, and later selling” of pinks, while claiming the diamonds offer “insulation from traditional financial markets”.

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