As prices rise and supply falls, investors see diamonds’ potential

As prices rise and supply falls, investors see diamonds’ potential

Take a product that is difficult and extremely costly to locate, mine and bring to the market, while sources of that product are drying up and new mines take years to bring on stream and, generally, are on a relatively small scale. At the same time, demand from major emerging markets is continuously pushing the price of the product higher. Surely from the point of view of an investor, seeing volatile global stock markets, governments in crisis, and the threat of a double-dip recession and disinflation, this would appear to be a classic investment opportunity?

Indeed, investing in diamonds is increasingly being considered as following in the footsteps of gold, providing a worthy investmentopportunity and a safe investment haven. As a result, groups are being established to provide investors, nervous about the state of global stock and bond markets, with both an alternative investment option, as well as benefitting from rising demand and prices for diamonds. Indeed, despite the recent decline in prices for both rough and polished goods following the sharp rises seen in the first half of 2011, analysts still believe that investor interest in diamonds will continue to grow, largely as a result of the supply shortfall that is expected to be felt in the coming years. Although the idea of investing in diamonds has popped up several times over the past decade or so, it generally was not taken further due to the perceived difficulties of investing in gems.

Since diamonds are so heterogeneous, unlike gold or platinum for which single prices can be quoted, it traditionally was regarded as difficult to persuade investors to put their money into the gemstone. However, several factors have helped change investors' positions and persuaded some that such funds can be not only viable, but highly profitable. Firstly, there is the financial volatility which has continued for the past three years since the near financial meltdown of September-October 2008.

Then, there are the sharply rising diamond prices seen in the past year or more, and certainly since the start of this year. In addition, there were widespread reports that the easy portability and inherent value of diamonds further boosted their prices as they were sought after by the wealthy in Middle Eastern states as a result of the so-called Arab Spring earlier this year.

Concern among the wealthy political and business elites in the countries of North Africa and the Gulf that popular revolutions could see their wealth confiscated is reported to have persuaded many people to place their cash, and faith, in diamonds. The renewed interest in diamonds as an investment tool was certainly reflected in a memorandum of understanding and framework agreement concluded between the Antwerp World Diamond Centre (AWDC) and ICBC, China’s biggest state-owned bank, and one of the largest financial institutions in the world. The agreement provides the possibility of additional sources of financing for the diamond trade though the provision of alternative investment opportunities for the bank's more than 240 million private and corporate clients. The move also makes a new source of diamond inventory available to an expanding salon network without making additional demands on working capital, as well as supporting an expanding bridal business where clients prefer to review a wide range of diamonds at each salon. In addition, it reduces inventory financing costs and improves returns on capital. “The financial markets are weird and people are looking for alternatives to holding the dollar,” Rapaport told Bloomberg. “In that kind of environment, diamond prices are going to do very well.” Rapaport said that global demand could outstrip supply by at least 75 million carats by 2025, as producers struggle to find commercial deposits of rough, while demand continues to increase in Asia.“Diamonds are going to track exponential growth of wealth in developing markets. Chinese demand for diamonds is simply fantastic, so is Indian.”

Gold and diamond prices have traditionally moved together, with diamonds generally attracting a higher price, however gold prices have been higher than those for diamonds since the 2008 financial crisis. That was because jewellery sales dropped in the wake of the recession, while gold was seen as a safe-haven investment. However, the theory that gold could only drive higher took a bash in September when the price of bullion plummeted quickly on profit taking. While gold supplies remain ample, the increasing scarcity of diamonds will push prices higher, Sterck believes.

Author: L. De Backer

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