The Future of Diamond Investing and its Impact on the Economy
The Diamond industry is only 240 years behind schedule…but rapidly catching up!
What does a bond, a share, and a diamond have in common? Other than the fact that all three are considered an investment, all three were prominently trading in London.
Bonds are considered today among the safest type of all investments (government backed of course), while stock shares are considered to be riskier. Although most of us would consider diamond trading to be even riskier than bonds or stocks, since they are less liquid, they are considered by many to be a defensive investment to balance your long term risk, just like gold.
Some ask why diamonds are not yet traded on a stock exchange. Well, the answer is actually quite simple; Diamonds are as inimitable as your fingerprint. Each diamond has its own unique characteristics, and as a result there are no two diamonds exactly alike. Still, because similar ones can be found, diamond pairs are made. Diamond pairs among the even rarer items, such as natural fancy color diamonds, are considered extremely exclusive. But if this is the case, how come they are not yet regulated by any government? There are many theories about this. One thing is certain; that world economies rely on diamond values. A diamond is a fundamental financial pillar of the world economy. How will the value of diamonds, specifically Fancy color Diamonds be affected should all of a sudden, the investment community decided to create major Diamond funds, or trade them on an electronic system just like the NASDAQ.
When and how will the next Fancy Color Diamond (FCD) boom occur?
Recently, the AWDC (Antwerp World Diamond Centre) in partnership with Bain & Co. released its 2013 annual report about the industry, called Journey through the value chain. The report discusses the journey that a diamond makes from the time it is mined from the ground, until it hits the shelves in a retail store. Much of the information is well presented with graphs, and statistics. An important observation was established, such that demand for diamonds was correlated to the growth of GDP, which economically makes sense. But nowhere in the report is it mentioned about the effect of prices and demand should it become a standardized commodity in the investment community.
We are aware that the supply will remain the same for the foreseeable (next 10 years), but as only a few mines will start to operate in the next 7-10 years, there will be a gap between regular demand and supply. But how big will the gap be should the investment community decide to substantially increase the demand for diamonds for investment purposes? Will they just be huge “DeBeers” style management who will just store the stones in a safe and let the supply/demand economic rules adjust, or will they trade the commodity on an exchange like all other commodities and so become supersized trading houses. How will it all work together?
Will all of a sudden the mass market turn to synthetics while the “rich & famous” continue to buy diamonds which may not be at the reach for the masses? I doubt it. We always want the real thing.
Social Class change
If we look at the demographic and social change in both china and India alone, we see a major shift. Both countries have a middle class which consists of only 19% and 16% respectively, will increase to 44% and 46% respectively. Fundamental demand for diamonds will increase due to increase of disposable income by this growing social class.
Market changes ahead
There are also many challenges facing the current market chain from mining to the retail store. The mining sector, sorting and selling of rough is called the “upstream” according to the Bain report, the cutting, polishing and jewelry manufacturing is known as the "middle market," and the diamond retail sales is known as “downstream”. There will definitely be some pressure on this chain as well, and eventually, layers in the industry will have to fold to either side. It is believed that eventually there will only be an upstream and a downstream while the whole middle chain will integrate into either side by way of closures and acquisitions. Some mines will get into cutting and jewelry, while some current jewelry retailers will find themselves buying directly from cutters, and so three layers will become two. We have seen this happen in many other sectors of the economy. The question remains, how will each player in the value chain adapt to this upcoming change? What will they have to do to survive the next consolidation stage?
We may be able to safely assume that major changes are coming to this obscure sector.
After all this talk about diamonds, and potential of an exchange, what about fancy color diamonds? What about that sector of the diamond industry that practically stands above the rest and has outgrown any other hard asset in the market? The asset that is only 0.01% of the market but that yields more return on investment to its dedicated followers over the years? What will happen to them? Can one imagine that not too far in the distant past these were actually less valuable than the white goods? These were actually pushed to the side when they were found as part of parcels.
Are we playing with another Pandora box?