Diamonds: an alternative asset class?

2 12 2009

I have flagged earlier this autumn that diamond prices were going to rise significantly in the Zeniths and Abysses entry. Unlike other minerals, investment in diamonds is not a straightforward endeavour as the gems are not traded in an open market and that the two main producers, that possibilities for equity investment is limited as the main producers, DeBeers and Alrosa, are unlisted. There is however a push to develop diamond as an alternative asset class, which could lead perhaps to a diamond fund of some sorts.

On November 17th, the World Federation of Diamond Bourses, an organization founded in 1947 to provide bourses trading in rough and polished diamonds with a set of common trading practices, endorsed a suggested retail price list for different categories of diamonds. This suggests that a basic market infrastructure for diamonds being developed. Considering this, it is worth asking if diamonds could soon become a widely traded good. This would be just short of a revolution for the diamond industry.

Diamond retailing and marketing: current world order

Diamond sales have usually taken place through tightly knit networks of dealers and retailers. More than half of the world diamond production is retailed through the Diamond Trading Company which is the sale and marketing arm of DeBeers. Not only does it market DeBeers’ production but it is also mandated to retail a part of Alrosa’s production under an agreement that is not exactly pleasing European regulators and that is meant to be phased out completely this year. Anyhow, the Diamond Trading Company supplies to a limited number of sightholders (e.g. clients) which are selected carefully (the company lists only 111 sightholders worldwide).

Here is an excerpt of DeBeers “Sight and Sightholders” web page

As demand for rough diamonds outstrips supply, the DTC uses an objective set of criteria to judge which businesses it will supply, known as Supplier of Choice.

This selection process is designed to ensure that the companies the DTC sells to are the best businesses for the categories of diamonds they are applying to buy.
The DTC has recently published the list of Sightholders that have been awarded supply until March 2011.

What I find surprising in this excerpt is that the company mentions that the demand for diamonds exceeds supply. NOT! There is no natural shortage of diamonds. At present, the absence of transparency in diamond retailing has contributed a great deal to the mystique and the ever increasing price of diamonds. Marketing and the control of supply have made the gem a coveted luxury good despite its common occurrence in nature. The “A diamond is forever” line was carefully crafted to discourage the resale of diamonds and thus keep them off the market.

In sum diamonds are niche products and commodities at the same time. At present the focus is more on the gems being luxury items rather than commonly traded goods. However with the push in favour of diamond becoming an alternative investment class, so the current focus could be changing.

An alternative asset class?

Is the interest in diamond investment possibly threatening the current world order? It could but it seems that the main producer is not keen to see diamonds being traded as commodities or becoming the anchor of funky financial products.

DeBeers does not voice any concerns against investment in diamonds in principle, it is wary of investments conduits that treat the gems as commodities. Stephen Lussier, head of corporate affairs at De Beers stated that “our view on the concept is that it is more like art investing and less like commodity investing.” At present, there are a few funds investing in diamonds. These however focus on very rare and unique gems that are particular due to their size or colour. Like this one.

De Beers has also been known to discourage investment in diamonds because they perceive that bubbles prices followed by sharp falls are bad for consumer confidence in diamond as a long-term value. They also want to prevent speculation from impacting the jewellery sector.

I assume that DeBeers is probably a sufficient force in the diamond market to prevent the development of a “commodity-like asset” for diamonds. The company’s view expressed above is probably shared by companies that extract diamonds exclusively. However among the four big producers, Alrosa, DeBeers, BHP Billiton and Rio Tinto, two are big integrated mining companies which are prone to have difficulties in adapting to the niche characteristics of the diamond market and could perhaps see some benefit to selling their production through more open markets.

I assume that there are difficulties related to the development of diamonds as an asset class. The extreme differentiation of the gems (through carat, cut, clarity and colour) makes pricing an intricate exercise. Investment in diamonds can be unappealing due to their low liquidity and fungibility. Still, it is perhaps not impossible to see changes in the way diamonds are traded.




One response

17 12 2009
Sally Buckley

I recently read an interesting chapter on the subject of diamonds in a book called ‘Africa: Altered States, Ordinary Miracles, by Richard Dowden’. In Sierra Leone, river blindness is increasing: the scramble for diamonds has spread the fly that causes the disease. I really recommend reading Richard Dowden’s work.

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