Understanding Colored Diamonds Education

Understanding coloured diamonds chapter 1

Stephen Hershoff

Introduction

Diamonds have long been considered the ultimate form of concentrated wealth - a private and easily transportable international currency. The coloured diamond market in particular can be traced back centuries to Indian merchants and European kings. These rare items have always adorned royalty and the wealthy merchant classes as symbols of power and prestige. Elizabeth Taylor and the Sultan of Brunei can be counted amongst those who have developed a passion for rare coloured diamonds.

Usually small and subtle, coloured diamonds possess a sophisticated, low-key glamour that only the wearer, or another elite connoisseur, can understand.

Although coloured diamonds continue to evoke images of wealth and prestige, collectors and investors now recognize the powerful investment fundamentals driving this closely held market. Few markets offer the price stability, concentration of wealth and growth prospects of coloured diamonds.

Investors are interested in the diamond market because "the supply-demand curve is very advantageous-growing demand and little new supply," notes Stephane de la Serre of Diapason Commodities Management, which is administering a fund of million-dollar-plus stones.

Diamond prices may soon be their highest ever, industry experts say, thanks to growing demand from new markets, boosting the cost of that engagement ring as much as 30 % over the next five years. At a meeting in Antwerp, Belgium, the president of Russia's ZAO Alrosa said diamond prices will rise to new highs as demand outpaces production. For the first time, the market faces a growing shortage of rough, Sergey Vybornov told a conference organized by the Antwerp World Diamond Centre. This will have a significant impact on long-term prices in the diamond market.

As sophisticated international investors continue to seek portable, tangible wealth in these uncertain times, the potential of investing in rare coloured diamonds has never been stronger.

Grading diamonds

Like any collectable, the initial price of a diamond and its ability to increase in value is determined by its rarity. The main factors that influence diamond prices are its colour, cut, clarity and carat weight, all being factors of rarity.

 

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Evaluating coloured diamonds

The actual grading of coloured diamonds is very straightforward and simple to understand but it requires sophisticated laboratory equipment and years of experience to become an expert. It is based on both colour saturation and the appearance of colour.

 

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Coloured diamond rarity

While it is true that all natural coloured diamonds are rare occurrences, the astute investor knows that there are differences in rarity among different colours. In other words, certain colours are more or less rare than other colours.

 

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The science behind coloured diamonds

To help understand the extreme rarity of coloured diamonds, it is important to understand the unusual process behind coloured diamond formation. Created millions of years ago, these colourful gems crystallized under relatively similar geological conditions as the well-known, colourless variety, yet with a slight twist of fate, endowing each of them with exciting and unusual colours.

For example, all natural pink diamonds show that they were subjected to a directional pressure in the earth when they were in a semi-solid crystalline state. This is referred to as a plastic deformation, similar to squeezing a deck of playing cards in your hand and having each card slide past the next one by a slight amount along natural parallel directions. In fact, the pink colour seen in all natural pink diamonds is localized along narrowly spaced parallel pink grain lines inside the body resulting from this plastic formation. Researchers are still trying to unlock the mystery behind these structural defects and to understand how slight movements of atoms along octahedral direction can absorb certain wavelengths of light causing pink colour.

Every coloured diamond has its own story. Green diamonds are exposed to natural irradiation, blue diamonds contain trace amounts of boron, yellow diamonds are created through nitrogen formation under the earth by extreme amounts of temperature and pressure.

It is these unusual circumstances in nature that lead to the creation of coloured diamonds. Only a small percentage of the earth contains diamond deposits. Within these deposits, only ideal conditions of temperature, pressure and chemical exposure will lead to the formation of coloured diamonds. What is critical to understand is that of these coloured diamond formations, very few have the colour saturation, colour composition and consistency of the top graded coloured diamonds. The science behind coloured diamond formation dictates that very few will appear in nature as the mining cycle continues in the future.

Coloured diamond demand

Coloured diamonds appear infrequently in nature. In fact, for every 10,000 carats of colourless diamonds mined, only 1 carat will turn out to be a fancy coloured diamond. Of the estimated 163 million carats of diamonds mined in 2007, only a few thousand carats will be cut and polished coloured diamonds.

Consider the Argyle mine in Australia:

The largest source of pink diamonds in the world is the Argyle mine in Australia. They may recover 25 million carats of diamonds in a year, but only 10,000 carats of pink, of which fewer than 1,000 will be larger than a quarter of a carat in the rough.

Anyone involved in the diamond market should understand that important long-term developments are occurring in diamond-producing countries around the world that will have a direct impact on prices over the next decade.

Although these developments have been unfolding over the last five years, they are now coming to the forefront as dealers, jewelers and consumers struggle with the reality of the market fundamentals: the global supply of diamonds is decreasing for the first time in 25 years

The first announcements came out of Australia in 2003, when Rio Tinto Diamonds, owner of the largest diamond mine in the world, The Argyle Mine, announced that they would no longer be mining the alluvial deposits surrounding the main open-pit mine. Another announcement quickly followed indicating that Argyle was doing a feasibility study to determine how much longer reserves could support current mining rates.

In late 2005, After millions of dollars of research and a lucrative financial package from the Australian government, Argyle decided to take the mine underground in 2007 and close the open-pit mine. Since that announcement, the Argyle mine experienced a supply decline from a peak of 35 million carats to just over 20 million carats in 2007, drastically impacting the supply of pink and cognac diamonds.

During this time De Beers announced that they would be closing the oldest diamond mine in the world, the Kimberly mine in South Africa, along with two other smaller mines. This was another indication of where the supply in the market is headed. As South Africa is the primary source of yellow diamonds, the supply of certain types of coloured diamonds began to come under pressure. South Africa is expecting supply to decline from 14 million carats in 2006 to 12 million carats in 2007, almost a 20 % decline.

As recently as the autumn of 2007, a number of diamond producing countries have been reporting first half production and a number of them have reported decreases.

     1) Russia reported a supply decline of 6 % from their most recent results, confirming that Russian diamond supply is on the decline.

     2) The Democratic Republic of Congo experienced declines of approximately 19 % from the previous year as new mining operations have lower reserves than anticipated.

     3) Botswana, the largest diamond producing country in the world, recently reported that supply is expected to be flat from last year to this year.

Dr. Steve Sjuggerud, editor of True Wealth Newsletter, recently reported that by 2008 the world would be facing a diamond shortage. Based on recent global reports on diamond mining production and exploration, the decreasing supply developments in the global diamond market are occurring at a much faster pace than anticipated.

Buying The Right Colors

Although there is no such thing as a coloured diamond mine, certain mines are known to produce small quantities of specific types of coloured diamonds. For example, Australia is recognized for their beautiful pink and cognac diamonds. South Africa and Botswana produce fine yellow diamonds and an occasional blue diamond. Central Africa and Brazil produce orange diamonds and a small selection of chameleon and green diamonds. It is important to consider which colours will be most affected by the imminent supply declines in the diamond market before acquiring rare coloured diamonds for your portfolio.

 

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Investing in coloured diamonds chapter 2

Stephen Hershoff

In terms of both value and growth, coloured diamonds are offering perhaps the best return in the gemstone market. Since formal records were first kept at the beginning of the 1970s, prices for the highest grades of coloured diamonds have increased in value by an average of between 10%-15% a year, with rarer colours and higher grades enjoying the greatest appreciation. In addition, this appreciation has statistically been non-correlated to the stock and bond markets, an important consideration for investors seeking a diversified portfolio.

Since 1970 natural fancy blue diamonds have doubled in price every 5 years, natural fancy pink diamonds have doubled in price every 6-7 years (see Figure W.1) and natural fancy yellow diamonds have doubled in price every 8-10 years. During recessions, coloured diamonds tend to retain their value and in stable or healthy economies they appreciate in price.

While there are no performance guarantees, the consensus of coloured diamond dealers is that continued long-term conservative appreciation of up to 10 per cent annually is a reasonable prospect, with the rarer colours appreciating in excess of this range. Investors should consider starting a collection by investing ₤5,000 to ₤10,000 in one or two coloured diamonds.

Figure W.2

Average prices of a highly saturated 1-carat fancy intense blue diamond since 1970, eye clean stones.

There are five main reasons why investors purchase coloured diamonds:

Privacy Most countries do not require the ownership of coloured diamonds be disclosed to any government authority. The certificates are in bearer form, there are no names or serial numbers and there are no registration requirements for coloured diamonds.

Portability Coloured Diamonds are considered the most concentrated form of wealth in the world. A multi-million dollar portfolio can be discreetly placed in a small envelope.

Estate Planning - Consider the acquisition of a small cache of coloured diamonds that can be discreetly passed from one generation to the next. Depending on the number of heirs, more stones with less unit value may be needed.

Price Stability - The majority of the important coloured diamonds are in strong financial hands, whether it be the dealers/jewellers or the investors/collectors who own them. Even in a severe recession, owners of fine coloured diamonds who need money will sacrifice or discount their common merchandise or other assets first. Fine coloured diamonds are so hard to substitute that anything that can be replaced more readily will be sold first. These two fundamentals combine to lead to remarkable price stability and consistency.

Long Term Growth Because of the rarity, decline in supply and the steady increase in demand for quality coloured diamonds, prices should continue to rise for the next decade. It is important to recognize that coloured diamonds are still new to the general public and the potential for new buyers in the next decade is significant, while the supply stream is finite.

Acquisition

When purchasing a coloured diamond, consumers have a number of options:

Retail Jeweller Retailers are starting to carry a larger inventory of coloured diamonds in their flagship stores. For example, Tiffany has built a collection of coloured diamonds, including a 2.58-carat mint green diamond that is considered almost impossible in its rarity. They can also take requests and acquire stones in the secondary market. Although coloured diamonds are very popular at the retail level, and they have a much better selection than in the past, you will be paying established retail prices.

Auction Houses - If you are planning to acquire a piece at one of the major auctions, you are required to provide information of financial suitability in order to enter into the bidding process. Although you may be able to bid on a number of different stones, auctions are a sellers' market, and the top pieces usually see a number of buyers competing for the same stone. However, astute buyers have been successful at selectively acquiring pieces at auction. The auctions houses are the standard for prices in todays market, with volumes continuing to increase and prices in selected segments of the market reaching new heights. The auctions have become an important gauge for the coloured diamond market and coloured diamonds are comprising a larger and larger portion of the important and magnificent jewelry sales at the worlds auction houses.

Specialty Dealers - A third method is through a group of international specialty dealers. Although most specialty dealers only work with a select client base, they are often in possession of rare coloured diamonds unavailable at the retail level and at a competitive price relative to some of the pieces that sell at auction. Specialty dealers have contacts directly with the diamond suppliers and are often in communication with any private sales offering coloured diamonds. The advice you will receive from a specialty dealer will be more personal and will give you a better gauge of the overall trends in the market. More importantly, specialty dealers are obliged to maintain both discretion and confidentiality for their clients.

Key trends in the market

Orange Diamonds People dont realize how rare orange diamonds are. They are very undervalued relative to their rarity as they are priced at a deep discount to blue, green and red diamonds even though they are almost as rare. One should attempt to find an orange diamond that looks like a pumpkin, tangerine or a citrus orange.

Chameleon Diamonds These possess the ability to change colour under different lighting conditions. Most chameleon diamonds have a greyishyellowishgreen colour. They are one of the great mysteries of the diamond world.According to Ariel Friedman with chameleons, you will own something clearly unique among the fancy colours.

Pink Diamonds The Argyle mine in Australia produces only a few hundred a year. With demand for pink diamonds growing dramatically and the mine seeing the supply decrease, pink diamonds offer strong fundamental growth prospects. The owners of the Argyle mine have announced they have closed the open pit mining operation and supply has already declined 30 % this year. If that pace continues, an investment in Argyle pink diamonds today could double in value in the next three to five years. Bubblegum, rose and lilac pinks are the most popular.

Yellow Diamonds True canaries continue to set new record prices at the worlds auction houses. They are also experiencing dramatic growth at the retail level. With the pending supply decreases in Botswana and South Africa, quality canary and daffodil yellows offer very good long-term prospects.

Special Stones Any time a red, green, violet or blue can be acquired at the right price, it is always a worthwhile purchase. Only one or two greens and reds are available for sale each year.

Taking possession versus offshore storage

Owners have the option of taking possession of their Coloured Diamond or leaving them in an offshore storage facility. If you take physical possession, diamonds can be delivered to any major city in the world by a bonded and insured delivery service. It is advised that owners have the stone insured, which may require an appraisal from a recognized laboratory, such as the EGL. Appraisals usually cost ₤50 to ₤100 and insurance premiums are nominal, usually well below 1 per cent of the value per year. If you choose to leave it in a bonded and insured storage facility, the fees vary from a flat rate every year to a small percentage of the value of the stone annually. Owners have full authority and control of these accounts. In either case, the owner will take possession of the laboratory certificate. Overseas storage facilities are available in the Caribbean, Switzerland, Dubai and the free trade zones in Asia. Your private dealer will be able to advise you on your options when it comes to both storage and insurance.

Monitoring the market

Monitoring prices is similar to the property market and requires a comparison of prices achieved for comparable stones on a per carat basis. Auction results, retail sales figures and dealer prices are used to gauge the general price level. Individual stones can sell for premiums or discounts depending on the buyers preference.

The Sales Process

Like real estate or art, the coloured diamond market is considered a decentralized market because there are no specific bids and offers on stones and there is not one central market where the majority of transactions take place. The advantages of a market like this are that buyers working with experts can take advantage of inexperience, lack of knowledge, distress sales and economies of scale to achieve discounted prices of specific pieces. For example, a seller of an uncertified stone may misidentify the stone for a fancy grade when in fact the laboratory may certify the stone as an intense diamond, thereby significantly increasing the value for the purchaser upon certification. However, it is essential to work with experienced firms who can source top quality stones at various levels of the wholesale market and who can acquire the relevant certification and documentation to ensure authenticity and quality standards.

Fancy coloured diamonds have among the most liquid and sophisticated markets for any collectible asset. They can be transported quietly and legally and sold globally in most major cities. There are thousands of participants in the market, from collectors and investors to dealers and jewelry buyers.

However, you should view them as a mid-to-long-term investment with a time horizon of five years or longer from acquisition to liquidation. When you do want to sell, you should contact your dealer at least ninety days before you need the money. This will give your dealer the chance to accurately gauge the expected market price. Coloured diamonds are similar to real estate and require time to find the right buyer.

Be realistic in your investment outlook; while coloured diamonds have historically been an exceptional investment, they are not as liquid as most securities investments and they are subject to higher markups.

The auction market

When it comes time to buying and selling rare coloured diamonds, one of the most prominent levels of marketing are the major auctions, held globally in the spring and autumn and selectively throughout the year. The major auction houses have an international clientele of dealers, wealthy collectors and investors who are attracted to rare pieces that represent good value. Because the coloured diamond market is narrow in size and scope due to the supply restrictions, it can be difficult to source stones categorized as extremely and notably rare through the retail sector. In addition, many buyers dont have the benefit of working with a specialty dealer who exclusively handles rare coloured diamonds. Consequently, they turn to the public auctions because of the access and the contacts they have developed.

The auction houses primarily sell estate jewelry, along with selective loose coloured diamonds.

Although the auction houses prominently market the truly one of a kind pieces, such as a four carat vivid pink or a true red diamond, they also handle more moderately priced pieces that have inherent rarity and natural beauty. These pieces also sell particularly well and have shown to achieve prices well above the estimate. Examples of prices achieved are shown in Table W.2 to W.6:

Table W.2 Hong Kong, June 200

Lot # House Size Colour Grade Shape Estimated Price Actual Price
2274 Christies 2.08 Deep Brown Orange Heart $5,200-$8,450 $29,640
2283 Christies 1.08 Fancy Yellow Green Pear $20,800-$31,200 $40,560

Table W.3 Hong Kong, November 2006

Lot # House Size Colour Grade Shape Estimated Price Actual Price
2854 Christies 1.02 Fancy Light Pink Marquis $5,000 - $7,500 $37,440

The auction houses will charge a percentage of the selling price, depending on the value of the sale. The higher the selling price, the lower the commission will be. However, The auction houses have the advantage of getting the kind of exposure that brings out buyers through their global marketing efforts and extensive list of wealthy clients.The minimum offering prices they accept are in the ranges of three to five thousand pounds, with top lots selling in the millions:

Table W.4 Geneva, May 2006

Lot # House Size Colour Grade Shape Estimated Price Actual Price
357 Sothebys 5.57 Intense orangy Pink Pear 460,000 - 720,000 CHF 1,140,000 CHF

Table W.5 London, June 2007

Lot # House Size Colour Grade Shape Estimated Price Actual Price
209 Christies 11.22 grey yellowish Green Rectangle £90,000 £120,000 £335,000
211 Christies 7.81 Fancy grayish Blue Circular £300,000 £400,000 £2,609,000

Experts agree that auction sales will continue to grow as new buyers in Europe, Asia, the Middle East and America learn to appreciate the beauty and rarity of coloured diamonds. HSBC private banking has already worked with Sothebys on three auctions in the UAE and major European private banks are advising their customers on rare coloured diamond purchases. As wealthy global investors are introduced to the benefits of investing in coloured diamonds, the auction houses will continue to see new record prices and strong sales for fancy coloured diamonds.

Summary

In these times of world economic and political uncertainty, investors are looking for alternative asset classes. Many turn to investing in collectibles as a means of diversifying their portfolios away from traditional investments.

The coloured diamond market offers investors the chance to achieve long-term growth, wealth preservation, financial privacy and portfolio diversification. They have proven to be one of the safest and most profitable long-term investments. However, before you buy your first diamond, research the market. The coloured diamond market is most suitable to certain types of in investors who have a strong capital base and a long-term horizon. Always work with a dealer that specializes in coloured diamonds. It is important to learn the subtle nuances of the market so that you can make informed decisions and plan your portfolio to realistically meet your financial goals.

Authors Bio:

Stephen Hershoff is Managing Director of Pastor-Genève bvba. He has over forty years of experience in the diamond business. Beginning in London in the 1960s, he was a dealer in diamonds and other coloured gems. Throughout the late 1960s and 1970s, he concentrated on advising a private client base of international collectors and connoisseurs through his own consulting company. In the early 1980s, he moved to North America to assume responsibility for a company that became one of the four most important gem dealers recommended by the Dow Jones-Irwin Guide to fine gems and jewellery. His company, Pastor-Genève, is recognized as one of the most established dealers in the coloured diamond market.

 

   Sources: Chapter 1

 

   Sources: Chapter 2