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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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