Abu Dhabi, UAEMonday 10 December 2018

A golden time for diamonds as investors eye a new best friend

The beauty of diamonds might be in the eye of the beholder, but experts forecast the precious gem will soon outshine gold.
The rising global demand for diamond jewellery is being fuelled by increased consumer spending, in particular in emerging markets such as the Middle East, China and India. Ali Haider / EPA
The rising global demand for diamond jewellery is being fuelled by increased consumer spending, in particular in emerging markets such as the Middle East, China and India. Ali Haider / EPA

Gold may have been the star investment over the past couple of years, but it is expected to be outshone by diamonds as leading producers of the precious gem prepare to list before the year is out and investors increasingly recognise its sparkling potential.

Although the value of diamond jewellery, in particular antique jewellery, is in the eye of the potential purchaser, the stones provide a more liquid and international asset. And, while tastes in jewellery often change radically from one geography and culture to another, a diamond is a diamond.

The price of rough, uncut diamonds will rise by 9 per cent this year, according to Edward Sterck, an analyst at BMO Capital Markets. Mr Sterck predicts that the price will continue to rise by 1.4 per cent in 2014, 2.6 per cent in 2015 and 3.2 per cent in 2016. And, although gold may rise by as much as 19 per cent this year as investors use it as a hedge against inflation, it is expected to fall for three years, starting from next year, according to a median of seven analyst estimates compiled by Bloomberg.

Global demand for rough diamonds is expected to grow at an average rate of 6.6 per cent to almost US$23 billion (Dh84.4bn) by 2020, according to a report by the business consultancy, Bain & Co, which was commissioned by the Antwerp Diamond Centre.

"Demand will likely return to its pre-crisis historical trajectory and then continue to grow steadily," says Gerhard Prinsloo, a partner at Bain & Co.

Rising global demand for the precious stone is being fuelled by increased consumer spending on diamond jewellery in developing regions such as China, India and the Middle East. Rapidly expanding middle- and upper-class consumers in these regions can now afford to buy jewellery in volumes large enough to fuel rising diamond prices worldwide.

"In recent years, the most striking phenomenon relating to the demand for luxury goods has been the growth in Asia, particularly throughout what is known as 'Greater China' - which includes China itself, Hong Kong, Macau and Taiwan," Mr Prinsloo says. "Sales of luxury goods in this region have been growing fast, now accounting for 10 per cent of the market. In the near future, it could overtake Japan in luxury goods consumption."

According to Bain & Co, high-net-worth individuals and banks in China, India and the Middle East, in particular, have shown interest in investing in large, high-quality diamonds.

"We are hearing of people in the Middle East buying diamonds as a physical asset in uncertain times and this belief may have driven some additional purchases," says Stephen Lussier, an executive director of De Beers and the chief executive of Forevermark, the De Beers Group diamond brand.

But investors should be wary of believing that all diamonds represent equal value. Some diamonds mined from the ground are so flawed in their rough state that they are suitable only for industrial use. But some can be so flawless that they command a huge premium. A rough diamond sold by Petra Diamonds achieved a price of $1.45 million at the start of this year. The sum paid for the 4.8-carat blue stone represents a value of $300,000 per carat.

Diamonds also have radically differing values at various points in their value chain. The cost of a diamond sold in a jewellery store in the US is more than 50 times higher than when the same stone was mined in South Africa.

However, to get in on the ground floor of the industry and buy high-value, uncut stones is difficult, if not impossible, for most ordinary investors. The rough-diamond market is highly individualistic and there are only three legitimate ways of buying uncut diamonds.

One is a sales channel, developed by De Beers, called the "sightholder system". This involves inviting holders of long-term contracts, traditionally called "sightholders", to inspect diamonds the producers wish to sell.

"Sights" generally occur every four to six weeks. But the sightholder system is very much a sellers' market and dates back to the days when the big diamond producers held the industry in a vice-like grip. Buyers must still accept they will be offered the opportunity to buy certain stones.

"Prices are set at regular intervals that are determined by each individual producer," Mr Prinsloo says. "The quantity and quality of diamonds sold in each box is set in advance, as is the price for the entire box."

He adds that being a sightholder remains highly advantageous. Fewer than 100 independent sightholders work with the largest producers and buy more than 70 per cent of all diamonds produced in the world.

The second method of buying uncut stones is at auction. Ten years ago, auctions were held only for large stones. They now account for as much as 30 per cent of overall rough-diamond sales. Diamond auctions are sometimes open to the public, although some are attended only by selected buyers.

"Auctions allow buyers to make purchases without a long-term commitment, so they can take advantage of changing market circumstances," Mr Prinsloo says. "Typically, auctions help identify the maximum price the market will bear at any given time."

But diamond producers also believe that spotting a good diamond in the rough requires considerable expertise. The level of skill used in cutting and polishing a diamond could double its value or reduce it - and it takes a seasoned eye to make a killing buying uncut stones.

"I would think that the market for uncut stones is generally best left to professionals as it takes considerable expertise [and equipment] to transform a rough stone into a polished gem whilst maximising its beauty and value," Mr Lussier says.

When it's time to sell and realise the capital on the investment, private owners of uncut diamonds are also likely to find themselves up against tough professional negotiators prepared to argue the quality of each stone.

"I would suspect that the market for rough stones is likely to be relatively illiquid when compared to the market for polished gems," Mr Lussier says.

Once a diamond has been cut and polished and is more easily tradeable, a number of additional factors come into play.

"The physical characteristics taken into consideration include weight, clarity, colour, luminescence, proportion, finished cut and dimension," Mr Prinsloo says.

Although Mr Lussier says some jewellers can add considerable value to diamonds by using them to create valuable luxuries, he believes that the stones themselves can represent a better investment.

"It's almost impossible to generalise about jewellery because every item has to be assessed on its merits," he says. "In general, larger diamonds are a better store of value."

Buyers of polished stones should also beware of two potential traps. One is the plethora of types of synthetic diamonds now available. The other is the risk of unwittingly purchasing a "conflict" diamond; one that has been illicitly traded to fund warfare. However, according to De Beers, the industry now has both risks in check.

"There are a number of industry safeguards in place to protect consumers, including guidelines which require jewellers selling synthetics to clearly identify them," Mr Lussier says.

"It's important to point out that less than 1 per cent of the world's diamonds are deemed to be conflict diamonds and the diamond industry is one of the most effectively regulated industries on the planet."

The legitimate trade in synthetic diamonds outweighs the dangers of them being passed off as natural stones, although it takes an expert to tell the difference between the two. To cash in on the future industrial potential of synthetic diamonds, De Beers has launched a subsidiary called Element Six, which has opened offices in California's Silicon Valley. Diamond microchips, for instance, are expected to be 20 times faster than silicon chips.

"The unique and extreme properties of synthetic diamonds have the potential to solve some of the world's biggest industrial challenges, leaving synthetic diamonds well placed to enter an exciting era of future growth in the coming decades," Mr Lussier says.

Some investors prefer to invest in diamond-production companies rather than take the risk on individual stones. Alrosa, the Russian diamond monopoly, is expected to launch an initial public offering (IPO) either late this year or early next year.

Key shareholders in the company are the Russian government, with a majority stake of 51 per cent, the state government of the Yakutia Republic and local municipalities. The company's core business is the production of rough diamonds in Russia and Angola. In 2010, the company produced more than 34 million carats of diamonds.

There was widespread speculation last year that De Beers would also seek a stock exchange listing. But in November, Anglo American, the UK-headquartered mining giant, acquired the Oppenheimer family's 40 per cent interest in De Beers for $5.1bn, making it clear it did not intend to launch an IPO.

Then, on December 21, Petra Diamonds, the South African producer, listed on the London Stock Exchange.

But whether investors are looking at rough or uncut diamonds, or at diamond company stocks, the market believes that the gem will sparkle in 2012.

"Clearly, diamonds have a unique and enduring value and, as they become rarer and demand continues to outpace supply, have become a more attractive store of value," Mr Lussier says.