Diamonds: don't buy into the illusion

Mar 01, 2010, 11:10

Merryn Somerset Webb

Posted byMerryn Somerset Webb

Share with
friends:

Comments (9)

There was a fine picture in the newspapers this weekend of Johan Dippenaar of Petra Diamonds holding up a large diamond. A very large diamond – it came in at over 500 carats (the average engagement ring is well under one carat). And, being entirely flawless, had just been sold to a Chinese buyer for $35.3m.

So did the buyer get a good deal? That's hard to say. The financial crisis hasn't been good to diamond prices. By mid 2008 the market for new diamonds had all but collapsed. Polished diamond prices fell by a third as retail sales just vanished (30% of US jewellery stores have shut down since the crisis kicked off) and rough diamond prices fell around double that.

So what next?

The industry says that the worst is over, that prices have bottomed out and that those of polished diamonds are steady.

And the brokers are tipping diamond miners again. They say that there have been no good diamond finds since the 1990s, so supply could soon be tight. They also point to the huge GDP growth in China as a forewarning of fast-rising demand from the middle class for polished stones (which is presumably why Hong Kong's Chow Tai Fook Jewellery wanted Petra's stone in the first place).

But this might be an area where only fools rush in.

For starters, note that a lot of the things you belive about diamonds aren't really true. Diamonds aren't rare. Turn on to QVC for an hour during one of the jewellery sales if you aren't convinced. No obvious shortage there.

Or take yourself off to a country auction: there you will find you can buy handfuls of second-hand diamond jewellery for a couple of hundred quid.

And right now there are even more diamonds about than usual. The industry is living in fear of Alrosa (which controls 97% of Russian diamond production) dumping its huge inventory on to the market and pushing prices down in the process. The firm did not cut production during the crisis, so its stock of unsold diamonds is now ludicrously large.

Alrosa's vice president told the Antwerp Diamond Symposium late last year that the company would "approach its inventory in a responsible manner." But the point is not how they dispose of it but the fact that the inventory is there at all.

The truth is that when you buy a diamond you buy an illusion – you pay a high price for perceived scarcity when there is actually none. Diamond prices rest on little more than the retail market continuing to buy into that high-cost illusion.

But with the Americans (still the largest diamond market in the world by a long way) desperately deleveraging and the Chinese miracle clearly at risk, I'm not sure that is something ordinary investors should be betting on.

Comments (9)

Published in Blog More articles by Merryn Somerset Webb

Share with
friends:

Related articles

Comments

Leave a comment

  • 1. assetinvestor34

    (01 March 2010, 12:18PM)  Complain about this comment

    Another ill informed, useless blog.
    I doubt Chow Tai Fook spent 35mill on a piece of rough because of the fast-rising demand from the middle class for polished stones. And QVC for an hour to see that there are loads of diamonds? - that sounds like good technical analysis!
    When you write blogs about industries you should actually know something about the industry other than regurgitated nonsense from the uniformed!

  • 2. Merryn

    (01 March 2010, 12:57PM)  Complain about this comment

    There is plenty of statistical evidence on diamond supply should you want it - see my comments on the Alrosa stockpile. The point of mentioning QVC is simply to say that if you can buy something for a couple of quid every 3 seconds on a shopping TV channel it is hard to argue that it is rare and precious...

  • 3. assetinvestor34

    (01 March 2010, 02:47PM)  Complain about this comment

    I apologise if my previous comment was rather forthright but it seems like there is a regular trip on the bandwagon of picking up on misguided propaganda relating to diamonds to make headline statements.
    A couple of quid on QVC are not diamonds they are cheap CZ or very low quality goods. Gem quality diamonds ARE rare. Less than 1000 tonnes (gem quality) have ever been mined. Also diamond mines have a very long lead time to production (between 5 to 7 years). 2009 there were major cut backs from all of the producers with many of them shutting down parts if not all mining activity. Much of Alrosa's production was actually purchased by the Russian repository Gokhran, which is government owned. ..................

  • 4. assetinvestor34

    (01 March 2010, 02:48PM)  Complain about this comment

    ..................(cont)
    It is not as simple as flipping a switch to turn it back on. There is a very clear supply/demand forecast deficit. But for some strange reason there are many who dispute this with virtually no evidence other than hearsay.
    There are reasons to be cautious when considering diamonds as an investment. But the headline propaganda seems too easy to focus on rather than the real issues of pricing and access to the market.
    Moneyweek is a great site for information and investment blogging but please add more substance to the topic of diamonds because there is too much misinformation out there!

  • 5. likelicorice

    (02 March 2010, 05:03AM)  Complain about this comment

    The diamond market is tightly controlled to maintain prices and create the appearance of scarcity. It is a very artificial market where supply and demand are largely irrelevant. When the spread between a "new diamond" and a "used" diamond is at least 30%, the only conclusion is that diamonds have very little intrinsic value.

  • 6. Digger47

    (02 March 2010, 10:46PM)  Complain about this comment

    I agree with Assetinvestor34 - diamonds ARE rare.
    Total world production in 2005 (the latest numbers I have, but probably not changed too much) was 175 million carats. That may sound a lot, but it is actually only 35 tonnes of stones!
    Of these rough stones, around 40% are industrial grade and only worth around $10/ct. That leaves just over 20 tonnes of gem quality diamonds - and the vast majority of these will be small stones that get even smaller as they are cut and polished (they can lose over 50% of their weight in cutting and polishing).
    (Continued below) .....

  • 7. Digger47

    (02 March 2010, 10:47PM)  Complain about this comment

    Continued ....
    The only major find in the past 20 years has been the mines in the Canadian Arctic, which came into production in the late 1990's and now make up over 10% of the world total by volume, but around 15% by value.
    Russian production has also increased since 2000, but based on pushing up mining rates at the existing mines. On the other hand, Australian production has declined due to falling reserves - as has production from South Africa and Botswana recently in response to lower demand during the economic crisis.
    I would not recommend buying diamonds directly as an investment - the resale market is just too difficult and, yes, there is a big spread on prices. But they are scarce (particularly larger, high quality stones) and the companies that mine them can be worth looking at as investments - particularly if the markets in the Far East grow.

  • 8. Sceptic

    (03 March 2010, 06:54PM)  Complain about this comment

    Seems to me Assetinvestor34 (and maybe digger47) has a vested interest here. de Beers PR man maybe?

    Thanks for the tip Merryn, I'll keep a look out for local sales!
    Keep up the good work.

    PS Found that new dream home yet??

  • 9. Turtle Trader

    (06 March 2010, 07:44PM)  Complain about this comment

    Try Tanzonite One. Tanzanite is 1000 times rarer than diamonds.

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.

>