A
seemingly modest 2 or 3-gram high-quality diamond can hold a value equivalent
to 100 kilos of gold. This remarkable combination of value and portability
positions diamonds as a potential form of emergency funding. Throughout
history, populations displaced by war or extreme upheavals have successfully
utilized diamonds as a portable and reliable asset in times of crisis.
Diamond
Producers:
Diamonds
are distributed across more than 35 countries globally. The primary
contributors to diamond production are Africa and Russia, which collectively
account for a significant share of the world's diamond output. Africa, in
particular, is home to numerous diamond mines and plays a central role in the
global diamond industry.
Canada
and Australia are also significant players in the diamond production landscape.
Both countries have made substantial contributions to the global diamond
market, with mining operations that yield high-quality diamonds. Canada, in
particular, has become renowned for its ethically sourced diamonds and is a key
player in the industry. Regions
in the Americas are also actively involved in diamond production. Brazil, in
particular, has emerged as a smaller but noteworthy source of diamonds.
Diamond
Characteristics:
Diamond,
a solid form of carbon, exhibits a crystal structure known as diamond cubic,
endowing it with the highest hardness and thermal conductivity among natural
materials. The extreme rigidity of the diamond's atomic arrangement exposes it to contamination by few types of impurities,
with exceptions like boron and nitrogen. Infrequent defects or impurities,
occurring at about one per million lattice atoms, impart colors such as Blue (Boron),
Yellow (Nitrogen), Brown (Defects), Green (radiation exposure), Purple, Pink, Orange,
or Red. Additionally, diamond boasts a remarkably high refractive index and
relatively high optical dispersion, contributing to its unique and captivating
visual properties.
Classification
of Diamonds:
Diamonds
can be broadly classified into two main categories: (1) Natural Diamonds
and (2) Synthetic Diamonds.
Natural
diamonds are those formed through natural processes or events. The majority of
natural diamonds boast ages ranging from 1 billion to 3.5 billion years,
originating at depths between 150 and 250 kilometers (93 and 155 miles) within
the Earth's mantle.
On
the other hand, Synthetic diamonds can be cultivated either from high-purity
carbon under high pressures and temperatures or from hydrocarbon gases through
chemical vapor deposition (CVD).
Additionally,
Imitation diamonds can be crafted from materials such as cubic
zirconia and silicon carbide.
Distinguishing
between natural, synthetic, and imitation diamonds is commonly achieved through
optical techniques or measurements of thermal conductivity. This classification
not only highlights the diverse origins of diamonds but also underscores the importance
of accurate identification in the diamond market.
The
4Cs of Diamonds:
Diamonds
are assessed based on four key criteria, commonly known as the 4Cs, which play
a pivotal role in determining their quality and price: Carat, Color, Clarity,
and Cut.
Carat:
Carat measures the weight of the
diamond, with one carat equivalent to 0.2 grams. This metric is integral to the
overall value of the diamond, influencing its price and highlighting its
rarity. It's crucial to note that carat weight is distinct from diamond size,
as different gem materials can have varying densities.
Color: The color of a diamond indicates whether it
is naturally clear or exhibits a different color. Generally, the rarer the
color, the higher the diamond's value.
Clarity: Clarity refers to any imperfections that may
detract from the visual appeal of the diamond. Blemishes and inclusions are
factors that reduce a diamond's clarity score.
Cut:
Cut refers to the style or design used
in shaping a diamond and encompasses symmetry, proportioning, and polish. Each
diamond is unique, making them exceptional investment assets. The cut, with its
unique facets, influences how much the diamond sparkles or reflects light,
consequently impacting its price. To assess quality, diamonds are evaluated
based on symmetry, polish, brilliance, and fire, categorized as poor, fair,
good, very good, and excellent. Poorly cut diamonds may appear dull,
significantly decreasing their value.
Diamonds
possess high value density, allowing for easy transportation at a fraction of
the cost of precious metals. The diamonds within a Diamond Standard Bar and
Coin, for instance, are valued at around $1 million per ounce. However, value
density varies among diamonds; for instance, a 1-carat Red diamond may be more
value-dense than a 1-carat White diamond due to the rarity of Red diamonds.
Diamond Standard's efforts to standardize diamond commodities enable investors
to bridge the value gap by acquiring fungible Coins and Bars. This
standardization helps eliminate disparities in diamond value, providing a more
equitable investment platform.
An
Underallocated Investment with Pent-Up Demand:
Investors
currently maintain a significant presence in various precious metal markets,
with substantial allocations of approximately 30% in the gold market, 19% in
the silver market, 17% in the platinum market, and 15% in the palladium market.
In stark contrast, the diamond market remains notably underallocated to
investors, constituting only around 1% of their portfolios.
The
underwhelming investment in diamonds, despite their well-established reputation
as one of the most sought-after and valuable precious resources, becomes
particularly perplexing when considering the substantial allocations in other
precious metals. The lack of awareness regarding standardization issues further
complicates this scenario, making it challenging for investors to tap into the
diamond market. Each diamond's unique characteristics and individual price
tags, in the absence of standardization, create a hazy path to liquidity.
The
absence of a streamlined market structure has hindered diamond price discovery and
transparency, deterring potential investors from entering the market. Efforts
to establish organized exchanges and market standards could potentially unlock
the pent-up demand for diamonds and bring about a more robust and accessible
investment avenue.
An
Uncorrelated Asset for Portfolio Diversification:
Diversification
stands as a cornerstone for risk mitigation within any investor's portfolio. By
holding assets with low correlations, investors can effectively reduce
portfolio risk. The correlation between two assets directly influences the
resulting portfolio volatility, making it essential for savvy investors to
maintain a diverse mix of assets with low or negative correlations. This
strategic approach maximizes returns for a given level of non-diversifiable or
systematic risk.
Diamonds
emerge as a unique and uncorrelated asset class, exhibiting low correlations
relative to multiple other asset classes. This characteristic suggests that
diamond prices are influenced by independent drivers different from those
affecting more frequently traded assets. The potential benefits of adding
diamonds to a diversified portfolio become evident in the lower volatility they
may contribute, given their distinct market dynamics.
However,
it is important to note that the correlation of diamonds may experience
changes, particularly with an anticipated increase in investor holdings. The
advent of standardized and regulated diamond investments, coupled with a
growing acceptance of diamonds as an asset class, could lead to an increase in
correlation. Investments tied to diamonds, such as commodities, futures,
options, private funds, exchange-traded funds, and commodity indices, may link
a portion of their market price performance to overall demand for assets and
securities. Consequently, heightened periods of market volatility could
contribute to an increase in correlations between diamond investments and other
assets.
Among
the various diamond indices, the 1.0 carat mixed diamond index has shown
the most effective risk-reducing performance. The construction of these indices
considered different weights (0.3, 0.5, and 1.0 carats) and quality
classifications (fine, commercial, and mixed) to reflect the diverse grades and
applications of diamonds within each class. Investment-grade diamonds are
further categorized into three size groups (0.3, 0.5, and 1.0 carats) and then
classified by color and clarity.
Only
colorless or near-colorless diamonds (grades E, F, and G) and specific clarity
grades (VVS1, VVS2, and VS1) were used for these indices, with the rarity of
apex clarity grades (FL and IF) and color grade D warranting a separate
grouping. This meticulous categorization ensures a nuanced approach to
including diamonds in investment portfolios, recognizing their potential as an
uncorrelated asset for effective diversification.
High
Price Volatility of Rough Diamonds:
The
global financial crisis marked a period where rough diamond prices experienced
significant volatility. Despite sustained consumer demand for polished
diamonds, rough diamond prices plummeted by 50% as retailers, wholesalers, and
manufacturers opted to sell down existing inventory rather than risk
replenishment in an uncertain market.
Interestingly,
18 months later, rough diamond prices more than doubled, surpassing pre-crisis
levels, driven by the industry's rush to restock in response to continued
consumer demand. The expectation is that such pronounced volatility will
persist, offering attractive trading opportunities for qualified investors who
can navigate the market's fluctuations.
Single
Stone Investment:
In
a broader analysis, Low, Yao, and Faff (2015) identified 1.0 carat flawless
diamonds as a strong hedge and a safe-haven asset. Notably, during the 2008
global financial crisis, these diamonds experienced the least volatility, with
1.0 carat flawless diamonds even rising in price when financial markets
collapsed. The authors concluded that physical diamonds demonstrated
satisfactory performance during periods of market volatility and should be
included in a portfolio for their downside hedging potential. Top-quality
flawless diamonds exhibited a strong negative correlation with international
equity markets, making them an attractive store of value that can provide price
stability and potential appreciation during market turmoil.
Larger
and rare stones, resembling the high-end art market, carry characteristics of
infrequent trades and unique pricing determinants, resulting in greater
variability in outcomes and risks. Despite this, larger stones offer
store-of-value characteristics and diversification benefits. The introduction
of standardized exchange trading methodology on the SDiX platform enhances the
recognition of diamonds as a rising asset class.
Industrial
Applications of Diamonds:
Diamonds,
renowned for their beauty, are equally valued for their exceptional hardness,
making them indispensable in various industrial applications. The abrasive
industry extensively utilizes diamonds for cutting, drilling, and grinding
rigid materials. The growth of the construction industry has further
intensified the demand for industrial diamonds, playing a crucial role in
cutting, drilling, polishing, and grinding materials like glass, concrete, and
ceramics.
Challenges
of Cost and Price Volatility:
Despite
the growing demand, the diamond market grapples with challenges related to cost
and price volatility. The high cost associated with diamond extraction and the
inherent uncertainty in natural diamond prices have left a notable impact.
However, the market has seen a surge in lab-grown synthetic diamonds, offering
a more cost-effective alternative. Price fluctuations in the diamond industry
are influenced by factors such as consumer perception, rough diamond
production, currency fluctuations, and evolving consumer buying patterns.
Cost
of Carry:
The
cost of carry for diamonds is defined as the expenses associated with storing a
physical commodity or holding a financial instrument over time, is notably
favorable. Carrying charges include insurance, storage costs, interest charges
on borrowed funds, and related expenses.
Unlike
traditional commodities such as oil and metals, diamonds have a fraction of the
cost of carry due to their size and handling process. This advantageous cost
structure, coupled with ease of storage and transport, distinguishes diamonds
from bulkier commodities and adds to their appeal as an investment.
Future
of Diamond Industry:
Continuing
the trend of the past decade, the future demand for gem diamonds is anticipated
to surpass global supply, leading to potential price increases. Existing mines,
having surpassed their peak capacity levels, are facing increased production
costs as they transition from open-pit to underground mining, and
navigate stricter environmental regulations. The industry consensus is that no
major new mines will be developed and operational in the medium term, given the
considerable lead time of 7 to 10 years required to open a new diamond mine.
On
the demand side, the United States maintains its position as the largest retail
market for polished diamonds. Notably, China and India have surpassed Japan in
recent years, with China emerging as the second-largest market for polished
wholesale diamonds. The rapid expansion of retail jewelry stores in China
underscores its growing significance in the global diamond market.
In
the context of broader market dynamics, investors have witnessed volatility not
only in listed stocks but also, in tradable forms of precious metals and
commodities traditionally considered safe havens, especially following the last
recession. In response to this, investors are increasingly seeking attractive,
tangible assets characterized by low volatility and low correlation to other
major asset classes, offering potential inflation hedging benefits. The
heightened investor sensitivity to valuation characteristics has fueled a
growing appetite for assets such as physical diamonds, where prices are
fundamentally driven by real supply and demand dynamics. This shift reflects a
strategic move towards assets perceived as more stable and grounded in tangible
market fundamentals.
Conclusion:
The
diamond market has witnessed significant developments, including the
introduction of blockchain-backed diamond source platforms by major players
like the De Beers Group. This technology ensures tamper-proof source assurance,
enhancing transparency and traceability in the diamond supply chain.
Looking
ahead, the diamond market is poised for steady growth. Factors such as
increasing demand from millennials, expanding industrial applications, and
technological advancements are expected to drive market growth. However,
challenges related to cost and price volatility persist.
In
the realm of investments, the polished diamond industry continues to evolve
with a focus on increasing transparency, particularly as wealth accumulates in
emerging markets. Diamonds, as precious commodities, serve as a store of value
and a hedge against inflation. Currently representing only 3% of annual
production, diamonds as investments have substantial upside potential in
comparison to gold (40%) and silver (20%). The inherent rarity of diamonds
further enhances their attractiveness as investments and valuable additions to
diversified portfolios.
Author
Thakur Ajit Singh
Founder - Quick Turtle | Graded Financial Services | AskCred
Financial Expert | Trainer | Management & Placement Consultant
Cell: 8169810833
