Diamonds might be a girl’s best friend but from next year they could also be an investor’s best friend thanks to a global decline in the production of quality gems from mines in Russia and Canada, and rising demand, particularly in China.
Not a recommended investment for everyone because of the difficulty in valuing individual stones there is evidence that the top end of the diamond business is starting to stabilize after a sharp fall in gem prices in 2011.Like some other luxury goods, diamond prices were pushed higher in the wake of the 2008 Lehmann Brothers collapse as rich investors diverted a portion of their capital into non-monetary, and highly-portable, assets.
Between mid-2009 and early 2011 industry indices which track the value of the highest quality diamonds rose by 70%, but crashed by around 30% last year as fear faded.
The latest assessment of the diamond market, according to an analysis by Citigroup C Markets, is that improving economic conditions, structural social trends in China and a decline in the rate of newly-mined gem quality diamonds is setting the stage for a sustained price recovery.
Because diamonds are tricky to value, and the same stone can generate widely different opinions, they are a commodity best left to professionals, and even then only after receiving expert advice.
But, what analysts at Citigroup have detected is a change in the outlook for diamond demand, a significant decline in the rate at which kimberlites (the host rock for most diamonds) are being discovered, and the drying up of a diamond stockpile once kept by the industry leader, De Beers.
“Diamond prices are weaker than they were two years ago and demand does not yet appear to be strong enough for the limited mine supply to create a significant shortage,” Citigroup said in report titled Diamond Price Outlook which was circulated to clients this week.
“It is therefore likely that prices will stabilize at the lower levels through 2013 and 2014, but that the mine supply trend, the structural shift in China, and a slowly recovering global economy should see diamond shortages making their mark on prices in 2015-to-2010.”
Of the major factors in the diamond market the three most important are the melting of the De Beers stockpile, the development of a diamond-ring buying habit by engaged couples in China, and the failure of the mining industry to discover big new deposits of gem-quality stones.
The De Beers stockpile was a critical factor in controlling prices for much of the 20th century when the London-based company drip-fed diamonds into the market via an arcane process that caused it to be viewed as a monopoly engaged in unacceptable trade practices.
A changed marketing policy by De Beers has seen it behave more as a conventional business, but the sell-down of its stockpile has reduced the buffer-effect so that when the next shortfall in mined diamond supply occurs there could be significant upward price pressure.
Catching The Engagement Ring Habit
In China, a growing middle-class has seen the development of a diamond-buying habit with Citigroup reporting that 62% of engaged coupled in Shanghai now buy a diamond ring, roughly double the 33% rate in the 1990s. In Beijing the gift of a diamond ring currently extends to only 40% of couples.
In the mining world, despite a worldwide search, there has been a very low rate of kimberlite discovery with mine production of diamonds peaking in 2006 at an annual rate of 175 million carats, and currently down to 130 million carats a year.
“New discoveries could see industry production reaching 160 million carats in 2018 but if economic growth has normalized by then, diamond demand should be far greater than that level at that time.”