For more than 100 years, unless you were an industry insider or had connections to DeBeers, the prospect of investing in diamonds was completely out of reach. However, for the first time in history, diamond prices are no longer manipulated and are now a product of true market forces, providing investors with a long awaited opportunity.

Diamonds are not just a “girl’s best friend,” they’re also the next golden opportunity for millions of individual investors seeking safety and performance in this uncertain global economy. Investors can now buy, take physical delivery, track real-time prices, and liquidate their investment-grade diamond positions effortlessly.

And even better – prices are expected to spike soon.

So what happened over the last 100 years to make such an opportunity possible? The short answer is that natural economic forces will always prevail over any one company’s power and influence.

It all started in the second half of the 20^th century when DeBeers began to lose its control over the diamond market as a result of major mines being discovered in Australia, Canada and Russia. These discoveries made it difficult for DeBeers to purchase all of the rough diamonds on the market, in turn weakening their ability to influence supply and prices in their favor.

Over time, more and more diamond producers began to bypass the DeBeers cartel by selling their supply directly to the market. By the late 1990’s the DeBeers market share had eroded to 60 percent, a far cry from the 90 percent share it enjoyed in the 1980’s.

By 2004, the DeBeers stockpile was depleted, allowing diamond prices to trade on supply and demand fundamentals, just like any other commodity. Currently DeBeers has a market share of less than 40 percent.

So why should an individual investor care about these major structural changes to the diamond industry? Well… because allocating diamonds to their investment portfolio may well be one of the best investment decisions they can make.

According to a study released by Bain and Company in 2011, it is projected that there will be an additional 276 million middle class households in China and India by 2020. This influx of consumers is anticipated to fuel record setting diamond demand for years to come.

via www.valuewalk.com

Locally-based diamond experts are convinced that China’s new-found obsession with diamonds, combined with a burgeoning middle class, are forcing up prices globally.  As Chinese consumers grow increasingly enamored with luxury goods, they are buying diamonds so quickly that it’s inflating the price of stones around the world.  Since 2000, it’s estimated that 230 million Chinese have moved into cities to work for wages, creating a massive middle class that aspires to own diamonds.

As the demand grows for “affordable” stones, prices are being inflated under the rules of supply and demand. 
While prices for 1-carat internally flawless “top white” diamonds have risen about 7 per cent in two years, according to PolishedPrices.com – an independent diamond information website – an SI stone of similar size and colour has increased by 24 per cent.

Australian diamond expert Garry Holloway, said: “the same thing happened when Japan entered the diamond market in the 1980s.” China surpassed Japan in 2011 to become the second largest diamond-buying nation, behind the US.  “Japan demanded, and got, better cut quality diamonds,” Holloway added. “This raised the price of better cut diamonds, which in turn became more readily available, but at a higher price.”

Diamond dealer Robin Sobel of Protea Diamonds agrees with Hollaway, saying the price has definitely increased recently. He says he is paying between 5-7 per cent more for some diamonds.  He says mainly SI1 stones are very strong while VVS and VS1 stones are weaker due to Chinese purchasing power.  "The price has gone through the roof for these SI1 diamonds because they have become so scarce. I have clients waiting to purchase good quality stones and I can't find them. It's crazy," he said.

According to Anglo American Plc (AAL), owner of De Beers Buyers, China and the US accounted for about 20 per cent of global diamond demand in 2011 and that will rise to 28 per cent in 2016 as the market grows from US$23 billion to US$31 billion.

Initially, affluent Chinese would consider only purchasing the highest quality diamonds, but as the middle class has pushed into the diamond market, that requirement has disappeared.  However, it appears there is still sufficient activity in the top end of the market to ensure prices remain high.

Financial news analyst Bloomberg reported that even as shoppers go down-market in China, the gap to VVS stones was still large. The report suggested that a flawless 1-carat “top white” round diamond would cost about US$28,800 from online retailer Blue Nile, while a typical middle-market SI1-category diamond of the same size and colour would cost about US$7,200.

www.jewellermagazine.com

A 28 ct. D internally flawless diamond set a per-carat record at Sotheby’s April 8 Hong Kong sale of Magnificent Jewels and Jadeite. 

The stone, which had excellent cut, polish, and symmetry, achieved $6.9 million, or $239,352 per carat—a world record per-carat price for a round white diamond.

Other notable sales: 

• A matched pair of diamond pendant earrings, each 8 cts., brought in $2.82 million. 

• A 19.54 ct. cushion-shaped Colombian emerald and diamond ring took in $1.93 million, above its $1 million to $1.5 million estimate.

via www.jckonline.com

Dominion Diamond Corp., formerly known as Harry Winston, has seen diamond prices rise over the last few months, and predicts they will continue to increase over the next year. 

While the company saw overall diamond prices decrease this year, it also found that prices rose 9 percent since August, and 6 percent in the current quarter, according to James R. W. Pounds, the company’s executive vice president, in a conference call following the release of its financial results.

He said he expects prices to plateau over the next couple of months, and then possibly increase again by the end of the year.

He noted that diamond demand remains uneven in India and China, but said the company is seeing “upbeat trends” in the United States, with strong indications that the American distribution channels were consolidating.

“Larger players now dominate what was once a fragmented market,” he said.

Company executives also dropped numerous hints they have their eyes on buying the rest of the Diavik mine, after purchasing nearby Ekati. The company currently owns 40 percent of Diavik, and the remainder is currently being offered for sale by owner Rio Tinto.

CEO Bob Gannicott talked at one point about possible benefits that could occur if Ekati and Diavik “were to come under common ownership.” Later, he added that it “was not clear at this time" whether Dominion would acquire Diavik.

The company completed the sale of its Harry Winston luxury brand division to Swatch this month. “That sales transaction brought us closer to the Swatch Group,” Gannicott said. “We contemplate a diamond supply relationship going forward.” 

Dominion said it expects to close its purchase of the Ekati diamond mine by April 10.

The company also reported mixed financial results.

Results from the fourth quarter of fiscal 2012 (ended Jan. 31):

• Consolidated sales from continuing operations: Up 8 percent, to $110.1 million
• Operating profit from continuing operations: Down 12 percent to $21.0 million Consolidated EBITDA from continuing operations: Down 6 percent to $45.3 million 
• Rough diamond production: Up 19 percent to 1.9 million carats

Results from the 2012 fiscal year:

• Consolidated sales from continuing operations: Up 19 percent to $345.4 million
• Rough diamond production: Up 8 percent to 7.2 million carats  
• Operating profit: Up 27 percent to $47.7 million   
• Consolidated EBITDA from continuing operations: Up 10 percent to $127.9 million  

via www.jckonline.com

Retail diamond prices in the second half of 2008 experienced one of the largest decreases in decades and followed by relatively no price changes up or down in 2009.  However, rough diamond prices in 2009 were up by about 15% and they have increased that much already in 2010.  As a result, there is significant pressure on polished diamond prices to move upward.

With the U.S. economy beginning to recover and the U.S. consumers typically purchasing about half the world’s diamonds and diamond jewelry, retail prices are moving upward.  The economies of other diamond-consuming countries are also showing signs of recovery so the global demand for polished diamonds is expected to rise in 2010.

At the end of January 2010, there was an industry wide price increase for diamonds over 3.0 carat weight with price increases ranging from 1.5% to 3.5% depending on carat weight, color and clarity.  In mid-February, another industry wide price increase occurred for round diamonds in the 1.00 to 1.99 carat range with at least H color and VS2 clarity and had increases in the 1.0% to 5.0% range depending on carat weight, color, and clarity.

It is only a matter of time before we see price increases for fancy (everything but round) shaped diamonds under 3.0 carats and for round diamonds in the 2.0 to 2.99 carat weight range.

These early year increases will not be the last increases as projections are for polished diamond prices to rise by double-digits for 2010.  For diamond shoppers, this means that the best prices are going to be had now rather than later this year or in the foreseeable future.  Of course, the lesson we have learned in the past two years is that projections for global economies are anything but certain.

We have many clients who want to buy a big diamond but have been waiting until the price bottom out due to the recession.  For months, I have been telling them this is the bottom and they can expect to see polished diamond prices moving up shortly.

I am not the only one with this belief.  Yesterday, Robert Gannicott, CEO of Harry Winston Diamonds noted that rough diamond prices have improved by at least 61% from the prices at the lowest part of the market, during the first quarter of this year.  Harry Winston owns part of the Diavik diamond mine in Canada’s Northwest Territories in addition to its high-end jewelry stores.  Even with the dramatic increase from the low, rough diamond prices in the quarter ended October 31 were about 9% lower than the same period in 2008 and 13% below the highs in the summer of 2008.

What is remarkable about the increase in rough diamond prices is that polish diamond prices have been flat for most of the year.  Most diamond mines closed for months at the start of 2009 and this allowed the excess rough and polished diamonds in the pipeline to be sold until demand was more aligned with supply.

The mines have been producing for months and the cutters are back in operation.  The demand for polished diamonds for the Far East and India is on the upswing and the US holiday season is in full swing.  In the months ahead, demand is expected to match and exceed supply, implying rough and polish prices will be moving up in the near term.

 

The past 12 months have been witnessed many forms of economic crisis and the diamond industry was no exception.  In past decades when demand for diamonds dropped, De Beers simply stockpiled diamonds to keep supplies and therefore prices stable.  However, in recent years the European Union has forbidden monopolistic activities (like stockpiling) and De Beers now only controls 40% of the diamond market compared to over 80% a few years ago so no longer has full control over diamond production.  As a result, the diamond industry had to implement new strategies to cope with the economic crisis.

The industry’s main tool was stopping production of diamonds.  De Beer’s mines in Botswana, Canada, and Namibia were mostly shut down with only about 10% production in the first quarter of 2009 compared to the same time in 2008.  While production is slowly being brought back online, some companies like Harry Winston Diamond Corporation has decided to cancel winter production at their Diavik Diamond Mine in Canada after a summer shutdown and production returning in the fall.

Rio Tinto shut down its Argyle diamond mine in Australia during the first quarter of this year resulting in a production drop for the country of almost 90%.

Alrosa, the Russian diamond producer, continued to produce diamonds but protected prices by having the Russian government purchase and stockpile the diamonds.

Even with the cuts in production, the dramatic drop in demand results in global polished diamond prices dropping 15.7% from August 2008 to August 2009.  Most of that drop occurred in the November to February period with prices being stable since May.

The past year produced the largest drop in diamond demand in more than 50 years with the most visible fall out being the weekly reports of bankruptcies in the retail and manufacturing sectors of the diamond industry.  Retailers in particular simply could not cut enough costs to compensate for the lack of sales.  Retailers and wholesalers who had made money by leveraging purchases of diamonds as the prices were going up suddenly saw their credit lines cut and interest rates rise at the same time their inventories lost 15% or more in value.

What can the diamond industry expect in the months ahead?  With the US economy slowly coming out of the recession and demand continuing to grow in China and India, demand should become more stable and head back up.  At the same time, many of the large diamond mines are moving from open pit to underground production, which will lower production levels.  The economic crisis has also delayed opening of any new mines so global production of diamonds will soon be outpaced by supply again, which means diamond prices will soon return to their historic 3 to 4 percent annual inflation trends.  However, the that price inflation will likely see considerably short term fluctuations as the industry continues to react to the more chaotic global financial times.

Diamond prices, like most commodity and luxury items had been climbing for years.  Large diamond prices in particular have been sky rocketing the past five years due to the imbalance of supply and demand.  This year alone, diamond prices were up about 16 percent.  However, the global forecasts and now the reality of economic slowdown, are taking their toll on the demand for diamonds.

After seeing the prices of large diamonds begin to fall, the world’s largest producers of diamonds (De Beers and Russia’s ZAO ALROSA) have announced they will cut supplies of rough gems to support prices.

The sight-holders who purchase diamonds from De Beers have requested the supply of diamonds be reduced at the final two “sights” scheduled in November and December.  ALROSA has said they will reduce rough diamond supplies as much as 30 percent.

The reduction of rough diamond supply is an effort to keep the price of diamonds steady and thus encourage continued exploration and mining efforts.  A sudden, short-term drop in diamond prices would play havoc with the capital-intensive diamond mining industry, causing some business to stop exploration and mining efforts.  Then when the economy recovers and the demand for diamonds gets back on its fast track, the supply side would lag the demand side of the industry and cause sharp price increases.  De Beers and ALROSA are acting as a moderating agent for diamond prices.

The plummeting stock market and severe credit crisis have caused the confidence of luxury buyers in the United States to drop to its lowest level in four years.  Stock prices of luxury retailers like Tiffany & Co have dropped as much as 40 percent this year in anticipation of reduced diamond sales.

Consumers will continue to purchase diamonds as engagements, anniversaries and special occasions continue in good and bad economic times.  However, even the wealthy shoppers are being more discriminate about their purchases and shopping for values.

De Beers Diamond Trading Company (DTC) has increased the average prices of rough diamonds more than 5% at its sixth sight distribution July 7-11.  While the average was over 5%, the price of higher quality rough diamonds over one carat increased as much as 15 percent.

The next sightholder rough diamond distribution, scheduled for the week of August 18, will likely have further price increases.

The prices of polished diamonds tend to track closely with the rough diamonds because the cutters and wholesaler have to pass on the increased cost of new diamonds.  It is only a matter of days or weeks before the retail market reflects these increased diamond prices in polished diamonds and diamond jewelry.

De Beers has scheduled sightholder meetings in July and August, which is where they sell the rough diamonds to cutters.  Industry expectations are that there will be significant price increases for rough diamonds and that the expected increases will probably take place in August rather than July.  Traditionally De Beers announces in advance what the range of increases will be but that information has not been released, resulting in anticipation of double digit increases in for some groups of diamonds.

Price increase announcements for rough diamonds are usually scheduled ahead of the three major industry trade shows (Basel in March, JCK Las Vegas in June, Hong Kong in September).  Price increases tend to be the greatest for larger diamonds since those are the items with the biggest differential between supply and demand.  The last major price increase was in May with average prices increasing about 8% but some four-carat and above diamonds increasing over 20% in one day.  Production of small diamonds tends to be more in line with demand so they have seen relatively small price increases.

The price increases for polished diamonds tend to follow close behind the rough diamond price increases so the likely timeframe is August or September.  If you are planning a large diamond purchase in the next few months, I would suggest taking action sooner rather than later.  We do not know when the retail price increases will occur, for what types of diamonds, or how much the price increases will be, but all the signs are that they will go up near the end of summer.  It would be a shame for a consumer to pay 5-10% more just because they waited a few weeks too long to make their purchase, especially if they have been made aware of the impending price increase.