The Strategist

Diamonds, new best friend for investors

11/20/2018 - 14:12

A growing shortage of diamonds can turn them into a popular protective investment asset that will push gold out of the world market.

Diamonds, new best friend for investors
October 2018 was the worst month for the global stock market in seven years: the fall in capitalization of global stock indices exceeded $ 5 trillion. Business cycles are relentless, and after ten years of vigorous growth, investors are preparing for a new financial storm.

The crisis of 2008 had been successfully overcome thanks to the actions of central banks, which lowered interest rates to zero and pumped trillions of dollars into financial markets. However, the largest economies remain fragile, which is complicated by the high level of debt burden, modest rates of productivity growth and demographics. Interest rates did not have time to rise to their previous high levels, which means that the following financial fire will be extinguished by central banks and governments with printing money. And investors will look for protection in anti-inflation assets once again.

One of the interesting options can be investment in diamonds. Gems are still more an emotional purchase than an investment. However, in the near future, technological and financial innovations will make diamonds a full-fledged investment asset.

Diamonds have special magic. It is difficult to imagine something that carries a greater value per unit volume and weight. The nail-sized crystal stands like a new Rolls Royce. Diamonds are uniquely hard not only physically, but also financially. The cost of a brilliant (1 carat, the highest level of cut, purity and color) increased from 1960 from $ 2,700 to $ 21,000 per carat.

One hundred dollars invested in such a diamond in 1960 would have turned into $ 774 today, while the purchasing power of the banknote itself has since dropped by 88%. Diamonds showed a dynamics that was 66 times better than the US dollar: while the US currency lost an average of 3.7% per year, diamonds rose in price by the same 3.7% for almost 60 years.

Diamonds are precious, desired and steadily increasing in value. Why, then, did the stones never become popular with investors? Probably because “diamonds are the best friends of girls,” while investment managers are mostly men?
Each diamond has its own unique features - color shade, microscopic inclusions and so on. Such features in jewelry diamonds cannot be seen with the naked eye, and the best of the stones withstand the test of a microscope. But every diamond is unique, and this fact was determining for the place of precious stones on women's fingers and ears, and not in investment portfolios.

Diamonds are not interchangeable, they are not easy to evaluate and sell. Large specimens worth millions of dollars are under the laws of exclusive art objects and are sold at Christie’s and Sotheby’s auctions.

Traditions also play an important role. Gold has been synonymous with money for centuries — sovereigns preferred to collect taxes in gold coins, and those who paid taxes had to adjust. Central banks continue to buy gold for national reserves to this day, which automatically makes it an attractive asset for private investors. Diamonds, on the contrary, until recently remained the prerogative of royal persons, inaccessible to the general population.

Finally, diamonds are much more rare than gold. 95% of natural diamonds (raw materials for the production of diamonds) are mined by only four companies. Two thirds of the production comes from Russian Alrosa and De Beers, whose significance for the diamond market is equivalent to the role of Boeing and Airbus in aviation.

The annual production of jewelry diamonds does not exceed $ 10 billion, which is negligible relative to the size of the financial assets market, reaching $ 100 trillion. The diamond market is tightly balanced between diamond miners, diamond cutters and jewelers. When additional demand arises from the financial market, there may not be enough diamonds for brides.

The difficulties of turnover, tradition and a narrow market have been limiting attractiveness of diamonds as an object for investment until now. Information and financial technologies, as well as the growing shortage of diamond mining, will turn diamonds into a popular investment tool in the near future.

Transaction difficulties will go first. Remember paper letters and phone calls through the operator? Modern technologies have already solved transaction problems in a variety of industries, including the diamond one. Gems feel good on the Internet (more than 20% of US sales occur online), as well as being among the first to appear on the block chain — just remember the Tracr b2b platform to track the origin of diamonds.

Traditions in the financial market are changing very quickly. Assets of ETF funds increased from $ 1 billion in 2005 to $ 100 billion in just five years. Diamonds are ideal for tools such as ETFs, because investors get a professionally formed portfolio and are free from the hassle of individual selection of stones.

And although diamonds lack the historical role of money, they have another strong trump card - the reputation of the main symbol of eternal love. A diamond ring means the beginning of a new family and serves as a catalyst in the most important evolutionary tradition that ensures reproduction of humanity. About 80% of brides in developed countries get a diamond ring.

China and India are just starting on this path. As demand grows in the giant Asian markets, the main factor affecting both the price and investment demand for diamonds will be a shortage of supply.

Deficiency is a good condition for any protective asset. World diamond production is approaching depletion. According to Bain & Co, while maintaining the organic growth rate of demand for diamonds (not taking into account new investment demand), by 2030 the gap between supply and demand will exceed the entire current annual production volume. This will launch a market mechanism for regulating the deficit: prices will rise, and the size and quality of stones in jewelry will decrease.

Simultaneously with the reduction in production, new technologies are penetrating the diamond industry. The consumer is no longer offered to buy just a beautiful crystal with a certificate of its optical-physical qualities. Soon, each diamond will carry the entire history of origin from mining to sale, including the exact date of birth after a billion years in the depths. Imagine the marketing potential of this data in the markets of Asia obsessed with numerology.

Rising prices for increasingly scarce and high-tech diamonds will create a demand for the return to circulation of stones owned by the population. Diamonds are forever, and can be re-put up for sale quite simply after a simple inspection and certification. Modern online platforms and smart individualization technologies will finally make the process of resale of a diamond as simple as the first purchase. This will be a turning point for the market, when diamonds will become the best friends of not only girls, but also investors.