Diamonds as an investment - AbsoluteAstronomy.com

History

In mineralogy, diamond is an allotrope of carbon, where the carbon atoms are arranged in a variation of the face-centered cubic crystal structure called a diamond lattice. Diamond is less stable than graphite, but the conversion rate from diamond to graphite is negligible at ambient conditions...

s have been treasured as gemstone

Gemstone

A gemstone or gem is a piece of mineral, which, in cut and polished form, is used to make jewelry or other adornments...

s since the ancient times. Popularity of diamonds has risen since the 19th century because of successful advertising in spite of a greatly increased supply. Diamonds are not normally used as a mainline store of value

Store of value

A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....

during times of crisis

Crisis

A crisis is any event that is, or expected to lead to, an unstable and dangerous situation affecting an individual, group, community or whole society...

, because of their lack of fungibility

Fungibility

Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution, such as crude oil, wheat, precious metals or currencies...

and low liquidity

Market liquidity

In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...

. However, they may still be useful during times of hyperinflation

Hyperinflation

In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...

.

Approximately 20% of mined diamonds are used in jewelry and 80% for industrial uses (such as lasers, drill parts and surgical equipment).

Chemical vapor deposition

Chemical vapor deposition

Chemical vapor deposition is a chemical process used to produce high-purity, high-performance solid materials. The process is often used in the semiconductor industry to produce thin films. In a typical CVD process, the wafer is exposed to one or more volatile precursors, which react and/or...

is now used to produce synthetic diamond

Synthetic diamond

Synthetic diamond is diamond produced in a technological process; as opposed to natural diamond, which is created in geological processes. Synthetic diamond is also widely known as HPHT diamond or CVD diamond, denoting the production method, High-Pressure High-Temperature synthesis and Chemical...

s which, unlike diamond simulant

Diamond simulant

The high price of gem-grade diamonds, as well as significant ethical concerns of the diamond trade, have created a large demand for materials with similar gemological characteristics, known as diamond simulants or imitations. Simulants are distinct from synthetic diamond, which unlike simulants is...

s, inherit all the properties of gemstones formed in nature.

Price fluctuations

Historically, the rough diamond price has been controlled by the De Beers Group

De Beers

De Beers is a family of companies that dominate the diamond, diamond mining, diamond trading and industrial diamond manufacturing sectors. De Beers is active in every category of industrial diamond mining: open-pit, underground, large-scale alluvial, coastal and deep sea...

, which has a 40% to 50% market share. Botswana

Botswana

Botswana, officially the Republic of Botswana , is a landlocked country located in Southern Africa. The citizens are referred to as "Batswana" . Formerly the British protectorate of Bechuanaland, Botswana adopted its new name after becoming independent within the Commonwealth on 30 September 1966...

is currently the largest producer of diamonds by value, with mines operated by Debswana

Debswana

Debswana Diamond Company Ltd, or simply Debswana, is a giant mining company located in Botswana, and is the world's leading producer of diamonds by value. Debswana is a joint venture between the government of Botswana and the South African diamond company De Beers; each party owns 50 percent of...

, a joint venture between De Beers and the government of Botswana. However, since the 1980s, other producers have developed new mines in Russia

Russia

Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...

, Canada

Canada

Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...

and Australia

Australia

Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...

for example, challenging De Beers' dominance (historically De Beers' market share was considerably higher). De Beers through its trading company DTC

Diamond Trading Company

The Diamond Trading Company is the rough diamond sales and distribution arm of the De Beers Family of Companies. The DTC sorts, values and sells approximately 75% of the world’s rough diamonds by value...

raised wholesale diamond prices three times in 2004 by a total of 14%.

The United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

is the biggest consumer of diamonds in the world. It accounts for 35% of diamond sales, Hong Kong

Hong Kong

Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...

26%, Belgium

Belgium

Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...

15%, Japan

Japan

Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...

6%, and Israel

Israel

The State of Israel is a parliamentary republic located in the Middle East, along the eastern shore of the Mediterranean Sea...

4%. Israel and Belgium in particular are important diamond-trading hubs thus their consumption numbers are misleading.

Polished diamond prices vary widely depending on a diamond's carat, color

Diamond color

A chemically pure and structurally perfect diamond is perfectly transparent with no hue, or color. However, in reality almost no gem-sized natural diamonds are absolutely perfect. The color of a diamond may be affected by chemical impurities and/or structural defects in the crystal lattice...

, clarity

Diamond clarity

Diamond clarity is a quality of diamonds relating to the existence and visual appearance of internal characteristics of a diamond called inclusions, and surface defects called blemishes. Clarity is one of the four Cs of diamond grading, the others being carat, color, and cut...

and cut

Diamond cut

A diamond cut is a style or design guide used when shaping a diamond for polishing such as the brilliant cut. Cut does not refer to shape , but the symmetry, proportioning and polish of a diamond...

(The 4 C's). In contrast to precious metal

Precious metal

A precious metal is a rare, naturally occurring metallic chemical element of high economic value.Chemically, the precious metals are less reactive than most elements, have high lustre, are softer or more ductile, and have higher melting points than other metals...

s, there is no universal world price per gram for diamonds. However the industry does refer to price guides such as the Rapaport Diamond Report, The Diamond Registry

The Diamond Registry

The Diamond RegistryIn 1961, Joseph Schlussel started selling diamonds as a dealer. In 1968, he started one of the first publications devoted to the Diamond Industry -- The Diamond Registry Bulletin...

Wholesale Diamond Price List, Ajediam Antwerp Diamonds Monthly and The Gem Guide, which are published weekly or quarterly.

In addition to print and online references, numerous institutions have varying standards which can be used to aid in diamond identification and pricing. GIA, HRD and IGI are three such institutions. Often these organizations focus on new research and education which they pass on to their members and the public.

Financial feasibility

There is no natural shortage of diamonds. Diamonds can be synthesized at much lower cost than the equivalent natural diamond price, and the chemical and structural purity of a synthetic diamond

Synthetic diamond

can exceed a natural one. However, the chemical composition is not the only factor that determines their value - the quality of the cut is of as much, if not greater, importance.

Today there are a few funds that are investing in diamonds. These funds purchase unique diamonds (very large in size or color); each stone is checked by a few professionals and negotiated until the fund decides to purchase it. Then a marketing team goes into action and through an extensive work the fund yield is gained. Between 2007 and 2008 the price of a diamond from the top range of color, clarity, cut and carat went up by over 50%.

Polished diamonds

Polished and rough diamonds lack some of the desirable attributes of investment vehicles, including liquidity, homogeneity and fungibility

Fungibility

Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution, such as crude oil, wheat, precious metals or currencies...

. Grading and certification by recognised laboratories goes some way to redressing this. Weight and cutting proportions are parameters which can be precisely measured. Colour and clarity grades are parameters which need to be determined by gemologists.

The increasing quality and size, and decreasing price, of synthetic diamond

Synthetic diamond

s is presented as a threat to the value of polished diamonds as a long-term investment, but has never impacted real investment-grade diamond prices. The possibility of low-cost ultra–high-quality diamonds becoming available in industrial quantities at some time in the future has never been a hindrance for long-term investors in diamonds; synthetic diamonds have been manufactured since the 1950s and have yet to make a major impact on the market.

An alternative example of such a price fall caused by introduction of a new simulant strongly undermining prices was the permanent fall in natural pearl

Pearl

A pearl is a hard object produced within the soft tissue of a living shelled mollusk. Just like the shell of a mollusk, a pearl is made up of calcium carbonate in minute crystalline form, which has been deposited in concentric layers. The ideal pearl is perfectly round and smooth, but many other...

prices with the introduction of cultured pearls. The mechanism by which prices were affected was complex. In part because of the social acceptability of wearing cultured pearls to much of the market, customers migrated from the natural to the lower priced cultured product. This altered the supply and demand situation for natural pearls and perhaps the overall prestige of pearls in general was lowered. In cases where synthetic stones have been much less socially acceptable to the market as a replacement for the natural version, the prestige of the natural stones has been retained. Thus increased availability and lowered prices of synthetics may or may not have major implications for the future price of natural diamonds. In addition, the introduction of synthetic rubies in the late 19th Century did not appear to have a permanent effect on the price of natural rubies.

There are several factors contributing to low liquidity of diamonds. One of the main is the lack of terminal market

Terminal market

A terminal market is a central site, often in a metropolitan area, that serves as an assemblyand trading place for commodities. Terminal markets for agricultural commodities are usually at or near major transportation hubs...

. Most commodities have terminal markets, and some form of commodities exchange

Commodities exchange

A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials and contracts based on them...

, clearing house

Clearing house (finance)

A clearing house is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions...

, and central storage facilities. Until recently this did not exist for diamonds. Diamonds are also subject to value added tax

Value added tax

A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...

in the UK, EU, and sales tax

Sales tax

A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....

in most developed countries, therefore reducing their effectiveness as an investment medium. Most diamonds are sold through retail stores at very high profit margins.

As diamonds in larger sizes become increasingly rare and valuable, any easily visible and readily understood pricing system has been difficult to establish. Martin Rapaport

Martin Rapaport

Martin Rapaport is an American entrepreneur and founder of the Rapaport Diamond Report. Rapaport is a maverick within the diamond industry, and is often recognized for his signature bow tie. He is a member of the board of Jewelers for Children and an early proponent of the Kimberley Process...

produces the Rapaport Diamond Report, which lists prices for polished diamonds. The Rapaport Diamond Report is relatively expensive to subscribe to, and as such is not readily available to consumers and investors. Each week, there are matrices of diamond prices for round brilliant cut diamonds, by colour and clarity within size bands, and also other shapes. The price matrix for brilliant cuts alone exceeds 1,400 entries, and even this is achieved only by grouping some grades together. There are considerable price shifts near the edges of the size bands, so a 0.49 carats (98 mg) stone may list at $5,500 per carat = $2,695, while a 0.5 carats (100 mg) stone of similar quality lists at $7,500 per carat = $3,750. This may appear such a large difference as to defy logic, but in reality stones near the top of a size band (or rarer fancy coloured varieties) tend to be uprated slightly. Some of the price jumps are related to marketing and consumer expectations. For example, a buyer expecting a 1 carats (200 mg) diamond solitaire engagement ring may be unprepared to accept a 0.99 carats (198 mg) diamond.

There are numerous diamond grading laboratories, with each offering investors, consumers and dealers similar diamond-grading and verification services. The standards are high, and when they ever slip, immediate ramifications are felt throughout the diamond industry. When the market-leading Gemological Institute of America

Gemological Institute of America

The Gemological Institute of America, or GIA, is a nonprofit institute dedicated to research and education in the field of gemology and the jewelry arts. Founded in 1931, GIA's mission is to protect all buyers and sellers of gemstones by setting and maintaining the standards used to evaluate...

(GIA) saw a number of large, important and valuable diamonds overgraded some time ago, this resulted in legal action by one dealer against another dealer who had submitted them to the GIA for grading. A number of GIA employees left after the scandal emerged, and the GIA immediately changed a number of its procedures to prevent such occurrences from happening again. There are also a number of laboratories affiliated to CIBJO (Confédération Internationale de la Bijouterie, Joaillerie et Orfèvrerie

CIBJO

The CIBJO , also known as the World Jewellery Confederation, is an international confederation of jewellery, gemstone, horology, and silverware trade organisations...

, also known as the World Jewellery Confederation).

The non-linear, exponential pricing of different sizes (weights) of diamonds means that it is not realistic to exchange, for example, 2 quarter carats (50 mg) for 1 half carat (100 mg). With commodities such as gold, it is clear that 1 twenty gram bar is worth the same as 2 ten gram bars, assuming the same quality. In most terminal markets, there needs to be a readily available standard quality, or limited number of qualities, available in sufficient quantity to be tradable. This is a major factor which affects liquidity. The large number of variables in diamond quality makes commodity-like pricing difficult, especially with rarer stones that merit special handling above standard-issue diamonds.

There are also fashion and marketing elements to take into consideration. De Beers expends marketing efforts to encourage sales of diamond sizes and qualities which are being produced in relatively large quantities. They have also been known to take steps to discourage investment, primarily because they perceive that bubble prices which are followed by sharp falls are bad for long term consumer confidence in diamonds as a long-term store of value..

The investment parameter of diamonds is their high value per unit weight, which makes them easy to store and transport. A high quality diamond weighing as little as 2 or 3 grams could be worth as much as 100 kilos of gold. This extremely condensed value and portability does bestow diamonds as a form of emergency funding. People and populations displaced by war or extreme upheaval have utilised this portable asset successfully.
In 2009 an exchange was launched by DODAQ to trade categories of polished diamonds. The DODAQ exchange is intended to be a terminal market for round polished certified diamonds (which is the most liquid part of the market) and hosts its centralised storage facility in a Freezone. The exchange is an attempt to overcome the traditional investment barriers of sales tax and low liquidity on the resale market.

Funds

In 2008 Diapason Commodities Management listed an investment company called Diamond Circle Capital, which aimed to invest in rare colored and colorless diamonds worth more than $1m each. As of July 2008 the IPO

Initial public offering

An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...

for the closed-end fund

Closed-end fund

A closed-end fund is a collective investment scheme with a limited number of shares. It is called a closed-end fund because new shares are rarely issued once the fund has launched, and because shares are not normally redeemable for cash or securities until the fund liquidates.Typically an...

was postponed until further notice.http://www.ft.com/cms/s/0/3c41a09c-2b5a-11dc-85f9-000b5df10621.html

Mining companies

These do not represent diamonds at all, but rather are shares

Stock

The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

in companies that mine diamonds. Rockwell Diamonds

Rockwell Diamonds

Rockwell Diamonds is a mid-tier diamond mining and development company. The Company has an interest in several producing and exploration alluvial diamond properties in southern Africa. The stocks of the company trade on South African, Canadian, and American exchanges...

, located in South Africa

South Africa

The Republic of South Africa is a country in southern Africa. Located at the southern tip of Africa, it is divided into nine provinces, with of coastline on the Atlantic and Indian oceans...

, which is also listed on Toronto Stock Exchange

Toronto Stock Exchange

Toronto Stock Exchange is the largest stock exchange in Canada, the third largest in North America and the seventh largest in the world by market capitalisation. Based in Canada's largest city, Toronto, it is owned by and operated as a subsidiary of the TMX Group for the trading of senior equities...

, is an example of a mid-tier established diamond producer.

The largest diamond company in the world is Alrosa

Alrosa

ZAO ALROSA , is Russia's largest diamond company. Alrosa is engaged in the exploration, mining, manufacture and sale of diamonds. The company's operations are located primarily in the Sakha Republic/Yakutsk region. Alrosa accounts for approximately 25% of the world's rough diamond supply and 97%...

, which surpassed De Beers

De Beers

in carat production in 2008. Alrosa is currently government owned, so not listed on the stock market. De Beers is privately owned by Anglo American

Anglo American (mining)

Anglo American plc is a global mining company headquartered in London, United Kingdom. It is a major producer of diamonds, copper, nickel, iron ore and metallurgical and thermal coal and the world's largest producer of platinum, with around 40% of world output...

(45%), the Oppenheimer

Ernest Oppenheimer

Sir Ernest Oppenheimer was a diamond and gold mining entrepreneur, financier and philanthropist, who controlled De Beers and founded the Anglo American Corporation of South Africa.-Career:...

family (40%) and the Botswana

Botswana

government (15%), so its shares are not traded on the stock market. Rio Tinto

Rio Tinto Group

The Rio Tinto Group is a diversified, British-Australian, multinational mining and resources group with headquarters in London and Melbourne. The company was founded in 1873, when a multinational consortium of investors purchased a mine complex on the Rio Tinto river, in Huelva, Spain from the...

and BHP Billiton

BHP Billiton

BHP Billiton is a global mining, oil and gas company headquartered in Melbourne, Australia and with a major management office in London, United Kingdom...

are the next largest producers, but diamond mining is a small part of their commodity portfolio.

European Union

Diamonds are subject to value added tax

Value added tax

, and sales tax

Sales tax

in most developed countries. Other taxes such as capital gains tax

Capital gains tax

A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...

may apply for individuals depending on citizenship

Citizenship

Citizenship is the state of being a citizen of a particular social, political, national, or human resource community. Citizenship status, under social contract theory, carries with it both rights and responsibilities...

and if the asset

Asset

In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...

is sold at increased value.
Rough diamonds are also subject to taxation and in the near future all rough diamonds mined in South Africa will be subject to a 7% royalty.

External links

Diamonds Investment Historical Graph
http://www.evolutioncommodities.com

The source of this article is wikipedia, the free encyclopedia. The text of this article is licensed under the GFDL.

History

Price fluctuations

Financial feasibility

Polished diamonds

Funds

Mining companies

European Union

See also

External links