Originally published by Portfolio.
Lauren Razavi discovers that when it comes to investing, diamonds really are forever
Nothing says everlasting love like a glittering diamond. But while brides around the world – including some 75 per cent of modern American brides – are still wooed by diamond engagement rings, for would-be jewel investors, a diamond presents an equally intoxicating proposition: the promise of enduring resale value.
But first, a little history. While there’s evidence that diamonds were traded in India in the fourth century BC, our modern fascination with them has its roots in South Africa. In 1866, diamonds were discovered in the town of Kimberley, Northern Cape, and De Beers, which quickly became the world’s largest producer and distributor of diamonds, was founded 22 years later.
Today, diamond production has spread around the world, with significant deposits in Russia and Canada. De Beers launched its famous slogan ‘A Diamond Is Forever’ in 1948, and although the phrase lives on in popular culture, sales have fluctuated. Following the global financial crisis of 2008, for example, demand for diamonds plummeted.
Then, just when the market was making a recovery, China’s economic slowdown in 2015 put a fresh damper on sales. Reduced buying led to a supply glut, and diamond prices tumbled. While recent volatility might intimidate potential investors, there’s no need to balk just yet: the emergence of new markets is leading experts to predict an uptick in sales. “Like every business, the diamond industry has had to evolve to respond to changing consumer trends and macro-economic realities,” says Lynette Gould,
a spokesperson for De Beers Group. “Future growth in demand is expected to continue at a healthy pace, driven primarily by economic recovery in the USA and the growth of the middle classes in China and India.
Jewellers and retailers must now sell the timeless image of the diamond to this new generation of luxury customers. And as desire for diamonds grows, mining firms will have to contend with a more precarious task: extracting the precious gems from depleted reserves. As supplies grow scarce, mining companies must dig deeper into the earth, and in more remote locations, to find economically viable deposits. The need to find and exploit new deposits is becoming stronger day by day. Recent analysis from consulting group GlobalData predicts that global production of ‘rough’, or uncut, diamonds will peak in 2019, with three of the world’s major mines largely drained of their resources already.
Unless significant discoveries are made before the end of the decade, supply will begin a gradual decline in 2020. The combination of growing demand from new markets and shrinking supply could drive prices up – and draw investors in. “There’s a finite supply of diamonds, and increasing production is both expensive and risky,” explains Richard Ross, chartered wealth manager at intergenerational wealth planning firm Chadwicks. “This means that increases in demand tend to translate into higher prices fairly quickly.” Higher demand could also be satisfied by another source: the laboratory. Advances in technology mean that diamonds can now be ‘grown’ by technicians. Even the most astute pair of eyes would be hard-pressed to tell the difference between
a natural diamond and a synthetic one. Lab-made diamonds could replace lower-quality and lower-value diamonds in consumer markets, but investors shouldn’t be too concerned. Authenticity matters at the higher end of the market, so luxury customers are unlikely to turn their backs on the real thing. “The first diamonds were found more than 6,000 years ago and even then the rough, uncut crystals were prized for their sparkle,” says Ruth Donaldson, founder of Heirloom, a London-based jeweller. “I don’t think these stones are going to cease to be a source of desire, wonder and fascination for consumers any time soon.”
One topic the industry has had to address, however, is the association of diamonds with human rights abuses, which has threatened the industry’s reputation since the late 1990s, when ‘blood’ diamonds were used to fund brutal civil wars in central and western Africa. But positive action came swiftly: in 2002 a coalition of international governments, civil society groups and diamond companies unveiled the Kimberley Process, a certification scheme guaranteeing that gems are ‘conflict free’. While controversies linger around blood diamonds and the exploitation of workers, ethical concerns have not steered buyers away.
According to Donaldson, the blood diamond exposé simply shifted the concerns of consumers rather than
deterring them altogether. “Perceptions of diamonds haven’t really changed,” she says. “The majority of people are keen to ensure that they have the best stone for their money and, as a secondary point of view, that the stone hasn’t come from a region where the proceeds are funding conflict.” For would-be investors there is no substitute for expertise. Diamonds have not traditionally been treated as investments in the same way as gold and property, but with the right knowledge and expert help, buyers can
select gems that will become assets over time.
“The problem with investing in diamonds is that you have to know the market, you have to understand the pricing structure, and you have to buy at source,” says Lewis Malka, a bespoke jewellery designer based in London. Based on perceived characteristics, there are more than 16,000 varieties of diamond. Experienced jewellers will evaluate a stone based on the four Cs – cut, clarity, colour and carat – and generally, the more rare qualities a diamond possesses, the more money it will be worth. Flawless and colourless diamonds, for instance, are hard to find, and command higher prices as a result. “Someone who’s looking for an engagement ring and has spent two hours searching online thinks he’s got the best price,” says Malka. “And he has. But he hasn’t necessarily got the
A diamond might be forever, but market conditions are not. Millennials worldwide spent nearly $26 billion on diamonds in 2016, more than any other generation on record. At the same time, diamonds are becoming more difficult to find in natural environments. With new consumers clamouring to get their hands on diamonds, and dwindling supplies to satisfy them, investors can rest assured that the world’s favourite gemstone won’t lose its lustre in a hurry.