There are currently several different ways for individuals and institutions to invest in diamonds. One option is to buy stock in publicly traded companies focusing on diamond production as their core business. Among such companies are ALROSA, Gem Diamonds, Harry Winston and Petra Diamonds.
Alternatively, individuals and institutions can invest in diamond-industry operations, for example, by securitizing inventory. Diamond Asset Advisors (DAA), established in 2011 with capital of $100 million, has made one such investment.
Under its business model, diamonds are sourced by experts at Harry Winston but owned by DAA. When Harry Winston sells the diamonds through its retail outlets, ownership transfers from DAA to Harry Winston and then directly to the consumer. This is a great concept for the retailer, as they do not own the diamonds in their windows, the group DAA is the owner of all the diamonds. In a sense, the diamonds are on consignment to the retailer.
Investors in the DAA fund gain access to the diamond market, with complete price transparency, while Harry Winston gains access to external funding for acquiring inventory and opening new stores. Whilst a brilliant idea in theory, as of yet, it is not clear how well the business model is working out.
Yet another approach is to invest in physical stones, acquiring, holding and selling diamonds through trading platforms. One such platform, the Singapore Diamond Exchange (SDX), was launched in 2011. Established as an “exclusive private investment platform for private investors to acquire diamond portfolios at wholesale prices as a hedge against market volatility,” the fund aims to manage about $100 million in diamond portfolios in the next three to five years.
Under SDX’s business model, the exchange helps buyers source polished diamonds and publishes quarterly reports on global diamond prices. For its services, it collects 2% of the transaction value when a diamond changes hands. It also manages individual accounts for clients, issuing quarterly portfolio reports and valuations based on IDEX online prices, with all payments being processed through Antwerp Diamond Bank.
Because of the strong interest in diamond investing in China, several financial institutions in that country are pioneering new approaches. In 2011, China Merchants Bank (CMB) launched a one-of-a-kind trading platform as part of its private banking service for wealthy individuals. Boasting a database of international diamonds that customers can search to buy and trade, it currently holds more than 200 diamonds of three carats or larger in its inventory, all with GIA certificates.
Key Points:
The “diamond pipeline” enjoyed a robust 2011.
The industry’s mines yielded 124 million carats of rough diamonds, valued at $15 billion. Those stones were worth $24 billion after moving through the chain of dealers, cutters and polishers, on their way to making diamond jewelry worth $71 billion at retail level.
Global diamond jewelry sales grew strongly in 2011, increasing from 2010 by 18% to $71 billion, near the pre-crisis peak of $73 billion in 2007. Rising consumer demand in China and India accounted for most of the growth.
Prices for rough diamonds increased by 31% in 2011. Polished stone prices rose 24%.
We expect prices to continue rising in the mid-term, as production is likely to remain level or increase slightly, while demand will grow.
Investor interest in diamonds continues, but their idiosyncrasies, as well as a lack of price transparency and liquidity in the market, are inhibiting the development of an investment market. The future diamond investment market is certainly a market to watch.