Diamonds: investor’s best friend?
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Diamonds: investor’s best friend?

One of the most memorable acts in cinematography is performed by Laurence Olivier in Schlesinger’s film Marathon Man. In the anonymous vaults of a New York safe deposit, Olivier as the Nazi villain bends over a suede pouch which he unfolds with greedily shaking fingers to reveal a sparkling hoard of flawless, and priceless, polished diamonds. He sucks through his teeth with untamed arousal. It is the sexual act of an old sadist.

It is a lesson too about the attractiveness of diamonds as a unique storage of value and about its easy transportability. A small piece of crystal, weighing perhaps no more than two or three grams, can be worth the equivalent of 100kg of gold. It qualifies extremely well to transfer wealth undetected.

A few years back a Swiss private banker advised his tax-shy American client to take a handful of polished stones back to the US inside a tube of toothpaste. African warlords finance their atrocities with ‘blood diamonds’ and even in times of ever stricter anti-money-laundering rules, there’s still a good chance to cash them in undetected.

What makes it less attractive for drug traffickers, arms dealers and other black market activists is the fact that diamonds are not easily tradable yet. There is no anonymous market as for virtual currencies like blockchain-cleared Bitcoin. And diamonds are strictly speaking not a fungible commodity: each stone has unique characteristics which are to a certain extent identifiable. This would still qualify them for VAT rackets, or at least for capital flight.

Hong Kong is lately gripped by an export fever of precious stones to mainland China. They make up half of the city’s exports. Money is squirreled away by over-generous billing or by carrying the stuff back again. This is testimony to China’s wobbly economic state, Chinese ingeniousness and the corruption of its border officials. It is commission business, not trade.

Despite their wide use in industrial applications, as abrasives, precision tools, bearings and cutting devices – more than 80 per cent of all mined diamonds go to industry – it is the mythical beauty of diamonds which has fired imagination for millennia. It is assumed that more than 90 per cent of all engagement rings are diamond rings. Jewellery is passed on over generations and in times of war it is often the only possession carried into safety. It is considered a repository of family wealth, a means to store value through upheavals and times of galloping inflation.

Whoever has experienced the sobering disparagement of a pawn broker or war misery will have learned though that value in times of need is a rather relative measure. As a pension pot, jewellery is a suboptimal tool, no matter how Marilyn Monroe might have warbled about an ageing “girl’s best friend”, “square-cut, or pear-shaped”, or otherwise.

Family valuables are rarely a Cullinan, or a Kohinoor. Yet after years of sub-optimal investment returns the idea of diamonds as an ‘alternative investment’ is now increasingly propagated. The prices of gem diamonds were hardly dented by the recent financial crisis and have shown little correlation to other asset classes.

Classic polished diamonds of clear colour and insignificant impurities have not lost much in value, but they have not gained either.

What has evolved over the last 20 years as a fashionable money-spinner though are fancy diamonds, in hues from yellow to pink, purple, blue, orange or even red. Such stones achieve mindboggling valuations at auction, like the Pink Star ($71m) or the Oppenheimer Blue ($57.5m) and fuel a narrative that even affordably small stones could outperform mainstream investments like stocks, bonds or real estate, while they can be worn with joy.

Diamonds are not only forever, they are forever more

Coloured diamonds are geological freak accidents and even rarer than high-quality colourless stones. A major supplier over the last 20 years was Rio Tinto’s Argyle mine in Australia, which is in the process of closing down, denting expectations for yet more fancy stones coming forward in sizeable quantities any time soon.

Websites of traders of coloured diamonds are proliferating, taking prospective retail investors through the ABC of the trade. They patiently explain the significance of the four ‘c’s – carat, cut, colour and clarity; the exponential price jumps which come with increasing weight; the hair-raising risks of uncertified trades; the extortionate profit margins of jewellery retailers; the danger of assessing mounted gems and their impurity.

It is serious stuff, convincing. I do not wish to diminish their earnestness. What quickly becomes apparent though is that someone who has never handled diamonds for a living will be in no position to ever come up with a meaningful evaluation. You need a laboratory in the garage and a diploma in gemmology.

It is not only difficult to detect how stones are doctored. Traces of laser drilling and cracks filled with sealants are impossible to detect for the layman and neither are colour treatments. It is the seemingly arbitrariness of price formation which confuses. Why is a stone at 0.99 carat worth so much less as another one weighing 1.0 carat? Hence the indispensable necessity of trustworthy, reliable certification, which, alas, ruins what may have remained of a diamond’s anonymity.

De Beers, the world’s most famous miner of diamonds since the time of Cecil Rhodes and more than a century the market maker and price guarantor for polished stones, gave up its market cartel a few years ago. Since then prices are determined by demand and supply alone, with ever more supply coming to the market. Of 900 tons of rare diamonds excavated in the last 150 years, 20 per cent were prospected in the last five years alone. Diamonds are not only forever, they are forever more.

De Beers sold its mines and cleared its stockpiles and ventured into the business of synthetic diamond production. Its chemically grown gems, produced for less than $800 per carat, are sold through Lightbox, a jewellery retailer for the millennials.

Molecular microscopes can of course easily distinguish between industrially grown and natural stones. Synthetic diamonds are too regular, too clear, too flawless when compared to their brethrens grown a few hundred million years ago at a depth of 700 kilometres. Yet they sparkle all they can. Why would consumers in the 21st century care? Ice of Elisabeth-Taylor-size can be bought for a student loan.

What could boost the investment argument in the short term are internet ventures like DIAMDAX, the Antwerp online exchange for gemstones. Like Amazon’s Marketplace, it gives a platform for traders, wholesalers and retailers offering their wares on a 24/7 basis, guaranteeing the genuineness of the stones, their certification, buyer and seller due diligence and secure payment mechanisms.

They seem to face some hiccups though, because registration was not possible at the time of writing. To create market depth a standardisation of contracts would help, like in the derivative markets. Stones of standard weight and quality could better reflect ups and downs in the overall market rather than guessing collectors’ prices.

A good example for the welcome trend of selling diamonds more transparently online is the beautiful designed website of James Allen (www.jamesallen.com). Finanz Konzept AG, a small Zurich-based asset manager, even offers a fund model for keen investors who are attracted by the steep price rises of fancy-coloured diamonds over the last two decades.

The headache of choosing, evaluating, storing, buying and selling of such sought-after gemstones is left to professional asset managers, like fund managers focusing on rare wines or vintage cars.

The trifle inconvenience for the prospective investor, I imagine, are rather static evaluations while still invested. And the nasty surprise in the end when trying to cash out.

To sell off rare collectors’ items, time-consuming even in good times, may prove problematic in a downturn. My attempts to contact them for clarification went sadly unanswered.

The past, as the investor adage goes, is never a guarantor for future performance. Fancy coloured rocks are certainly the flavour of the moment. But what tastes yummy today might taste stale tomorrow. Who knows? Perhaps virtual jewellery will be the new thing, or rent-a-rock. And the nouveaux riche will wear plunder from Mars.

Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.

andreas.weitzer@timesofmalta.com

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