Are diamonds a good investment?

Yes.   Over the long term, diamonds are a brilliant prospect…  Let’s consider the prevailing state of diamond mining, synthetic diamond production and the undervaluation of gem diamonds due to purchasing behaviour.

Starting at basics, diamonds are the crystal form of one of the most abundant elements on Earth - carbon.   Diamonds form as carbon molecules are compressed under extreme pressure and heat.  Think of placing your foot onto a 1200°C hot plate and then loading a block the weight of the entire Empire State Building on top.  That’s the sort of heat and pressure which might turn your foot into a diamond and which exist in nature’s furnace 100km under The Earth’s surface.  However, only due to violent rare tectonic events long ago, and in specific geological locations, were diamonds brought up to The Earth’s surface, in reach of where they can be mined (‘extracted’).  About 80% of extracted diamonds are used in industry, where, because of their hardness, they are used to cut, grind, or drill other materials.   In these uses ultimately the diamonds get ground away to dust and must be replaced. 

The Pareto principle applies to diamond mining, proving that it’s the gems that essentially fund extraction of non-gem diamond grades: 20% of global mined diamonds account for 80% of the value.   Of all the diamonds mined, only a tiny proportion are top gem quality – free of inclusions and tinted colour - and larger than 1 carat, and exponentially rarer in larger sizes.   One carat (ct) is 200mg – the average weight of a raindrop.   Generally, the larger a diamond and the greater clarity and pure whiteness it has, then the more it is sought after for fashioning into high class jewellery.   The best return on investment is to cut a large piece of rough into two or more commercially sized stones, avoiding flaws and making the most of their inherent quality, rather than leave it as one big gem.   Large diamonds (10-20ct and up) fashioned into single polished gems become difficult to sell, due to their extreme size and the scarcity of people who like to wear sparklers that big, and the price per carat levels out around 50ct weight, if all else is equal regarding quality.

The most sought-after diamonds are those that possess not only good size and clarity, but intensely vivid colours such as yellow, pink and blue.   These beauties are the rarest of all, and have proven to be an excellent investment, but their collectability to passionate collectors and extreme value is an anomaly and asset class I will not consider here. 

The Letšeng Legacy from the Lesotho mine rich in huge diamonds. Image  Gem Diamond Ltd

The Letšeng Legacy from the Lesotho mine rich in huge diamonds. Image Gem Diamond Ltd

The increasing scarcity of natural diamonds

The availability of supply of diamonds depends on diamond inventories in the value chain, and new extractions from mining.   Of existing mines, however, the largest and most productive, primary open-pit mines have either closed or are near to closing (Argyle, Daivik, Voorspoed, Komsomolskaya & Victor mines), and no major mines are due to take their place within the next few years.  There are financial and logistic challenges to developing new mines.  Initial exploration of sites often in remote areas or in extreme conditions, then successful prospecting, installing heavy plant and facilities in situ for mining and processing the ore, and then providing labour, security and insurance all within an ethical operational governance framework is extremely costly and continually tests existing local and national geopolitical structures.  There are potential opportunities for more intensively developing non-primary alluvial locations, but these are often poorly accessible, for example in The Democratic Republic of Congo (DRC), where installing infrastructure is all but impossible.  So, it is a real possibility that financially viable mines and new gem diamond supply will likely be exhausted in the future; possibly within a generation or two. 

 Synthetic, laboratory-produced diamonds

The technology to manufacture synthetic diamonds was first developed in the 1950s, and a pioneering manufacturer was De Beers’ Element Six division.  Nowadays, after the initial investment in machinery, facilities and the ongoing cost of energy for power in manufacture, synthetic diamond production is becoming economically advantageous compared with the costs of mining.  Indeed, already, 98% of industrial diamonds are synthetic: they are a viable option for producing superiority in crystal quality and durability for industrial uses due to grown-to-order size.   What is new is that, increasingly, lab-grown diamonds are used in jewellery: De Beers’ are spinning out their own synthetic production into a fashion jewellery brand called Lightbox.   Increasingly, lab-grown, small sized diamonds (less than 0.10ct) are promoted for their equivalence in terms of ‘beauty’, and value compared to naturally sourced low-quality gem diamonds for fashion jewellery, and this is beginning to occur for larger sized diamonds over 0.50ct in the bridal market.   However, I feel many will resist the marketing hype.   I believe the intrinsic authenticity of natural, compared to synthetic, diamonds will remain of value to the discerning and connoisseurly among us.   The perception of beauty is not compromised.   Importantly, a dwindling natural diamond supply from mining may not matter for supporting the industrial uses of diamonds because a growing, increasingly competitive industry producing synthetic diamonds nicely matches the need to continually procure industrial grade diamonds whilst containing costs of production.   Where it will matter, is in the availability of gem quality diamonds.

Synthetic mass production in China.  image from internet search

Synthetic mass production in China. image from internet search

 Current undervaluation of large white diamonds

Currently, the index for 1ct diamonds, which is a highly commercial size for jewellery sales, has been flat for 5 years and the price for large gem quality diamonds of 3cts and more, is continuing a slide over the same period.  At the super-gem end of the market, a slew of large stones being mined by Gem Diamonds from their world class asset in Lesotho are further softening prices of hard to sell extreme sizes.   Reasons of course include a global market slowdown and trade wars between the two major markets for diamond jewellery, China and the USA.  But one important reason may be less demand for diamonds as jewellery per se.   For example, there may be now a significant break to the trend of younger adults, accumulating wealth and looking to jewellery for their ‘luxury’ purchases.   Over the same period, global value indices of luxury technology have dwarfed white diamonds’ performance.  Far from aspiring to buy large gem quality diamonds, today’s ‘Generation-Z’ and ‘Millennial’ consumers appear to prefer more modest expenditure on luxury goods and pursue more diversity in their purchases - in technology and ‘experiences’ to define measures of success and fulfilment.  A prevailing decline in marriage overall partners alarmingly with a rise in positive perceptions of lab-grown diamond engagement rings: in a recent report conducted by MVI Marketing, in May 2018, over 75% of men and nearly 65% of women would consider synthetic engagement rings, a rise of 13% from the previous year.   Also, many people now question the environmental impact, ethics and sustainability of diamond mining particularly where it doesn’t benefit local indigenous communities.   The industry feels threatened, and prices have softened. 

10 yr index - source Mercury Diamond

10 yr index - source Mercury Diamond

Where does this lead?

With the benefits of growing synthetic diamonds for industry and the decrease in global mining activity over the next generation, in my opinion we will start to see a trend to regard large natural white diamonds as desirable again.   Much like the market in fine art, where prints haven’t negatively impacted the prices of original masters, I think the natural beauty, history and increasing rarity in ‘Earth-derived’ large diamonds over 5-10cts will prevail in regard, and this will be reflected in the purchasing behaviour of discerning customers and shrewd investors.  If I am correct with this, then given the current undervaluation of gems, diamonds are a good investment – now, whilst indices are flat or sliding.  Over the long term there are few assets with such a brilliant prospect.  I had the resources, whilst the prices are low and no one is noticing, I would buy large white gem diamonds now to invest for my future grandchildren’s futures.

 

Diamond 12.67ct D IF heart shape,  image Jessica Cadzow-Collins

Diamond 12.67ct D IF heart shape, image Jessica Cadzow-Collins

 References

1.       Bruton, E. “Diamond”, 1981, pp.17.  NAG Press

2.      Rough Polished ”Prospects for World Diamond Mining Industry” https://www.rough-polished.com/en/analytics/111305.html

3.     Bloomberg  - diamond market - https://www.bloomberg.com/news/articles/2019-03-27/the-great-diamond-shortage-that-never-was-is-likely-coming-soon

4.      De Beers Diamond Insights Report 2018 https://www.debeersgroup.com/reports/insights/the-diamond-insight-report-2018

5.      USGS – Synthetic Diamond https://minerals.usgs.gov/minerals/pubs/commodity/diamond/mcs-2017-diamo.pdf

6.      Rapaport Diamond Price Index   https://www.diamonds.net/News/NewsItem.aspx?ArticleID=63521&ArticleTitle=Rapaport+TradeWire+March+28%2C+2019

7.       Mercury Diamond Price Index, Ehud Laniado

https://www.ehudlaniado.com/home/index.php/news/entry/polished-diamond-price-index-sharp-price-changes-up-and-down

8.       MVI Marketing Millenial Consumer Research – Lab Grown Diamonds https://www.mvimarketing.com/download-report.php?report=34

9.       ABN AMRO - industry sentiment Https://insights.abnamro.nl/en/2019/01/diamond-sector-outlook-entering-a-growth-and-disruption-phase

10.   Mining MX - challenge to lower end jewellery https://www.miningmx.com/news/diamonds/35100-diamond-jewellery-sales-facing-never-seen-before-challenge-in-luxury-stakes/

 

 

Disclaimer

This article has been compiled by Jessica Cadzow-Collins from sources believed to be reliable, but no representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. All opinions and estimates contained in this article are judgements as of the date of this article, are subject to change without notice and are provided in good faith but without legal responsibility. This article should not be construed as business advice and the insights are not to be used as the basis for investment or business decisions of any kind without your own research and validation. This article is for information purposes only.