Secrets of diamond investing

Frequently asked questions

How can I track diamond prices real-time?
Since there not a centralized spot or futures market for diamonds, “real-time pricing” does not exist the way that it does for stocks or fungible commodities. Given the unique characteristics of each diamond, there is technically a separate market for each category of diamond, of which there can be upwards of 12,000 categories. There is also a separate market for rough and polished diamonds. That said, there are still ways to actively track diamond prices.

Rough diamonds can be priced using publicly released sales figures by miners. Most miners will press release average selling price on a per-carat basis after large diamond sales or include this information in regular financial reports. Miners will also usually provide specific selling price information on larger notable diamonds sold (see Image 1).

Polished diamond prices are typically more readily available than rough and can sourced through diamond consulting companies like IDEX and Rapaport that publish pricing data on a fairly regular basis broken down by category of diamond. Another option for pricing polished is to monitor prices on the web via online diamond retailers. Retailers represent the real market (at least one-side of the market), and the online retailers websites have interfaces that make searching for specific diamonds very easy. Lastly, the fine auction houses tend to provide the best source of pricing for rarer polished diamonds. Sotheby’s and Christies provide sales data for completed auctions on their websites.

Those interested in a general proxy for diamond price trends can access a handful of subjectively created diamond indexes distributed by WWW Intl. Diamond Consultants, Rapaport, and IDEX. These indexes are typically updated at least weekly.

Image 1: A 29.6 carat fancy blue rough diamond recovered by Petra Diamonds in January 2014 and sold in February for $25.6 million. Source: Petra Diamonds Ltd.

What is the best way to value a diamond?
The first step in valuing a diamond is to accurately determine the characteristics of the diamond being valued, which requires expertise, equipment, and experience, or a reputable professional diamond grading service such as GIA. Once the classification of the diamond has been determined, one of the methods mentioned above can be used as a starting point to indicate recent transaction prices for a similar stone.

Next, directly access the market. Go out and find how much someone is willing to pay for the diamond. The point where a buyer and seller are willing to meet on price is the truly the best indication of value. The fair value of a diamond will fall somewhere in-between the range of where you can buy a similar diamond and where you can sell the diamond you are looking to value. Be aware that the spread between where someone is willing to sell and buy a similar diamond can be relatively wide because there are more sellers than buyers in the secondary diamond market.

Is the value of diamonds an illusion created by De Beers?
Yes and No.

No, in that supply and demand ultimately determine value. There is an intrinsic global demand for diamonds and supply is limited by nature and mining economics.

Yes, in that De Beers influences supply and demand. De Beers created demand for diamonds with its ultra-successful marketing campaign, and De Beers controls its own diamond supply to an extent, which currently represents 35-40% of global market share.

How rare are diamonds really?
Diamonds in the size and quality that most people want are rare, as these diamonds are limited by geology and mining economics.

While the general geological occurrence of the mineral diamond may not be perceived as rare, diamond deposits that are economic to mine are. For instance, gold is contained in every rock in the earths crust in some quantity, but gold cannot be economically extracted from most rocks unless the grade of gold is high enough to justify the costs to produce it. The same is true for diamonds in that the size, quality, and occurrence of diamonds have to be great enough to justify the production cost of a deposit.

Kimberlite pipes are the geological formations that serve as the primary source of mined diamonds. About 6,400 kimberlite pipes have been discovered in the world, of those about 900 have been classified as diamondiferous, and of those just over 30 have been economic enough to diamond mine.

Does De Beers fix diamond prices?
De Beers sets the prices of their own diamonds, but they no longer have the market share to fix the global market as a whole.

De Beers offers most of its diamonds for sale via pre-arranged contracts with select large buyers called Sightholders at events referred to as Sights. De Beers sets non-negotiable prices for its diamonds sold at Sights. Sightholders agree to buy from De Beers this way because they are assured a reliable source of diamonds in the quantity and quality needed at predictable intervals.

As recently as the mid-1980’s when De Beers controlled almost 90% of global rough diamond supply, the Sightholder system gave the cartel a tremendous amount of pricing power which was used to target diamond prices at a trajectory that was stable but gradually rising over time. Beginning in the 1990’s, the emergence of new competition reduced De Beers market share to less than 40%. Today as a global market, De Beers and its competitors sell approximately 60% of inventory via long-term contracts like Sights, and the balance of sales are conducted through auctions and one-time sales where current market forces prevail. The portion of sales that occur in the open market, influences the prices set at Sights and other similar contract sales systems.

Is investigative journalist Edward Jay Epstein correct when he states that diamonds are “the most common element in the world”?
No, technically diamonds are not even an element. Diamonds are a mineral composed of the element carbon. Oxygen is the most common element in the earth’s crust, and hydrogen is the most common element in the universe.

While the presence of the mineral diamond could be perceived as abundant, economically accessible diamonds in the size, quality, and color that buyers want are by no means common.

How will the diamonds discovered in the Popigai crater in Russia impact global supply?
The Popigai crater headline got a lot publicity in September 2012, but there have since been no further developments. My understanding is that there are diamonds present in the crater, but the diamonds are of very low quality, so low-quality that it is not economic to produce them. Generally speaking, diamonds fall into two categories, gem-quality and industrial-quality. Diamond mines produce both qualities of diamonds, but without gem-quality diamonds a mine will not be economic. Very low quality diamonds for industrial application are more economic to produce synthetically than by mining, so the Popigai crater should have no impact of gem-quality diamond supply.

Image 2: A satellite view of the Popigai crater. Source: Google Earth.

Will the ability to make higher quality synthetic diamonds make natural diamonds worthless?
I don’t see the emerging presence of high quality synthetics making natural diamonds worthless, but some demand for natural diamonds may be lost to more widely available synthetics in the years to come. The presence of synthetics does not in any way alter the finite supply of natural diamonds, as technology exists to distinguish between natural and synthetic diamonds.

How do I know if I am buying a synthetic or a natural diamond?
Synthetic diamonds are produced in an environment that replicates nature, making synthetic diamonds chemically identical to natural diamonds. However, with proper equipment, fluorescent colors and patterns of a diamond can be used to differentiate a synthetic from a natural. But without proper equipment, it can be nearly impossible to identify a synthetic, so trust in the source that you are buying from is essential.

What is kimberlite?
Kimberlite is an igneous rock (cooled magma) found in geological formations referred to as kimberlite pipes. Kimberlite pipes are the primary source of mined diamonds. From a cross section view, a typical kimberlite pipe is shaped like a carrot, widest at surface, narrowing at depth.

Approximately 6,400 kimberlite pipes have been discovered in the world, of those approximately 900 have been classified as diamondiferous, and of those just over 30 have been economic enough to mine for diamonds.

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