Elizabeth Taylor’s 33.19 carat colourless diamond ring may have broken records by selling at a recent auction for a whopping $8.8 million (Dh32.34m), but analysts at managing consulting firm Bain & Company said the mineral has not made much headway as an investment tool.
Diamonds have been favoured as luxury jewellery, often carrying hefty price tags that attract high-net-worth individuals worldwide. Because of its unique property as a hard natural substance, as well as its ability to conduct heat and refract light, diamonds are also used for industrial purposes.
But in a report commissioned by the Antwerp World Diamond Centre and published on December 21, Bain & Company said diamonds’ investment potential has yet to be tapped on a larger scale.
“Two main constituencies drive the demand for diamonds in the global marketplace: the fine jewellery/watch market and the industrial goods market. An additional potential source exists in the investment community, but to date demand for diamonds as an investment vehicle has been small,” the company reported.
Bain attributed this lacklustre appetite to the fact that valuation of diamonds is relatively difficult and subjective. As a rule, rough diamonds have to go through a tedious sorting process that takes into account the stones’ cut, clarity, colour and carat – each of which has various gradation levels.
“By the time the diamonds reach the final stage, they have been sorted into 12,000 to 16,000 different categories. Even though the appraisers use predefined guidelines to evaluate the stones, certain amount of subjectivity is inevitable... Although gold and diamonds appear together often in jewellery, their valuations behave differently in the market,” the report explained.
Because each stone is unique, diamonds’ valuation and pricing can also be dependent on their individual characteristics such as weight, luminescence, proportion, finished cut and dimension. As such, Bain said the price of a stone does not necessarily correspond to its size and a one-carat diamond could be worth anywhere from $200 to $25,000.
Also unlike gold, diamonds are not considered a commodity and its market performance is very much dependent on the broader luxury goods and jewellery segment. There is no spot market that currently trades rough or polished diamonds, therefore prices are not available to the general public, but only to select people who are involved in private contracts.
“Producers do not disclose price tables for the different categories, nor do dealers, manufacturers or other players reveal their prices. As a result, it is very difficult to obtain an accurate, industry-wide pricing picture for rough and polished diamonds,” the report noted.
Attempts to rally investment sentiment
Bain & Company mentioned that while diamonds currently does not have the same investment reputation as gold, industry players are continuously rallying behind the precious stone to promote its financial significance.
“Some groups and individuals keep trying to create diamond investment instruments. Diamond Circle Capital [DCC], for example, launched a closed-end diamond fund on the London Stock Exchange in 2007, with a portfolio of high-quality cut diamonds worth more than $1m per stone. The fund promised investors long-term deposit growth,” the consulting firm said.
DCC was optimistic it could raise $400m, but has so far managed to gain just 18.5 per cent of that target or $74m. Bain reported that the portfolio has been posting negative annual returns and its future faces uncertainty.
“Other recent entrants include the KPR Capital Diamond Fund and the Diamond Asset Advisors. So far none has succeeded in a meaningful way. Going forward there is no reason to anticipate that investment demand will become a significant part of the diamond demand pool in the near future,” the report concluded.
Gulf as emerging growth market for diamonds
Since 2000, the United States has been the leading market for diamond consumption, but the Asian and Gulf regions have been gaining speed in recent years, according to Bain & Company’s report.
The oil-rich GCC region in particular has become a significant market for the diamond jewellery industry. Statistics published in the Bain report revealed that total private diamond demand in the six-nation Gulf area amounted to $500 billion in 2010 and this figure is expected to remain steady until 2012.
By 2013, regional diamond expenditure is predicted to gradually rise to five per cent per annum to reach around $800bn by 2020. The Gulf’s appetite for diamonds is seen exceeding demand from mature markets such as the United States, Europe and Japan, which will likely post annual growth of between one and two per cent during the 10-year period.
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