Diamonds as Investments
It is a little known fact that for more than 35 years, Fancy Coloured Diamonds as a whole have outperformed virtually every other traditional tangible investment we can think of. Since formal record keeping began in 1970, Fancy Coloureds have shown a track record that in some respects is almost unbelievable! Not only have they never seen a decrease in their value or price during that period (at the auction or wholesale level), they have also exhibited exceptional growth and hedge performance, having consistently risen several percentage points over the annual inflation rate. In 1987, the 0.95 carat Hancock Red Diamond fetched over $926,000 per-carat at auction, more than seven times the previous record per-carat price paid at auction for any gemstone. More recently, Coloured Diamonds have become a staple among Hollywood celebrities, further magnifying the public’s exposure and demand for these rarest of diamonds. In fact, in the last 5 years, the full range of Fancy Coloureds have seen price increases of at least 10 to 35 per cent per year, with some individual stones appreciating as much as 50 to 100 per cent in certain 12 month periods!!!
Stated simply, as most people already know, the prices of “hard” or “tangible” assets or commodities are determined by their levels of supply and demand. However, with most commodities, supply and demand and their resulting price levels are in turn influenced by a variety of factors. In the case of gold, for example, a multitude of factors affect the supply and demand for gold in the market such as the state of the economy, inflation, the level of the US dollar, other commodity prices, political instability and new supply coming on stream via large discoveries, to name a few. All of these factors can dramatically change the levels of buying (demand) or selling (supply) on any given day.
These changes in the level of buying or selling can come in “waves” and can cause huge swings in the price of gold. In contrast, as far as investment grade Fancy Coloured Diamonds are concerned, it would seem that very few factors affect the supply side of the equation. We are not aware of any period, since record keeping started in 1970, where a “wave” of selling or mass exit by holders of Coloured fancies occurred. Furthermore, whenever a new discovery of Fancy Coloureds has occurred, the demand has consistently remained strong enough to simply absorb the increase in supply…seemingly without so much as a hiccup. For instance, when the Argyle mine opened in Australia in 1985 it effectively increased the available world supply of Pink Fancy Coloureds by tenfold. Nonetheless, the prices for Pink Fancies didn’t even flinch…in fact; they have continued to rise consistently year on year since then. A 2 carat high quality Pink Fancy could have been bought for well under $50,000 in 1985. Today, that same stone would fetch something well over $500,000. As we mentioned above, it seems that prices in the Fancy Coloured segment of the diamond market have been virtually impervious to downward pressure and have actually risen consistently since 1970 even though wars, political instability, inflationary periods and economic recessions have all occurred during that time. Most diamond authorities concur that this is due to the extreme rarity of Fancy Coloureds and that demand has consistently outstripped supply.
Furthermore, while demand and public awareness is growing due to recent publicity, there are certain sectors of the Coloured diamond market that may see an even further reduction in the already very limited supply. First of all, this increase in demand is making high quality Fancy Coloureds harder and harder to come by in all sectors. Also, concerning pink diamonds, the Argyle has recently announced that starting in 2008 it will only operate their underground mine and will cease all of their open-pit activities which produce the majority of their pink diamonds. Please note that less than 0.1 per cent of Argyle’s production is pink diamonds, yet they currently account for over 90 per cent of the world’s pink diamond supply. Experts agree that this will lead to fewer quality stones, smaller average sizes and a reduction in the overall amount of pink diamonds produced by at least 40 per cent. To put this in perspective, consider that a whole year’s production of diamonds at the Argyle mine would fill a small truck and that until now the pink diamonds produced would barely fill the ashtray…now cut that almost in half! Obviously, all of these factors are likely to lead to even further increases in the prices of Fancy Coloured Pink diamonds.
The Argyle closure referred to above and any resulting jump in the price of pink diamonds may actually have a positive influence on demand and prices in other sectors of the Fancy Coloured Diamond market. Bear in mind that a one carat high quality pink diamond already costs well into the hundreds of thousands of dollars and is out of reach for all but the wealthiest of investors and collectors. Less well-heeled investors and collectors are clearly beginning to turn their attention to some of the other more affordable sectors of the Fancy Coloured Diamond market.
We believe that as awareness continues to grow and new investors and collectors enter the Fancy Coloured Diamond market, the more affordable stones such as high quality Yellows may very well see the biggest increase in demand over the coming years. High quality Fancy Coloured Yellows, from Fancy Light right through to the more saturated Fancy Vivid and Fancy Deep Yellows, while still extremely rare, are relatively affordable and as such we believe the above noted surge in demand will help to accelerate their price appreciation.