JOHANNESBURG – A diamond is the hardest stone and can cut and scratch virtually anything. "A diamond is forever" was one of the most successful campaigns in history. But is a diamond financially durable?
Contrary to what you may think, the gold in your engagement ring may be more valuable, because it is likely to appreciate in value over time while the diamond will probably disappoint in US dollar terms.
In fact, I estimate that the polished diamond price index is currently around the same level as in 2004. This means diamond prices have contracted 25percent since 2004 or 2percent a year in real terms.
The price of an ounce of gold has risen threefold during the period. Every natural diamond is unique. Yes, the price is determined by its rarity and based on cut, colour, clarity and carat weight.
You believe that the diamonds in your jewellery are of the highest quality and larger than they really are and you want your friends to believe it. Yet apparently only 1percent of all polished diamonds that are traded annually around the world are bigger than 0.3 carat.
What went wrong?
The diamond market became competitive. For decades De Beers had the monopoly and acted as a market buffer as it drip-fed the market through its Central Selling Organisation. This came to an end as other diamond miners ceased selling through De Beers.
De Beers’ massive stockpile, a critical factor in controlling prices, was liquidated over time while the market became very competitive.
China, with its burgeoning middle class, has developed a diamond-buying habit. The increased demand has, however, been offset to some extent by the trade in recycled diamonds that has ballooned and is worth up to 10percent of the global market.
The Diamond Prices Index or DPI (published on www.Diamondse.Info) is a good indicator of the state of the polished diamond market. It is a representation of the current market pricing trends and takes into account the average retail price per carat of loose diamonds from jewellers around the web.
The prices are calculated for groups of weight ranges as well as by colour and clarity.
The impact of China is significant. Between 2012 and 2017, the DPI tracked China’s Shanghai A Share Index, but diamond prices failed to follow through.
Closer scrutiny revealed that, according to the Global Diamond Industry 2018 report, commissioned by Antwerp World Diamond Centre and prepared by Bain & Company, rough diamond production grew 19 percent in 2017 and the additional 25 million carats had to be absorbed in the value chain.
Prices recovered in early 2018 and since then continued to track the Chinese stock market.
So, yes, the value of the diamonds in your jewellery is likely to rest on the laurels of China’s economy and the wealth of its population. But there is a catch – De Beers knows it!
De Beers has formed Lightbox, a company which will be selling man-made diamonds (MMDs) with total weights of up to one carat mounted in gold or silver earrings, pendants and bracelets at $800 (R11238) a carat – apparently much lower than what the industry is used to. Although the colour will vary, no grading will take place.
The Global Diamond Industry report says the potential impact of MMDs or lab-grown diamonds on the market is uncertain. They hope that the effect on natural diamond demand by 2030 will be limited to be between 5 to 10percent and that it will potentially increase the demand.
The other downside risk is not whether, but when, De Beers through Lightbox will decide to extend its product offering to MMDs on rings and other jewellery.
I sense an industry under pressure. But there is an upside risk though.
Seven countries produce the bulk of the natural diamonds (Russia, Canada, Botswana, Australia, the Democratic Republic of Congo, SA and Angola).
Any major disruption of these major producers can change the supply/demand equation overnight and see prices rocketing.
Diamonds may be a girl’s best friend, but is that where it ends?
Ryk de Klerk is an independent analyst. Contact email@example.com. The views expressed above are his own. You should consult your broker and/or investment adviser for advice.