Why diamonds, the world’s oldest investment, are attractive to high net worth individuals
Diamonds are a girl’s best friend. But it is also a friend to high net worth individuals who invest in them. Purchases by wealthy Chinese and Indian investors in the last decade have pushed up its prices.
The attraction of diamonds, the world’s oldest investment product
Diamonds, possibly the oldest financial product, are real tangible assets on par with gold. Being an alternative inflation hedge, they are very well established as an investment item for wealthy people.
Although international diamond prices have fallen around 10% from their 2014 peak, they rose 67% between 2005 and 2014. Historically, diamond prices have risen an average of around 14% a year since 1960.
Diamonds, known for their clear radiance, can also be naturally coloured, and such diamonds become collectors’ items. Popular colours are pink, blue and green.
Majority of diamonds extracted globally are either brown or yellow and typically used for industrial purposes, making these types of diamonds more functional than that of investment instruments.
The price of pink diamonds, the most popular type of diamonds, on the other hand, increased 3.6-fold in the ten years to 2014 while the price of blue diamonds rose 60%, and the price of yellow diamonds fell 50%.
So when it comes to the colour of the diamonds for investment, it is one of the most important factors.
Pink diamonds beloved by the wealthy globally
Pink diamonds were found in 1979, in Argyle, the world’s largest diamond mine, in Kimberley, Australia. It remains unclear why the diamonds are naturally pink, but they are extremely rare, comprising fewer than 0.01% of all the diamonds circulating on gem markets globally.
These rare and mysterious pink diamonds are sought after by the world’s collectors. It is worth adding that more than 90% of the world’s pink diamonds were extracted from the same mine.
Pink diamonds range widely from very light pink to very dark pink. And its colour determines its valuation.
If a dark pink diamond is dull and its luminosity low, its price will be lower. As a result, prices for a one carat pink diamond can vary widely, which would be anywhere from $19,600+ (SGD26,000+) to around $196,000+ (SGD260,000+).
The world’s wealthy buy high quality coloured diamonds, of five carats or more, as a hedge against inflation.
The auction of large, coloured diamonds tend to attract a lot of publicity.
In 2016, a top class 15.38 carat pink diamond was auctioned at Sotheby’s in Geneva, Switzerland. This diamond was classified as Fancy Vivid, with Fancy indicating natural colour and Vivid indicating the depth of the colour. The diamond sold for around $31.6 mil (SGD43.1 mil), a record high for a pink diamond.
The highest price ever paid for a diamond was for a blue diamond auctioned at Christie’s in May 2006. This was the 14.62 carat Oppenheimer Blue, the largest ever Fancy Vivid blue diamond, which sold for around $57.5 mil (SGD78.3 mil).
Its name comes from its owner, the late Philip Oppenheimer, a leading light of the diamond mining industry. Like pink diamonds, blue diamonds also have rarity value and are mainly extracted from the Premier mine in South Africa.
Diamond prices tend to hold up in bear markets
Collectors are driven by the desire to own diamonds with a unique and fascinating radiance. However, another attraction is undoubtedly the excellent long-term performance of diamonds investments.
While supply is limited by lower shipment volume from mines in Canada and Russia, demand is strong because of the rising number of wealthy people in emerging economies such as China.
Even in periods when equity and bond prices have sharply corrected, the impact on diamond prices has been comparatively small because of their high collectability.
Diamonds are also effective as an inflation hedge because their prices tend to move with resource prices as they rise. Also, with 29 diamond exchanges globally, good liquidity adds to the attraction of diamonds as investment products.
Incidentally, 60% of the exchanges are concentrated in Antwerp in Belgium.
Despite all of the above, there are no ETFs that involve diamonds. and there are no futures transactions in diamonds.
Investment tends not to be in the form of jewellery but in the form of gems. This is not a product in which individuals should invest in lightly.
An individual should even be careful when they take a family engagement ring to a pawn shop, because it is not uncommon for them to be cheated in such circumstances.
Dabbling in diamond investment in Singapore
Singapore Diamond Investment Exchange (SDiX), the first electronic exchange for physically settled diamonds, opened in May this year. The chairman and founder of the exchange, Alain Vandenborre, says it provides the first transparent price discovery mechanism for diamonds, allowing investors to trade diamonds as an asset class. Diamonds traded on SDiX are graded by the globally recognised Gemological Institute of America.
UOB Kay Hian is the first broker on the Singapore Diamond Investment Exchange to launch diamond trading. Targeted at acredited investors, the exchange allows them to take delivery of physical diamonds or trade them as they would with shares or commodities. This can be traded as single stones or baskets of identical diamonds.
On top of the transparency of trading on the SDiX, investors are buying into it with a rate that is cheaper than the open market, with cost savings of up to 20% and are given the option of easy withdrawal of settled diamonds which are safe-kept by Malca Amit, a global custodian for diamonds and jewellery.