Diamonds: A New Investment Story

By Kishori Krishnan Exclusive To Diamond Investing News

There is a new sparkle in the air. No, it is not just the new year festivities, investors are snapping up diamonds to hedge their portfolios.

As miners search for new sources of the gems, investors are renewing their appetite for diamonds. What has added to the glitter is that two of the world’s largest diamond producers: De Beers and Harry Winston, have said that they see prices increasing in the next few months.

While 2009 was all about plunging demand, falling prices and lender reticence especially towards the Antwerp diamond industry, 2010 is bound to be all about the tangible, portable and liquid investment that investors are making sure is a `must-have’ in their investment portfolio.

The year past

The Antwerp diamond district, a multicultural hive with a large core of Jewish and Indian merchants, struggled through 2009. “It was one big holiday… There was just no appetite to buy,” said broker Joseph Paul, who added that trade was about one-tenth of usual levels.

Producers De Beers, Russia’s Alrosa, Rio Tinto, BHP Billiton and Harry Winston Diamond Corp then decided to bandy together and discussed plans for an unprecedented joint marketing effort.

De Beers used to foot the bill for generic advertising: “A Diamond is Forever” was its most memorable slogan. The new one – “Fewer, better things” was, tellingly, the message for the downturn.

From 2010, bigger players have planned to share the marketing burden with the newly formed International Diamond Board.

Tough times

Israel-based diamond expert Martin Rapaport had said that top-end demand from the rich and super-rich, such as Russian oligarchs or Arab sheikhs, had dried up completely and only smaller gems for engagement rings were keeping the market alive, through 2009.

“It’s wait and pray,” he said, adding equity positions of diamond companies were “technically wiped out.”

The global financial crisis also led to job losses for almost half a million of some 800,000 workers in India, the centre of diamond cutting and polishing. Some industry insiders had speculated that the industry would emerge from the crisis 30-40 per cent slimmer.

For consumers, cutbacks in company bonuses made a huge impact on the discretionary income of households with annual incomes of $100,000-$249,900.

According to a recent survey data from Unity Marketing, a luxury market research firm, this demographic “dropped throughout most of 2009, with a drop of 10 percentage points from the second quarter to the third in 2009.”

Unity Marketing owner Pam Danziger called this “a noticeable drop off the luxury market.” Even consumers with $250,000-plus household income were reportedly spending less.

2009 saw luxury getting redefined and new brands emerged. Of course, the competition for consumer luxury dollars also became fiercer. But all that is behind us.

In India, reviving exports have been imparting hope. Widescale bankruptcies have been averted, partly because producers slashed output and banks did not abruptly pull credit in an industry with debt last year of up to $15 billion.

Investment opportunity

During the worst of the recession, De Beers discussed marketing diamonds to investors as a way to boost its anemic sales. This made many in the industry cringe, particularly those with memories of the 1970s investment boom and bust.

The major argument against investment diamonds was that there was no agreed-upon set price marker for measuring prices. However, the World Federation of Diamond Bourses recently endorsed a manufacturers suggested retail price list devised by Idex, and a handful of funds are now devoted to diamonds.

With demand for diamonds likely to trump supply in the long term, many see diamond investing as a potential opportunity.

With the improved macro-economic environment which has set in place across the globe, and continuation of demand outstripping supply for investment diamonds into the medium term, diamond prices are set to rise during 2010.

Some analysts maintain that they may even return to their expected equilibrium natural growth rate of 12 to 16 per cent in the medium term.

Showing the way

Jewelry sales have already perked up in the final days before Christmas, a survey by National Jeweler’s Exclusive Holiday Season Weekly showed.

One retailer said: “The last three days, December 22-24, were the best three days before Christmas we have had in the last four years. We did well over $60,000, when we have typically done between $50,000 and $60,000 in those three days.”

Another survey by MasterCard Advisors’ SpendingPulse noted that jewelry sales in the US rose 5.6 per cent for November and December, while luxury retail excluding jewelry increased slightly by 0.8 per cent this holiday season compared to last year.

Retail sales in the period from November 1 to December 24 showed a 3.6 per cent increase as compared to 2008, according to the SpendingPulse report.

New year

With approximately 80 per cent of global diamond production being controlled by five diamond mining companies, diamantaires are now pinning their hopes on stronger demand in 2010.

Canada is no exception. Though Harry Winston reported lackluster profits after a temporary closure at one its Canadian mines in the Northwest Territories in summer, the shine is back.

Harry Winston Chairman and CEO Robert Gannicott expects his company’s fortunes to improve as rough diamond prices and retail sales continue to rise amid lower supply cycles.

“Although we would expect jewelry sales to grow only modestly through 2010, mine supply will remain constrained as mines pass their production peaks and no new major sources of supply appear to replace them,” he said at a recent conference call.

“This implies continuing price rises in the near term, increasing in velocity as the US economy recovers.”

If the recovery in the United States takes hold, it will inevitably produce incremental demand for diamond products, But not all hopes are pinned on the US alone.

Though the world’s largest diamond market – the US – may experience a slow recovery from the economic funk that has affected diamond demand for two years, diamond traders are focusing their efforts on developing sales in emerging markets such as China and India.

The Chinese New Year is celebrated in February, and it represents an opportunity for consumers in that country to give gifts of jewelry. And with China urging its citizens to buy gold and silver,  diamonds are not very far off.

Firming demand for polished diamonds from the Far East and India is also pushing the growth story.

Rough diamond prices have also improved by at least 61 per cent from the lows experienced at the weakest point of the market. Many expect a sustained improvement in rough diamond prices over the new year.