For more than 100 years, unless you were an industry insider or had connections to DeBeers, the prospect of investing in diamonds was completely out of reach. However, for the first time in history, diamond prices are no longer manipulated and are now a product of true market forces, providing investors with a long awaited opportunity.
Diamonds are not just a “girl’s best friend,” they’re also the next golden opportunity for millions of individual investors seeking safety and performance in this uncertain global economy. Investors can now buy, take physical delivery, track real-time prices, and liquidate their investment-grade diamond positions effortlessly.
And even better – prices are expected to spike soon.
So what happened over the last 100 years to make such an opportunity possible? The short answer is that natural economic forces will always prevail over any one company’s power and influence.
It all started in the second half of the 20th century when DeBeers began to lose its control over the diamond market as a result of major mines being discovered in Australia, Canada and Russia. These discoveries made it difficult for DeBeers to purchase all of the rough diamonds on the market, in turn weakening their ability to influence supply and prices in their favor.
Over time, more and more diamond producers began to bypass the DeBeers cartel by selling their supply directly to the market. By the late 1990’s the DeBeers market share had eroded to 60 percent, a far cry from the 90 percent share it enjoyed in the 1980’s.
By 2004, the DeBeers stockpile was depleted, allowing diamond prices to trade on supply and demand fundamentals, just like any other commodity. Currently DeBeers has a market share of less than 40 percent.
So why should an individual investor care about these major structural changes to the diamond industry? Well… because allocating diamonds to their investment portfolio may well be one of the best investment decisions they can make.
According to a study released by Bain and Company in 2011, it is projected that there will be an additional 276 million middle class households in China and India by 2020. This influx of consumers is anticipated to fuel record setting diamond demand for years to come.
Supply Of Diamonds Will Remain Unchanged
Even more interesting is the fact that industry experts agree that the supply of diamonds will at best remain unchanged throughout the decade because all major diamond mines are already at peak production. In fact, even if a large diamond mine were discovered, it would take eight to 13 years of development before diamond production can commence. That’s because diamonds are mined in some of the most remote and inhospitable places on earth
So how do investment-grade diamonds stack up against gold?
Historically, diamonds have proven themselves to be significantly more stable than other tangible assets like gold and silver, largely because diamonds have almost no exposure to speculative capital (roughly 1 percent). Gold on the other hand has a speculative investment share of approximately 40 percent, and as a result is highly volatile.
But an important change is about to happen for diamonds.
In August of 2012, the U.S. government issued a patent for identifying investment-grade diamonds, paving the way for diamonds to be a publicly traded commodity in the near future. This development will likely have a dramatic impact on the price of diamonds as higher levels of investment capital begin to flow into this asset class.
This is exactly what happened in 2004 when gold prices doubled and later quadrupled leading up to and following the release of the SPDR Gold Shares ETF (GLD).
In short, these highly favorable supply and demand fundamentals lead many industry experts to believe that diamonds will likely be one of the top performing tangible assets for years. In fact, it’s anticipated that diamond prices will outperform gold for the better part of the next decade, hitting annual record highs through 2020.
By Chris Duffield and Kris Schellhas
Chris Duffield is a former hedge fund trader and Kris Schellhas was a former futures trader at the Chicago Board of Trade. They co-founded and launched a liquid and price transparent diamond exchange for private investors. For more information please visit InvestmentDiamondExchange.com
