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- Aleksey Chekunkov talks about the investment potential of the Far Eastern diamonds — for Forbes
October this year was the worst month for the stock market over the last seven years: capitalisation loss of world stock indices exceeded $5 trillion. Economic cycles are inexorable: following nine years of dynamic growth, investors are getting ready for a new financial storm to come.
The 2008 crisis was successfully dealt with thanks to the efforts of the central banks which reduced interest rates to zero and injected several trillion dollars in financial markets. However, the health of major economies is persistently fragile and the situation is aggravated by a high debt burden, modest rates of labour productivity growth, and demographics. Interest rates did not have enough time to reach their past levels, hence, the central banks and governments will have to fight the new financial fire with “fire” by printing money and justifying it one way or another. Investors will again look for protection in anti-inflationary assets.
Gold is a traditional safe asset. In 2008-2011, the price of this precious metal rose from $746 to $1892 per ounce, but in 2013 — after fear has receded — it “bogged down” in the range of $1,200-1,300 per ounce.
The price ceiling for gold is due to the huge volumes of the precious metal held by central banks and by the population. As soon as the price of gold reaches yet another record high, a large number of sellers goes out to the market. Following each upsurge during a crisis, the prices of gold fall back and the range of this fall may be from ten to several hundred percentage points. A bad choice of the time to invest may inflict major losses on the buyers looking for protection against inflation. Safe Haven
Investments in diamonds may provide a good alternative to gold. So far, precious stones rather represent an impulse purchase than constitute an investment vehicle. However, technological and financial innovations will turn diamonds into a legitimate investment asset.
Diamonds have a sui generis magic. It is hard to imagine anything more valuable per unit of volume and weight. A crystal of the size of a thumbnail worth of a new Rolls-Royce! Diamonds are uniquely solid, both physically and financially. Since 1960, the value of a reference stone (1K, highest cut, clarity, and colour grade) has grown up from $2,700 to $21,000 per carat.
One hundred dollars invested in a diamond in 1960 would have turned into $774 today, while the purchasing power of this bill has lost 88% since then. Diamonds have outperformed the U.S. Dollar by 66 times: the U.S. currency has lost an average of 3.7% per year, while diamonds have gained the same 3.7% for almost 60 years.
Diamonds are precious, desirable, and persistently appreciating. Why then have they failed to become popular with investors so far? Is it really due to the fact that “diamonds are girls’ best friends” and investments are managed predominantly by men?
Investment for the Chosen Few
“Better a diamond with a flaw than a pebble without”, Confucius reportedly said. Indeed, every diamond has its unique features — colour shade, minuscule impregnations, etc.
A naked eye is unable to see these peculiarities in jewel diamonds and the best gems can withstand a microscope test. But it is this very fact that each diamond is unique that has determined the place of the gems on women’s fingers and in their ears instead of investments portfolios.
Diamonds are not easily interchangeable, they are not easy to appraise or sell. Large specimens worth of millions of dollars are similar in status to the works of art and are auctioned at Christie’s and Sotheby’s.
Traditions are equally important. Gold has been synonymous to money over the course of centuries — sovereigns preferred to collects taxes in gold coin and taxpayers had to adapt. Central banks are still buying gold into national reserves today, which automatically translates into its popularity with private investors. Diamonds, by contrast, have been the royal prerogative inaccessible to the public at large until very recently.
Finally, diamonds are much rarer than gold. 95% of natural diamonds (raw materials to produce diamonds) is produced just by four companies. Alrosa and De Beers produce two thirds of this amount — their significance for the diamond market is equivalent to that of Boeing and Airbus for the aircraft market.
Annual output of jewel diamonds does not exceed $10 bn, which is miniscule relative to the size of the market for financial assets reaching $100 trillion. The diamond market is tightly balanced between the producers, cutters, and jewellers. In case of additional demand from the financial market, “brides may run short of the diamonds”.
Journey to the Market
Circulation difficulties, traditions, and a narrow market have restrained the investment potential of the diamonds — up until now. Information and financial technologies combined with the rising shortage of diamond production are about to turn diamonds into a popular investment vehicle.
In the first place, the transactional difficulties will be resolved. Do you remember letters in hard copy and operator-administered calls? Modern technologies have already resolved the transactional problems in multiple industries, including the diamond industry. Precious stones feel quite comfortable online (over 20% of sales in the U.S. are online sales) and were among the first to leave a trace in blockchain — just recall Tracr — a b2b platform to trace the origins of diamonds.
Traditions in the financial markets are changing equally fast. ETF assets have risen from $1 bn in 2005 to $100 bn in just five years! Diamonds are ideal for such instruments as ETF, because investors get a professionally built portfolio and are spared the trouble of individual stone selection.
And even though diamonds have not historically served as money, they have another impressive strength — it is a recognised symbol of eternal love. A diamond ring serves as a symbol of a new family and as a catalyst of the crucial evolutionary tradition ensuring reproduction of the humankind. About 80% of brides in developed countries purchase a diamond ring.
China and India are just about to get on this path. As demand in the gigantic Asian markets grows, the primary factor affecting both the price and the investment demand for diamonds will be shortage of supply.
Shortage is a useful situation for any safe asset. “Buy land, it is not produced any longer”, Mark Twain was reported to advise. Global output of diamonds is on the verge of exhaustion. According to Bain & Co, should the organic growth rates of demand for diamonds (net of the investment demand) persist, then the gap between demand and supply will exceed the total current annual output by 2030. This will trigger the market shortage regulation mechanism: the prices will go up and the quality of the stones in jewellery will go down.
As output shrinks, new technologies are concurrently penetrating the diamond industry. The consumer is not offered to simply buy a fancy crystal with a certificate of its optico-physical properties any more. Very soon, every diamond will carry the entire genealogy from production to sale, including the exact “date of birth” following billion years in the soil. Imagine the marketing potential of these details in the Asian markets obsessed with numbers.
Upsurge of the price for the increasingly scarce and hi-tech diamonds will provoke demand for recommercialisation of the stones owned by households. Diamonds are ageless, and once they undergo a simple inspection and certification, they can be reoffered for sale relatively easily. Present-day online platforms and smart customisation technologies will ultimately make resale of a diamond just as simple as the original purchase. This will be the turning point for the market, when diamonds will become the investors’ best friends similar to being the girls’ best friends.
Aleksey Chekunkov, Chief Executive Officer of the Far East Development Fund, member of the Supervisory Board of Alrosa PJSC