Fancy Color Diamonds
Investing in fancy color diamonds
Research indicates that only one in every few hundreds of thousands of diamonds possesses enough natural color to be referred to as a fancy color diamond. For this reason, fancy color diamonds are purchased almost exclusively for the intensity and distribution of the diamond's color, as opposed to white or colorless diamonds, where the cut proportions and clarity are other primary indications of value. As a general rule, the more intense the color, the rarer and more valuable the diamond is.
In recent years, fancy color diamonds, especially the larger and rarer ones (typically with an individual price tag of $500,000 and above) have emerged as a unique and attractive investment opportunity. Proponents of this asset class show that prices for rare fancy color diamonds have shown strong price appreciation in the past few years, and claim that this trend will continue in the foreseeable future. They add that those rare diamonds have proven to be resilient to adverse economic conditions with only marginal price declines occurring during recent general economic downturns. One of the possible drivers for price appreciation are declining global supply of rare fancy color diamonds, as existing diamond mines have yielded fewer of those rare stones each year and no new significant diamond mines with notable fancy color diamond production have been discovered or exploited as of late. Another important driver for price appreciation is the increasing global demand for rare fancy color diamonds due to the general worldwide demand for tangible asset investments and the growing number of high net-worth individuals around the world, specifically in Asia. The projected growth of Asian economies in both the near and intermediate term, with Asian cultures placing particular value upon investments in gold, diamonds and rare gems, is a fundamental game-changer in diamond investments. Moreover, some investors believe that rare colored diamonds may provide excellent inflationary hedges based on past pricing performance.
Although today diamonds are mined in about 25 countries, by some of the world’s largest mining companies such as Rio Tinto, BHP Billiton and De Beers, a significant portion of rare fancy color diamonds still originates from developed countries where diamonds are extracted by small- scale miners working in the informal sector. These small-scale miners often use simple artisanal mining techniques in alluvial deposits. The process of alluvial diamond mining involves digging and sifting through mud, sand and gravel using shovels, sieves, or even bare hands. Typically, diamonds come from geologic rock formations called Kimberlites. Kimberlite rock formations that contain diamonds are eroded over time by rivers and streams and can deposit diamonds in the sediments carried by those streams farther downstream from the original source rocks. These deposits are called alluvial diamond deposits. All rare fancy color diamonds originate in diamond mines, either alluvial or kimberlitic. Like any other diamond, rare fancy color diamonds are discovered in rough form which require cutting and polishing before these stones can be marketed to end consumers. Typically, the finding of rough diamonds that will eventually become rare fancy color diamonds is random and impossible to predict. Due to the difficulties in retrieving these stones from mines, projected rough fancy color diamond supply produced from mining operations is expected to remain largely unchanged or to slightly decrease for years to come. Furthermore, currently there are no mega-mines (such as De Beers’ rich mines in Botswana, Jwaneng and Orapa, which have been in service for more than 30 years) in development. As it typically takes a decade to develop a significant mine from exploration to commercial production, it is unlikely that the primary supply picture for RFCDs will improve before the end of the decade.
On the demand side, rare fancy color diamonds typically sell at retail prices surpassing $1,000,000, their consumer profile is meaningfully different than that of a typical diamond buyer. In 2010, the typical end-consumer who purchased a rare fancy color diamond was male (shopping independently or accompanied by his partner), rather than a self-purchase made by a female consumer. This consumer is referred to as an Ultra-High-Net-Worth-Individual (UHNWI), frequently a jewelry and diamond connoisseur that have purchased important white and/or color diamonds in the past and understands the unique proposition of the fancy color diamonds. Increasingly this consumer is purchasing the item for investment (or price appreciation potential) purposes in addition to other reasons. One of the most intriguing characteristics about this consumer, learned from our own experience, is the fact that more often than not he would be of Asian origin (regardless of whether the transaction took place in San Francisco, London or Hong Kong).
As more baby-boomers grow restless over meager nest-egg returns, fueled by a sluggish economy, a depressed real estate market and a 0% interest environment, they have discovered alternative asset classes as a potential means to diversify small to medium portions of their investment portfolios. Gold, either through physical purchases of coins and bullions or through ETFs, has long been identified by many as a coveted portfolio ingredient. Some savvy investment professionals believe that diamonds, especially unique and scarce such as rare fancy color diamonds, are the next asset class to penetrate global portfolios.
The writer: Eden Rachminov, principal of Rachminov Diamonds 1891, and author of The Fancy Color Diamond Book,consideredby many to be the diamonds industry’s primary tool and reference guide to fancy color diamonds
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