Opinion - Best friends forever? The answer is crystal clear.

It was Marilyn Monroe who sang the legendary words ‘Diamonds are a girl’s best friend.’ I sometimes wonder how much songs actually impact on our thinking and our decisions. Did the words of this song run through Richard Burton’s mind in 1969 when he bought the 69.42 carat pear shaped diamond for Elizabeth Taylor which he promptly renamed the Taylor-Burton diamond? Or did the song somehow make him conscious of the fact that the value of the diamond would go on to rise considerably in price before it would eventually be sold at auction?

These questions go some to way to explaining why, in my opinion article this week, I’ll be quoting not only Marilyn Monroe, but queen of pop Rihanna, and you guessed it, Bain & Co.

I believe diamonds are not only a girl’s best friend but a guy’s too. In the same song Marilyn Monroe sings: “He’s your guy when stocks are high, but beware when they start to descend.” She has a point. When the stock market goes down, I say it’s worth looking at your diamonds. They might just become your best friends. 

Diamonds “don’t lose their shape”, the song continues accurately. “They won’t leave in the night, I’ve no fear that they might desert me.” 

I believe diamonds retain their enduring value. The economy of rarity means that nearly 150 years since diamonds were discovered in Africa and throughout an entire century of major diamond mining, diamonds still store their value. They are still rare, they continue to be desired and in the long-term they maintain their value.

The disparity between the rarity of diamonds and the volume of diamonds being mined is itself a quality which makes diamonds a viable consideration for wealth preservation. Diamond industry analysts repeatedly report that they expect a growing gap between diamond supply and demand. It has become almost a consensus that supply will decline while demand will grow. 

“BMO Research expects demand to grow by an average of 7% a year through 2020…on the other hand, the outlook for supply remains constrained.” (BMO Capital Markets)

Mines have a limited lifespan. While major world mines are depleting, recently discovered mines are not rich enough to close the widening gap between supply and demand, or even to generate enough rough diamonds to make up for the declining supply of ageing mines. 

“Diamonds could soon be an investor's best friend as demand rises and supply falls” reads a Forbes headline from October 2013.

On the one hand, we are facing a declining supply of rough diamonds while on the other hand growing economies such as China and India, experiencing rapid urbanization and a growing middle class, are eager to possess diamonds to express their status. Underscoring this, IBIS World has just published a market research report stating: “As household incomes rose and living standards improved, jewelry purchases have increased rapidly in China. For China's most popular jewelry category, gold jewelry, consumption volumes in China increased from 224.1 tons in 2004 to 716.5 tons in 2013, representing annualized growth of over 20.0%. In the five years through 2014, total revenue for the jewelry store industry in China has been growing at an annualized rate of 22.9% to $98.9 billion. China has become the largest consumer of gemstone, jade and platinum jewelry in the world, and the second-largest consumer of gold jewelry (after India) and diamond jewelry (after the United States)”. 

Long-term diamond price analysis and popular industry indices show that diamonds retain their value through the years. Besides some short-lived hurdles, diamonds have overcome major economic crisis such as World War 2, the Vietnam War, the1973 oil crisis, the 1987 stock crash, the 1989 Berlin Wall Fall, the 1990 Gulf War, the 1994 stock market crash in Asia and the 2008 banking crisis. Diamond values have been the fastest to recover, rendering them a fantastic potential consideration for wealth preservation. 

Some people consider buying a diamond an expense no different from buying a handbag, a car or going on vacation. But I believe as long as a buyer understands the value of the diamond when purchasing it, he or she can consider it a logical and rational economic decision, which in turn can potentially contribute to his or her wealth preservation. Longer-term, this approach may be adopted by the purchaser’s descendants who will either hold on to the diamonds or sell them, turning them into reclaimed diamonds.

If you consider it a sound economic approach and you become acquainted with my “Crystal Clear” philosophy, your perception of diamonds may change and you may even come to consider their potential role as part of your wealth preservation, over and above the traditional reasons which might have traditionally drawn you to purchasing diamonds.

This philosophy adds a strong rational approach to the emotional one which has typically been fueled by the beauty of diamonds and their role as an expression of love and power. With the full detailed and logical approach that the “Crystal Clear” philosophy suggests, consumers will be able to rise beyond the emotional decision and may come to realise how buying a diamond may bring additional value. As with purchasing any other valuable item, a decision on budget is the first step, which then opens up a range of diamonds of different sizes and shapes, each being a possible logical economic choice. You might even start to feel like Richard Burton did.

If you are a prospective diamond buyer, you would do well to conduct your research while accompanied by a professional adviser. Gathering all the information in this way will enable you to choose between all the alternatives and tradeoffs that diamonds can offer while taking into account your budget. You will then understand in full the actual value of each considered diamond and have an adviser who will follow the value development in the future with you. 

You also need to know where along the supply chain to make the purchase so that the paid price is the closest to the first link in the diamond industry value chain and only minimal costs have been added to the initial recommended price. This will enable you to add value to the purchase from day one.

“Buying at retail and reselling at wholesale is a bad idea, so you need to connect with an expert that can give you direct access to international dealer prices and markets” (Martin Rapaport)

To make all this possible, first a critical question needs to be answered: Who and what defines the price of polished diamonds? Are diamond prices defined by diamond producers (the miners) or do they purely depend on supply and demand? Or is it consumers in a Fifth Avenue store or Hong Kong’s Central District that determines the price of a polished diamond?

I believe that in order for consumers to determine the value of a diamond, they need to know exactly what they are being offered. Marilyn Monroe said it right when she sang: “I can see every part, nothing hides in the heart to hurt me.” Buyers will determine the value of a polished diamond, but to do this, they need to fully understand the 4Cs and all the possible irregularities a diamond may carry. 

Over the years, consumers have learned that the 4Cs characterize diamonds. But just knowing these is not enough for a rational decision. Right now consumers do not possess all the tools and necessary knowledge to assess a diamond’s value so that they can make a rational decision beyond the obvious emotional one. I believe this knowledge is necessary when purchasing a diamond potentially representing long lasting value. 

“The diamond industry should address the transparency of pricing…to support a potential diamond investment market." (Bain & Co.)

There is a way to expose consumers to the full definitions of the 4Cs and further criteria which determine the price of diamond, which are called irregularities. An example of an irregularity is the intensity of the fluorescence of a diamond, the position of an inclusion or the exact measurements of the polished diamond. These and many more criteria have a substantial impact on the value of a polished diamond. 

Irregularities may create value differences between two similarly graded diamonds with the same 4C characteristics. The size of the value gap is very important but more important are the variables, which need to be formulated in order to accurately determine the final value of a diamond. Only after weighing up all these variables, can we determine the value of a diamond. 

Once the 4Cs and all the irregularities are documented and all considerations for the determination of the diamond's long term value have been taken into account, the final commercially viable product emerges.

Consumers should be informed so they have a full picture of the diamond considered for purchase and provided with all information about the value of the diamond they are about to purchase. This will be the way to truly make sure that consumers have the most accurate and transparent diamond value information in their hands. 

Ideally, given the large amounts of data involved in such a purchase, a professional adviser should accompany the purchase and provide all the necessary information.

“It does not take an expert to understand what an ounce of gold is worth but it does take an expert to bid on a Picasso or on a diamond worth $8m.” (Citigroup Markets, Oct 2013)

By classifying diamonds clearly – just as gold purity classified as 24, 18, or 9 carat is clearly understood – consumers will be able to understand the difference between types of diamonds. The transparency that this will add to the diamond buying process will reassure diamond buyers, be they men or women, about the additional economic value of their rational purchasing decision.

The full disclosure of diamond value components is all part of my Crystal Clear philosophy which is about making diamond values Crystal Clear and accurate, while making all possible information known to consumers. 

If chosen carefully, diamonds may be both women’s and men’s best friends, even more so when making an educated and well informed decision and considering them as part of wealth preservation. It may be over five decades since Marilyn Monroe sang “Diamonds are a girl’s best friend”, but women and men today can still easily relate to the words. 

Now that diamonds may become not only women’s but also men’s best friends, I sometimes find myself humming along to Rihanna’s song “Shine bright like a diamond, Shine bright like a diamond, Find light in the beautiful sea. I choose to be happy, you and I, you and I, We’re like diamonds in the sky.” Today, it is not just women or just men, it is us, you and I, we are in it together!

DISCLAIMERS 

The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified advisor. Nothing on this website can be construed or constitutes an offer or a recommendation to sell or to purchase diamonds or the solicitation of an offer to purchase any diamonds nor does it constitute an offer or a recommendation to sell or to purchase any security or financial product or the solicitation of an offer to purchase any security or financial product. Diamond prices are influenced by consumer demand and changes in local, regional or global economic circumstances could adversely impact overall diamond prices and the ability to dispose of them. Diamonds do not produce income, and the holding of diamonds will carry expenses such as storage fees, transportation fees, and insurance. The ability to dispose of a diamond depends on finding a willing buyer at a particular point in time. Therefore, the ability to realise the cash value of the held asset may be difficult or take a long period of time.