Investment Grade Diamond Prices: What Could Go Wrong

Diamond demand and prices are expected to grow at an accelerated rate over the next 10 years, due to rapid growth of the middle classes in China and India and the inability of existing and newer diamond mines to meet global demand.  The article entitled “Appreciation Potential of Investment Grade Diamonds” provides a quick summary of the supply-demand imbalance that exists and how it will increase diamond prices.

This article will summarize possible disruptive factors that could alter the projections of both demand and prices of diamonds that were presented in a 100 page study entitled “The Global Diamond Industry: Lifting the Veil of Mystery” published by Bain & Company, an international management consulting company with 40 offices in 37 countries. Serious diamond investors are encouraged to read the entire report.

Disruptive Factors

• A continued economic recession in developed countries, a slowdown in the growth of the middle classes in developing countries, a continuation of the European debt crisis or the unclear economic outlook in the US could significantly reduce demand for diamonds.
• The aggressive commercial development of synthetic diamonds resulting from increased consumer demand could adversely impact prices for genuine, natural diamonds. This is unlikely for the following reasons.
  • The consumption of gem quality synthetic diamonds in 2010 represented only .01% of all diamonds by volume, so growth would have to be extraordinary to have any meaningful impact on natural diamond sales.
  • The high production cost of gem quality synthetic diamonds does not allow a meaningful discount from the price of natural diamonds to warrant a substantial increase in sales.
  • Gem quality synthetic diamonds typically sell at approximately a 25% to 30% discount to natural diamonds.
  • On the demand side, consumers have not demonstrated a willingness to buy synthetic diamonds –especially for engagement rings.
• The development of a significant investment market for high grade diamonds could increase demand and prices.
  • Investment could be encouraged if investors perceive high grade diamonds to be a hedge against future inflation, just as gold is perceived.
  • Bain indicates that investment in diamonds as a hedge is most likely to happen in China, at least initially.
• A rapid development of new mining opportunities could increase the supply of diamonds, thereby reducing consumer prices.
  • This is an unlikely scenario, because Bain’s economic forecast for production of diamonds mines includes existing and newer mines going on line before 2020.  The discovery of any newer mining opportunities could take up to 13 years to get to production.
• Political instability and protectionist policies in diamond producing countries could be disruptive to the supply of diamonds.  

You are invited to comment or submit questions to Paul Buchanan at info@bidiamonds.com or 855-261-0100 (Toll Free).

Paul Buchanan is a Graduate Gemologist, Graduate of the American Institute of Diamond Cutting, President of Bella Ideale Diamonds Consulting Services and has 30 years of finance and investment management experience with traditional investments including venture capital.

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