Are diamonds rock-solid investments?

by Linda S. Heard

“I never hated a man enough to give him his diamonds back,” said nine-times wed Zsa Zsa Gabor, one of the world’s most glamorous celebrities. Other divas whose lives were diamond-encrusted include actresses Joan Collins and Elizabeth Taylor, whose massive diamond ring prompted Princess Margaret to declare that it was “vulgar”.

Once known as ‘tears of the gods’ when discovered in Indian rivers, aside from their material value, based on cut, colour, clarity and carat, diamonds are the planet’s hardest naturally-forming material. A diamond can only be cut by another diamond. It takes one to three billion years for pure carbon minerals to sufficiently crystallize to produce diamonds which are thrown to the surface by volcanic eruption. In earlier times, De Beers, founded in South Africa, almost enjoyed a monopoly on the industry, marketing 90 per cent of the world’s rough cut diamonds, a percentage that has fallen to 40 per cent today. Anglo-American, in which De Beers holds 46 per cent, is currently the largest company mining diamonds.

It may surprise you to know that diamond engagement rings were uncommon prior to 1939 when an advertising agency commissioned by De Beers promoted the trend in fashion magazines and came up with the slogan “A diamond is forever”. From then on diamonds were viewed as symbols of eternal love. The agency’s strategy was explained in a 1948 strategy paper. “We spread the word of diamonds worn by stars of screen and stage, by wives and daughters of political leaders, by any woman who can make the grocer’s wife and the mechanic’s sweetheart, say ‘I wish I had what she has’.”

That was a deliberate ploy on the part of the company. By persuading its customers not to re-sell for sentimental reasons, it was able to maintain the gems’ scarcity value. Substantial discoveries of diamonds in Canada, Russia and Australia were responsible for reducing De Beer’s influence that was further eroded in 2001 when lawsuits filed in the US alleged the company “unlawfully monopolized the supply of diamonds, conspired to fix, raise and control diamond prices, and issued false and misleading advertising.

Approximately 84 per cent of all uncut diamonds find their way to Antwerp in Belgium where they are sorted, traded, cut and polished. Each year over $16 billion worth of stones are handled by the district’s exchanges, dominated by Hassidic Jewish and Indian traders, mostly adherents of the Jain faith. The Antwerp Diamond District is a world within a world that holds to traditional methods of doing business.

Some years ago, I was invited with members of the international press to tour the diamond bourse, a rare privilege. It was surprising to discover that packages of uncut diamonds are bought sight unseen and deals are conducted on a handshake sealed with a Yiddish expression meaning “happiness and blessings”. No buyer would ever dare to ask for a receipt. Disputes are rare, but when they occur they are arbitrated by the industry’s governing body. It wasn’t so long ago when Jewish traders controlled 70 per cent of the trade; nowadays they control just a quarter of the turnover.

Converting a rough diamond into an object of beauty lies in the hands of cutters and is considered to be both an art and a science. The task is lengthy and challenging requiring a sharp eye, a steady hand, patience and years of experience. One mistake can render a high quality stone almost worthless. In recent decades, India has emerged as the world’s biggest cutting and polishing center, consisting of over 100 small workshops employing two million but now it’s facing serious competition from China and other Asian nations. Traditional centers, such as Antwerp, New York and Tel Aviv are still entrusted with cutting large, high quality stones.

In 1999, Chairman of De Beers Nicky Oppenheimer made a startling confession. “Diamonds are intrinsically worthless,” he said “except for the deep psychological need they fill.” That’s not only an astonishing viewpoint - from a man whose family’s vast wealth was built on diamonds – but it is open to argument. A highly-prized diamond does become more valuable as time goes by.

In 2012, the 76-carat Archduke Joseph Diamond was auctioned for $21.5 million and earlier this year, the 101.73 Winston Legacy Diamond was auctioned in Geneva for $26.7 million. Moreover, according to the Rapaport Diamond Trade Index, from 1999 to 2011, diamonds of three carats rose in price by 145 per cent, while five carat diamonds gained 171 per cent in value.

The problem faced by those wishing to sell more modest diamonds is that, unlike gold or other precious metals, there is no standard pricing authority or global commodity market for diamonds recognised worldwide; their value rests in the eye of the buyer’ subjective appraisal of the four C’s. However, that situation may be due to change. In August last year, the United States Patent and Trademark Office granted a patent on a new process that scientifically grades diamonds as a financial asset which may lead to diamonds being publicly traded on the NASDAQ next year.

In the meantime, Dubai’s diamond industry is forging ahead thanks to efforts made by the Dubai Diamond Exchange (DDE) established in 2005 when the emirate’s trade in diamonds was worth just $5 million. In 2011, that figure leapt to a startling $39 billion as Dubai, today ranking among the top three international diamond trading hubs, gears up to becoming the market leader. The DDE has hosted ten successful diamond auctions to date and, in March, hosted a much acclaimed international diamond conference in partnership with the Dubai Multi- Commodities Center (DMCC). Will Dubai succeed in knocking Antwerp and Mumbai off their perch? Chairman of the DDE Peter Meeus, who formerly headed Antwerp’s World Diamond Center, is optimistic that Dubai is up for the challenge. “Nothing is impossible – We already did the impossible…” he said. “We are truly at the center of the New Silk Road and will bring it to its full potential.”