The international community considers precious metals as safe-haven: as soon as the stock and currency markets show high volatility, investors immediately transfer the capital into gold. Only for the past 3 months gold has risen for more than 11% — China’s economy, not promising messages from Europe affected the preferences of investors. If gold is such an attractive asset for investment, would it make sense to individual and institutional traders to invest in precious metals?
What determines the value of an asset, if we are talking about commodity markets? We believe that it is the demand for the commodity and its relative rarity (limited number). If the asset is too small, it will not be able to fully satisfy investor demand if it will be a lot, it will lose an exceptional value. Gold and diamonds (take as long as they are the basis of an asset) are rather rare.
Diamond is a rare mineral, which is limited in production and actively used in knowledge-intensive industries, such as medicine, space industry. Refers to solid natural material (though other synthesized materials that are superior to the diamond in this parameter, for example, fullerite).
The leading countries in diamond mining (evaluation of cost, because the price of a diamond varies significantly depending on its size):
- Botswana — 2.9 billion USD. Source of diamonds — kimberlite pipes, which are located near South Africa. Extraction of the mineral accounts for about one third of the country’s GDP, the mineral is exported to USA and Western Europe;
- Russia — 2 billion USD. The market leader is a joint stock group of companies “ALROSA”. The company produces about a quarter of all diamonds in the world, existing stocks will be sufficient for at least another 30 years of mining. Due to the fall in demand in 2015, the diamond company refused to pay dividends, but decided to increase production;
- Canada — 1.4 billion USD;
- South Africa — 1.3 billion USD. The country is rich in deposits of various resources, however, the commodity orientation negatively affected the economy of the country. Due to the fall in world prices for raw materials Rand (currency of South Africa) in 2015 and 2016 years (in January and February 2016) became one of the leaders of the devaluation;
- Angola — 1.2 billion USD. 85% of the GDP in the country has oil, but diamonds — the second source of filling the budget.
Interestingly, not so long ago the President of Zimbabwe nationalized the diamond industry of the country, considering that extraction of the mineral will help to fill the budget.
Investing in precious stones
Diamond mining is under the control of the Kimberley Process, an organization controlling the legal trade of diamonds in the world. After diamonds are mined, passed their certification, they are sent to the companies that will do the processing. Thus, the investor has two options for capital investment:
- securities purchase of diamond mining company;
- purchase of loose diamonds (cut, finished diamond).
There is no way to purchase diamonds directly. Difficulty may also arise at the stage of search of a company that offer a diamond with the necessary certification and document certifying its authenticity and origin, with the seal of the company or appraiser. For example, in one of the countries of the CIS there are only 3 such companies — although there are much more intermediaries offering diamonds, only via these 3 companies diamonds come into country.
What a potential investor needs to know
Investing in gemstones is not as simple as, for example, gold. The existing methods of valuation of a diamond may confuse in a few minutes. On the other hand, without assessing a diamond purchase is also impossible, as there is a risk of losing by purchase the stone with the real cost 50-80% cheaper. Investing in gems can be compared with the stock market — it is difficult to say which of the varieties of diamonds will rise more.
- carat — a unit of weight, equivalent to 205 and 206 mg. the Stones weigh of 1 carat is considered large;
- diamonds are evaluated on the principle of Tavernier — the value of a diamond is equal to the product of the square of its weight in carats on a base price carat;
- gemology — the science that studies gems and forgery;
- price list of Rappaport — a kind of analogue of the index, overall summary, which includes quotes of diamonds on the market in New York, reflects world market prices;
- the color of the stone is one of the factors that determines the value of a diamond. The scale has 7 steps, a person is able to distinguish by the eye only three stages of color;
- 1 carat costed: 1980 — 12 thousand dollars, 2000 — 6 thousand dollars;
- 5 carats costed: 1980 — 28 thousand dollars, 2000 — 30 500 dollars. Price in 2015 has increased especially in larger stones, while small, showed a relatively small increase.
Yet the price of gems does not set the demand and the quality of the diamond, its uniqueness (rarity). The largest companies which produce diamonds, created the Association (ALROSA, De Beers, etc.), but they do not have control over the prices of the stones (unlike OPEC).
Most in diamond selling are interested intermediaries who offer stones that have passed all 4 stages (4th – the conversion of the diamond in jewelry). According to them, investing in precious stones is a great idea because:
- it is profitable — diamonds grow in value. They are really growing, but the sellers do not specify how quickly and on what kind of diamonds;
- diamonds are resistant to the market. The argument is interesting: precious metals and stock markets are subject to fluctuations due to the global economic upheavals, the stable diamonds — diamonds losing value a maximum of 10% for the year. Also, the company mentions that the gold and stock markets can bring 100%, whereas diamonds grow in value very slowly (in 2015 they even decreased);
- high liquidity. But here, the companies do not mention that a liquid include diamonds, confirmed by laboratories HRD (Belgium), IGI (Belgium), GIA (USA), weighing from 1 carat.
The authenticity of the diamond can determine only an expert, but there are also some quick ways to distinguish an original from a fake:
- brilliant should not be visible in water, otherwise its purity and authenticity can be questioned;
- diamond cannot be scratched or damaged;
- diamond always remains cold in the hand, unlike glass, the diamond will not fog.
Possible investment in other precious stones that differ in relative stability. For example, alexandrite for 35 years rose in price in 25 times, tourmaline is 30 times, the bright blue sapphire — 45 times.
Investing in diamonds: does it make sense?
The legislation in the countries of the former Soviet Union adds the problems. For example, there are issues with the subsequent sale of diamonds to individuals. In other words, it is possible to buy the diamond from the company but you may not resell it to a neighbor . The solution may be selling at auction, a pawnshop, but it is the loss of 30% of the cost of the stone. Russia plans to establish a diamond exchange, such exchange exists in Israel.
Summarizing all the above, we note that investments in gems make sense as a diversification of the investment portfolio. The diamonds practically do not lose value, but grow slowly; it is important to be able to determine which stone will go up (you need to be a specialist or seek advice from professionals). Another advantage of diamonds — expiration date – they will not oxidize like metals, and therefore the stone can be a good family heirloom for several generations.
For private investors the diamonds is a way to preserve capital, but not increase it. When the commodity markets will be volatile along with the stock, investing in precious stones will be the best conservative strategy.