The Financial Markets Want to Invest in Diamonds, But Some Help is Needed

Even though nearly five years have passed since the 2008 financial crash, the financial markets are still interested in diamonds and the diamond industry. And even though some time has passed, a meaningful investment in the diamond industry is yet to happen. A few obstacles are still standing in the way, preventing its materialization.

The financial crash of 2008 sent many financial institutions and investors to search for an investment vehicle that is relatively resistant to such crashes, a low-correlation asset that they can invest in. A typical investment portfolio holds company shares, bonds, real estate and futures contracts. All of them crashed during the crisis and some were hard to monetize even at the new low prices. An investor who needed cash was able to get just part of his investment back, and therefore the search for an asset that was resistant to financial crashes began.

Diamonds are not immune to price declines. Peak to valley, between September 2008 and October 2009, diamond prices declined on average by about 16.5%. Gold fell more than 21%, platinum by 59%, the S&P 500 dropped 52% and the Shanghai stock exchange plummeted by more than 69%. Everything fell – and recovered – at a somewhat different timeline. None was immune to the crisis, and all lost more than polished diamonds.

Housing prices in the U.S., the crisis precursor, are still some 29% below their peak prices of July 2006, according to the Case-Shiller Composite Index.

Diamonds, by comparison, fared much better, and naturally, financial institutions took an interest in them. Very quickly they found that diamonds are far from being a homogenous product, that prices are not transparent, and few investors even asked about "conflict diamonds."

Of these, price disclosure is the biggest issue. More than anything else, the most fundamental basis for tracking and deciding on an investment is a mystery – is the price up or down? Is this a good time to enter or exit? Hard to tell without a trustworthy price disclosure mechanism.

Reputational issues are also brought up, but to a lesser extent, today, and this is mostly a topic inside the industry.

There are some other questions, such as the big disconnect between rough and polished prices, and why manufacturers are operating at thin margins yet holding large inventories. All good questions, and all a matter of transparency.

Many in the diamond industry, mostly the mid-section, can benefit from a cash infusion. It will allow better marketing, for example. The possible downside is that prices will start to fluctuate more, and firms may prefer to invest the added income in rough diamond purchases – leading to unnecessary and harmful price hikes.

Finally, even if the issue of price disclosure is resolved, investors want to know that if they buy a hard asset, they can also sell it. This is another mechanism that does not exist, at least not yet.

Much can be done to break down the barriers. First is to lose the ingrained suspicion many diamantaires have towards the financial market. Willingness to disclose trading prices is essential. This data need not be directly connected to the identity of the buyer or seller, but without this disclosure there is no business with the markets.

Accepting the inevitability of change, and understanding that "this is not how the diamond industry works" is a mindset that is setting the industry back, and blocking evolution.

The diamond industry would do well to widen its way of thinking, introduce an innovating approach and extend it beyond inner-industry commerce. Some have already made the shift and are looking outwards. They stand a good chance to benefit from it most, because those that dare – win.

Follow Edahn on Twitter
Get in touch on LinkedIn
Connect on Facebook
Or email eg at edahngolan dot com