Tuesday, September 6, 2011

Diamonds look to offer fresh haven appeal

Diamonds are a girl’s best friend but the big question is whether they can also be the same for investors.

Several groups are hoping that the answer is yes and are putting together funds for investors looking to gain exposure to diamonds.

Martin Rapaport, whose firm conducts monthly auctions, plans to launch a fund. Meanwhile, Resolution founder Clive Cowdery is investing in Diamond Capital Fund, which is closing this week with about $12m in investments.

The pitch is simple: for investors who have maxed out their exposure to gold, try diamonds as an alternative shiny hard asset and haven.

Investors looking for exposure to diamonds in the past bought the stones through jewellers, or invested in shares of companies that produce or trade them, including Tiffany and miners such as Gem Diamonds or Petra Diamonds.

Diamonds are priced individually according to the 4C’s – carat, colour, cut and clarity – and there are tens of thousands of price categories. The top end diamonds have always been regarded as investments and priced mostly like art, as no two diamonds are the same.

However, the sharp increase in demand from emerging markets has widened the breadth of what is regarded as “investment grade”.

Supply and demand point to a rise in diamond prices. Wealthy Chinese and Indian consumers as well as those from the Middle East provide most of the growth.

On the supply side, there have been no new discoveries of large diamond mines, and developing a new mine takes 10 to 12 years.

Diamond prices have jumped in the past year, thanks to Asian demand, with rough and polished diamond prices hitting record levels. The value of top quality polished diamonds of 5 carats, or 1 gramme, have risen to about $150,000 a carat, up from about $100,000-$120,000 a year ago. De Beers recently said it earned more from its diamonds in the first half of the year than any prior interim period.

There are a few reasons for caution. Adjusted for inflation diamond prices are far below their 1980s peak. The track record of diamond funds, which offer exposure to the stones without having to buy the gems, has been far from glittering.

Unlike a fund which will buy and hold a diamond on behalf of an investor, Diamond Capital’s adviser Peter Langdon says managers of the new investment fund will buy and sell the gems through an existing network of diamond jewellery retailers, depending on market prices.

Des Kilalea, analyst at RBC Capital Markets, warns the market has stalled and banks, which provide credit to polishers and wholesalers, are less keen to lend money. “The market will stagnate in the next six months,” he says.

Investors lured by the sparkling stones might want to remember an alternative saying: “Diamonds are a girl’s best friend and a man’s worst enemy”.

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