As
currencies fluctuate and the global economic crisis rumbles on, wealthy
investors have increasingly focused on commodities for protecting their
assets.
Until recently – in precious metals terms – this centred on gold and
silver, but a new clutch of proposed diamond hedge funds is aiming to
overtake precious metals as the new hot investment.
In
the US, where there is only retail trading of diamonds, IndexIQ, a New
York company, is supporting the first diamond-backed exchange-traded
fund. The proposal is being reviewed by the Securities and Exchange
Commission. Harry Winston,
the largest publicly traded diamond company, is also collaborating with
a Swiss asset manager on a $250m fund to buy diamonds wholesale to
store in a vault, using money from hedge fund investments.
Peter Laib, chairman of Diamond Asset Advisors, the Swiss group
collaborating with the company, says: “After the subprime disaster and
with economic uncertainty, investors are looking for low-volatility
investments. Diamonds are less volatile, as they’re resistant to
speculation by the financial community, so there are no derivatives or
tradeable products and no short selling is possible.”
He says the fund could offer annual returns of as much as 12 per cent.
“
Diamonds have shown consistent growth over the years, polished
diamond prices have grown 100 per cent since 2004, and this only looks
set to continue.”
Diamond prices are certainly on a trajectory. Prices of ½-carat
diamonds have risen by 49 per cent since 2001. One-carat diamonds have
risen by 88.9 per cent in the same period. Meanwhile, three-carat
diamonds have gone up a staggering 238 per cent over the same timeframe.
Pressure on supply is one factor driving prices, says Mr Laib.
“Supply constraints are a big factor, with few or no mines expected to
emerge in the next 10 years and existing mines past their peak, meaning
supply will decline.” He says the supply-demand gap could add as much as
a 3 to 4 per cent premium to diamonds over the next few years.
Until just over a decade ago, De Beers, which controlled 80 per cent
of the diamond market, largely dictated prices. But a turning point came
in 2001, when the company went private. It had previously held
stockpiles of diamonds, but when it went private and took on debt, it
was forced to sell these, keeping prices flat.
Mr Laib notes: “Once that stockpile was depleted, prices started to
rise again, as market forces took control. De Beers now controls 40 per
cent of the market. Things have fundamentally changed. The market is now
liquid and transparent.”
Will diamond investments succeed in taking over from gold? One
director of a prominent independent financial adviser has expressed
concern over being able accurately to apply fixed values to diamonds in
index form, as with gold. “Diamonds are different. Each is unique, and
has different facets. They should almost be appraised as works of art.
It’s not like gold, where there’s the weight, and that’s it,” he says.
“There’s such a variety of factors with stones. Gold is gold is gold.
Diamonds are higher risk because the pricing is opaque.”
There is no doubt that wealthy investors are becoming more
open-minded about the commodities they invest in. Anxiety about
international currencies has seen interest in collectables and luxury
goods grow.
According to research this year by Barclays Wealth, the world’s
millionaires are devoting an average of 9.6 per cent of their fortunes
to non-financial assets such as collectables.
Rare sports cars and art works are achieving record sales figures.
Art too, has become a big focus. This year, a version of Edvard Munch’s
painting
The Scream sold for a record $120m at auction in 12 minutes. “People are seeking to diversify their portfolios,” says the adviser.
High-profile estate jewellery pieces are also in high demand. In
December 2011, Elizabeth Taylor’s jewellery collection broke all
records, achieving $157m.
“Diamond prices were up before these hedge funds. People want
concrete investments that are also portable,” says Rahul Kadakia, head
of fine jewellery at Christie’s auction house. “In 1996, Christie’s sold
$273m worth of jewels globally. In 2011, that reached $605m. In the
first half of this year we’ve sold $305m.”
Will diamond commodity trading have an impact on fine jewellery retail trends?
“It will mean that buyers are more interested in large flawless
stones. They will also only want the best and the majority of the value
to come from the stone,” says Mr Laib. “If you have an exquisitely
crafted piece but with smaller stones, you’re losing a lot of the value
in the labour.”
Mr Laib says that the funds could further fuel retail sales of fine
jewellery. “You lose a large piece of value by buying at retail, of
course [as opposed to investing in diamonds as a commodity at wholesale
prices], but the fact that diamonds are seen as assets will make pieces
more attractive,” he says. “It creates a feelgood factor about buying
pieces.”
Andrew Coxon, president of the De Beers Institute of Diamonds says:
“We do, of course, see clients investing these days in rare, beautiful
diamonds, but purchasers know that they are also a sound investment.
“It’s as good an investment as art, if you buy for your own pleasure as well as for capital appreciation.”
