Living Up to the Diamond Promise

Economy
18/04/2016 16:46

Diamond industry analyst Ehud Laniado takes an in-depth look at why diamonds are not fulfilling their economic 'promise' as a luxury investment that will appreciate in value. Comparing the performance of diamonds to other luxury items bought out of 'passion', he determines that the lack of marketing is hurting diamonds' potential to be perceived as an asset rather than just an expense. But he has a plan.  

Diamond prices are not living up to their promise. As compared with other luxury items, human appreciation for diamonds has been decreasing over the last few years.

As the only sentient beings that create value in objects, we humans have created economy, defined as the management of resources for our consumption. Another, somewhat more detailed definition of economy is as follows: “Economy is the large set of inter-related production and consumption activities that aid in determining how scarce resources are allocated.”

There are many more definitions of economy, some very detailed and elaborate, but all include the idea that we humans have developed a system of assessing resources, and we often also manipulate the resources in some way or another to use them. The assessment of resources involves setting a value for them that changes regularly over time.

The brilliance of economy is that it is not limited to commodifying goods for immediate consumption, but also allows for wider use, such as defining resources for science, medicine and even leisure. Some argue that the use of financial resources for leisure is a result of excessive economic assets beyond satisfying needs. This is false in my view. From the dawn of human existence, we adorned ourselves with jewelry and sought to use our resources for more than just meeting the requirements of continued existence.

As such, we can argue that jewelry is a necessity, perhaps of the soul. Whatever it is that drives our interest in jewelry, we place an economic value on it just as we would on any other object. My concern is that over the past several years, we have not been placing as much value on diamonds as we should be.

Diamonds and other Asset Class Items

Determining economic value of asset class objects has a subsection that relates to “other” items that are not easily tradable as currency. These are unique in that they hold great value and there is an expectation of appreciation, yet they may not have been created with the immediate intention to be such stores of value.

This includes such items as art, furniture, cars, stamps, wine, watches, jewelry, and diamonds. When I state that diamonds are not living up to their promise, I do so while making the comparison between diamonds and these other items; my aim is for diamonds to appreciate in line with these items. Not every car or bottle of wine fits into this category, just as not every diamond would fit into it. However, some cars, wines, and diamonds fit very well, and are purchased as such, with the expectation of retaining and potentially appreciating in value.

Over the years we have promoted diamonds as an enduring symbol of love as well as an indication of wealth. But the times are changing, and so are consumer tastes. If humans have created a reality in which some objects have more value than other objects, then we need to maintain this reality (which is in fact perception), and reinforce it.

Growing value is now being placed on vacations, experiences, and satisfying curiosity. As demand for these grows, other asset class items lose market share, demand, and appreciation. This is where our struggle begins. There is now higher demand for passing experiences, and this is being addressed by manufacturers of lab-grown diamonds: buying a low cost, mass-produced diamond lets you afford to experience owning a diamond, but also to replace it quickly and easily.

The same trend exists with gadgets. iPhones are cool and pretty, but their life is limited. “Buy now, be current, replace soon” seems to be the underlying message that Apple and most consumer electronics companies promote. Diamonds are a different kind of item. Diamonds are enduring.

Comparison

Enduring items, such as fine art, coins, cars, and diamonds are not collected in order to be discarded for an updated version. People collect them because of their enduring value. We should therefore assess them against each other to measure their economic performance.

In my many travels, I meet people with financial means. The older generation has started to lose their faith in diamonds because of their opaqueness. The attitude I've met with among younger generations has been “Diamonds? What for? Why would I wear diamonds as jewelry?” However, everyone's interest is piqued when I suggest that diamonds could serve as an asset that can retain its value.

This leads me to the conclusion that we can reposition diamonds on the market if we reframe the conversation and educate future consumers about the possibilities that rare natural diamonds hold. And this is why I am developing Mercury Crystal Clear™, an innovative yet rational methodology for valuing rough and polished diamonds designed to increase the transparency of diamond valuation. This is based on the conviction that diamond consumers currently lack sufficient information about what it is they are paying for. Diamonds are associated with emotions and with giving, while at the same time are considered an expense. A strong rational approach, transforming the concept of an “expense" into a valuable object is needed to demonstrate that diamonds carry a promising, long-lasting resale value that can be passed along to future generations, and embodies both love and a valuable possession.

Wealth Report publishers Knight Frank asked my company, Mercury Diamond, to help provide information on natural fancy color diamonds for their 2016 luxury report. The findings regarding appreciation in many luxury items' values over the past 1, 5, and 10 years impressed me. The luxury items with the highest rates of appreciation are those that have strong brands and are backed by marketing. I almost fell off my chair when I compared the findings to that of natural white color diamond prices. I found that industries that have made an effort to maintain and strengthen the perception of their goods did very well, and have vastly outperformed the sleepy diamond industry.

The following graph is from the 2016 edition of the Knight Frank Wealth Report; it displays the Knight Frank Luxury Investment Index (KFLII), which is a new index that tracks appreciation on investment in items that are often referred to as “investments of passion.”

See graph: Performance of the Knight Frank Luxury Investment Index (KFLII) by Asset Class

This graph clearly shows that natural diamonds are not living up to their full potential. Without any major marketing efforts in the past few years, both colored diamonds and fine jewelry fell below the average and are trading at below the KFLII. Art, coins, wine and classic cars are supported by marketing and are outperforming the KFLII index. Let us also look at our Mercury Diamond Global Tracker™ to view diamonds' performance as compared with other economic indicators:

See graph: Mercury Diamond Global Tracker

Over the five years ending in December 2015, diamond prices fell by 7.4%. In contrast, the KFLII has risen by 56%, jewelry has had an increase of 65% in appreciation, and colored diamonds have had a 38% increase in appreciation. The most important conclusion we can draw from this is that we are missing out on a huge opportunity created by branding, marketing, and development of a category. Even between diamonds we see a large disparity. One of the reasons that overall prices of white diamonds fell, while colored diamond prices increased, is the difference in rarity and the great exposure colored diamonds have, driving up their value.

Something can be done

Dear diamond pipeline’s midstream, which sells its annual output of some $20 billion, our product has been suffering from neglect and therefore has lost its appeal over the years. Diamond price appreciation over the last five years is somewhat unfavorable. In December 2015, prices hit bottom while in January of 2011 they were on a wild growth path (ending in a price bubble burst in August of that year). So let’s look at a longer stretch, from mid-2009 when prices recovered from the 2008 crash, through today, when prices are inching up once again. During this period, prices appreciated by 19.8%, with an average annual rise of only 2.6%.

This is dismal appreciation for a rare luxury product. Even when you separate a jewelry item, you will find that compared to gold, the ‘sister’ material in nearly all of the diamond jewelry, performance is poor.

What makes this trend worse is that diamond jewelry is sold with a story. Dismantle the jewelry and the story comes apart as well, as does the value of its main component. When gold and diamonds are sold separately, gold will exhibit appreciation in value that diamonds will not. A stronger story is needed for diamonds, with all the necessary marketing, branding, and availability of transparent price information, in order to increase the price of the loose diamond and prevent its loss of value in dismantled jewelry.

Forging a new future

We need to create a new reality for gem-quality natural diamonds in general, and high-end diamonds in particular. Using the philosophy of Mercury Crystal Clear™, this new reality can be created for high-end gem-quality natural diamonds – white and fancy color – because of their rarity, difficult accessibility, ability to preserve value and ability to appreciate. Make no mistake: even a one-carat D FL diamond is a rare diamond.

I want to create a new perception for high-end gem-quality natural diamonds that addresses future generations so they will view these exceptional natural creations as assets, not expenses. I want to encourage a large group of people to understand the value proposition of natural diamonds. Consumers buying natural diamonds should do so because they understand the economy of rarity, thanks to transparency and education by the industry. This will allow people to purchase diamonds with the confidence that they are a reliable store of value that can appreciate.

For consumers to have this new perception, we need to create it, jointly.

Ehud Laniado is a diamond expert with specialist expertise in diamond pricing and 40 years experience. Laniado is chairman of diamond businesses spanning mining, exploration, rough and polished diamond valuation, trading, manufacturing, retail and consultancy services. As a rough diamond buyer in Africa, in the 1970s, Laniado began studying the intricate and hardly known criteria which determine the value of all rough diamonds, from the cheapest to the rarest. Over four decades Laniado documented his findings and began forecasting the value of polished diamonds by examining rough stones. Today, his global operations are at the forefront of the industry, recognised in diamond capitals from Mumbai to Tel Aviv and Hong Kong to New York.