Even best friends aren't immune to layoffs, especially the kind that shimmer in the spotlight. If you haven't caught on, diamonds are the latest luxury commodity to emerge as victims of a downturn that has witnessed buyers tighten their belts, and their purse strings in recent months.
Diamond prices fell seven per cent in the first quarter of this year after slumping 9.2 per cent in 2008, according to a PolishedPrices.com index. Tiffany & Co, the world's second-largest luxury-jewellery retailer, reported a 76 per cent plunge in fourth-quarter profit in March as a direct result of dents in demand.
In this downward spiral, the glitter of diamonds should ideally tempt investors who are looking to buy low and sell high to come charging in with their cash-rich portfolios.
But while investment funds exist for the disconcerted, the precious stones market is not governed by something as trivial as simple economics.
At the crux of the problem is price, managed by the De Beers Group, the world's largest diamond producer, headquartered in Johannesburg, South Africa.
Controlling nearly 60 per cent of the world's uncut diamonds, the company's drastic solution to the plummeting demand was to curtail output and hoard the stones; dropping prices to bump up sales was not an option.
In February, De Beers set the ball rolling by suspending mining at a joint venture in Botswana that produces a fifth of global diamond supply. Russia's Alrosa, the world's second-largest precious stone producer, followed suit earlier this month to cut this year's production plans by a fifth.
Rio Tinto Group, the third-biggest mining company, gave the next big blow when it shut down the processing plant at its Argyle diamond mine. "We expect to restart the diamond processing plant on June 1 as planned but with market conditions we can't guarantee that," Gervase Greene, a spokesman for the London-based company said at that time.
Adding to this drop in output are other problems. Even though a tangible asset such as diamonds retain more value these days when compared to stocks, grabbing on to them is not as simple as heading to your closest Damas jewellery outlet and asking for 20 six-carat stones.
Rough diamonds don't trade on commodity exchanges. Instead, De Beers holds 10 annual sales, known as sights, to selected customers from Belgium and other countries known for diamond cutting.
If your interest runs in polished stones, be prepared to shell out for high retail prices. However, if you skip the retailer and head down to your neighbourhood diamond pawnshop, how much of an expert are you to guarantee its cut, clarity, colour or carat [see box]? Plus, who will you sell to, the same retailer?
Luckily, these days serious investors can find certain avenues that allow them to open this Pandora's Box.
The Dealers Organisation for Diamond Automated Quotes (Dodaq) is the world's first online electronic diamond exchange. This Belgium-based company facilitates consumers to trade diamonds like regular commodities, with two-way auctions and real time prices for further transparency.
Explaining the mechanism, CEO Simon Okuniew said in a statement: "In recent years, certifying diamonds has become an industry standard. By standardising diamonds we are realistically able to call them a commodity and therefore trade them as such. All global markets are traded electronically so the logical next step was to create a fully automated electronic exchange for diamonds."
With Dodaq being a cash market, the system calls for original diamond certification, which will be verified by on hand experts and the actual stones vaulted in Freeport of Geneva.
A concept that sounds great on paper, but so are the costs: 1.5 per cent commission charges on all transactions; a daily vaulting fee for the diamonds; all transportation costs to and fro from the vault… you get the drift.
If an online exchange doesn't meet your preference, take advantage of diamond funds that allow you to benefit long-term through commodity investment solutions.
Earlier this year, two major funds were launched for this very purpose: Russian Investment Group's Alfa Capital and the KPR Diamond Fund, headquartered in the Cayman Islands. The latter deals exclusively in physical assets, requiring a minimum investment of $250, 000. The KPR fund allows buyers to capitalise on price appreciation of diamonds, buying diamonds at wholesale prices, for later disposal at higher prices; the objective is to achieve a 10 per cent annual return. Read the fine print though and you will see a two per cent management fee, a 20 per cent performance fee and a 12-month lock-up on funds.
Yet, present these options to a long-time investor like Shyam Sunder Sharma and he still turns away, saying: "You can package things any which way you like, but if there's one thing I've learned in my 15 years of investing is diamonds cease to be your best friend in times of emergency.
"If it's hard cash I need, gold will get me through any door at the Gold Souq. Diamonds will simply have it shut in my face." (with inputs from agencies)
Mastering the c-factor
Before you buy that stone, brush up on your understanding on four Cs to get the best value:
- Cut: Contrary to belief, the cut is not the shape of a diamond, but the skill used in cutting the facets of the stone to make best use of light which gives a diamond its brilliance. If the cut is too deep or shallow, less light is reflected back to the eye (which decreased its brilliance). This is why experts call it the most important of the four Cs.
- Colour: This depicts the natural shade of the stone. Grades D, E and F are the top notch stones to opt for, but are also rare and expensive. But even more dear are the coloured diamonds, which carry hues of pink, blue and yellow.
- Clarity: This indicates the stone's purity. This is determined by nature, size, number, and location of the internal (inclusions) and external (blemishes) imperfections. At the top is Grade F, for flawless, while I3 rates imperfections visible to the naked eye.
- Carat: This is the unit weight of the stone. The value per carat rises with size, which means two one-carat diamonds are less expensive than a single two-carat stone.
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