Diamond Investment Review 2017 And 2018 Outlook– Was 2017 What The Industry Hoped For?

We are now past all the relevant diamond and jewelry auctions of the year, and the result is that many significant diamonds were successfully sold during the past 12 months. This annual milestone is important, because a large part of what dictates the prices of all the different colors of diamonds in the market is the influence that results from the prices that buyers are willing to spend on those colors at auction. Of course, when a diamond sale occurs in private, it is possible that buyers are able to put more pressure on sellers, or that sellers can demand even higher prices, and the auction prices will not be the only factor dictating a diamond’s value. However, auctions are a good indication of where diamond demand is in the market, and what colors to invest in. The other channels that would appeal to diamond investors, such as investing in diamond companies, in rough diamonds, in diamond backed funds, and other means, are less affected by auctions but still must keep watch on diamond sales behavior. The main lesson of this year in auctions is that mostly diamonds of serious investment value sold. Appeal and illusion may have been able to sell diamonds up until now, but moving forward this will no longer be sufficient in order to attract new capital into the diamond industry. Investors who are looking to either enter this asset or who desire to increase their exposure want more transparency.

 

Overall Price Trends

Overall price trends show another flat year of growth for yellow diamonds, with even a slight decrease. Pink diamonds’ prices have remained stable overall, while the winner in prices yet again was blue diamonds. They were the top performer in 2017 as blue diamond prices increased on average. The price behavior for all of the diamond colors is related to the rarity factor and the basic tenets of supply and demand. Demand for pink diamonds and blue diamonds continues to increase, while simultaneously, new supply of pink diamonds and blue diamonds is essentially non-existent. Most of the supply of rare blue diamonds and pink diamonds, especially the ones that appear in the auctions, are pre-owned diamonds and not newly mined. The supply-demand balance is understood deeply by diamond investment professionals and that is how they are able to determine which diamonds are the highest in demand and therefore can achieve the highest ROI when sold down the line.

 

Records at Auctions Achieved This Year

What have we achieved in 2017 in the auction scene? There was an incredible total of 9 new world records that were set. Five of the nine new records are for “per carat” prices, meaning that in certain carat weight categories, a new highest price ever paid per carat for a diamond was achieved. We track fancy color diamond prices by dividing them into colors, color intensities, and carat weight increments. Our analysis of fancy color diamonds is predominantly in the pink and blue diamond colors, in the Fancy Intense and Fancy Vivid color depths, and are broken into weight categories of 1-3 carats, 3-5 carats, 5-10 carats, and 10+ carats. One example of a record setter in this category was the 3.13 carat Fancy Intense Blue diamond that sold on April 4, 2017 at a Sotheby’s Hong Kong auction for $1.53 million per carat. The remaining four new records were for the overall price that was paid for diamonds. An example record set was for the 59.60 carat Fancy Vivid Pink diamond recently sold in Hong Kong and acquired by Chow Tai Fook, for $71.2 million. We analyze both of these systems of pricing (price per carat and overall price) because both have a direct influence on the pricing structures of diamonds in the diamond market, which affects the sensibility of investing in one diamond over another.

The 3.13 carat Fancy Intense Blue IF diamond          Image credit: Sotheby’s

 

The 59.60 carat Fancy Vivid Pink ‘Pink Star’ diamond          Image credit: Sotheby’s

Total Auction Sales of The Major Auction Houses Compared to Last Year

Sotheby’s and Christie’s are the major auction houses that sell investment grade diamonds, although other auction houses sell such diamonds as well. When analyzing how successful the sales of an auction house were, it is a useful indication of the strength of the diamond industry. Within that framework, it is always interesting to see how the majority of sales can be accounted for by the sales of investment grade diamonds, usually fancy color diamonds.

Sotheby’s had mixed results in terms of auction sales. While the overall sales in 2016 were $524,819,692, in 2017 they were $563,241,263, a 7.3% improvement (excluding the 3 small auctions still remaining in 2017 that should be included in the final percent increase). On the other hand, Sotheby’s had only 18 auctions in 2016, while in 2017, they had 25 auctions (not counting the 3 left), a 55% increase in auctions. The additional auctions were small both in catalog size and in locations, as the major auctions remained in New York, Geneva, and Hong Kong. It remains to be concluded whether the improvement in sales is significant enough given the percent increase in auctions.

On the other hand, Christie’s had $590,089,676 in sales of jewelry in 2016 from 21 auctions, both online and offline. In 2017, they had 23 auctions offline and online, but sales declined to $548,984,905, which total represents a just under 7% decline. At least Sotheby’s had an increase!

In both Sotheby’s and Christie’s cases, sales are approximate but close, and any discrepancies are due to exchange rates and final adjustments. Since the auctions occur around the world, the auctions occur in many different currencies and for the sake of our analysis, we took the time to convert all the auctions in all of the currencies into US dollars. However, even given the possible room for error in exchange rates etc, the fact remains that Sotheby’s increased and Christie’s decreased.

The combined sales of the top 2 auction houses totals $1.115 billion for 2016 and $1.112 billion for 2017, a small 0.269% decline. I consider this percentage to be flat, rather than a decline in sales, since the number is so minute. These figures actually only represent a small proportion of jewelry sales in the world, but they usually indicate the mood of the market.

Cutting & Financing Facilities

As further financing cuts took place in the industry, only those companies with strong fundamentals and business models can survive. The lack of financing is causing either businesses to close and their owners to move onto other, more lucrative investments, or causing diamond companies to merge and create larger entities, creating large scale consolidation.

The only place where diamond cutting activity has increased was in India, where now over 90% of diamond polishing is taking place at the expense of Chinese diamond polishing facilities. Most of the financing for diamond cutting facilities is also coming from Indian banks. Although rough diamond prices have increased slightly in 2017, overall polished diamond prices have continued to decrease. How can that be? How does it make business sense to buy a rough diamond at a certain price and sell it polished at a price lower than cost? What intelligent business person would do such a thing? For what purpose? The only answer that makes sense is that the buying of rough diamonds at higher prices has an ulterior motive behind it. Most of the rough diamond buying is done from Indian companies. This trend should be further investigated, but it seems that Indian companies are using rough diamond buying for other, more lucrative uses than jewelry or to be polished…

 

Internet & Digital Exposure

We saw a second major acquisition in 2017 in the diamond ecommerce world when Signet acquired R2Net, the owner of the James Allen website. The price paid? $328 million, in an all cash deal. Back in 2016, Blue Nile, the top online seller of diamonds and diamond jewelry was sold for $500 million in an all cash deal. We are seeing a consolidation in the industry, and all this is actually a positive trend for the industry. The Internet is a powerful tool. Some say that without it, any brick & mortar diamond business will die out. This is not quite the case. There are many businesses in the $72 billion a year market that do not, and will not, sell online. It all depends what you are selling. There are many companies that sell well above $50 million a year in diamonds and jewelry, and who do not sell online. These companies are in New York, Israel, Hong Kong and Europe. Even though the 2 acquisitions done up to now were of ecommerce sites, they still support the offline business. The number 1 growing market, China, does sell online, but in small numbers. Their business model is O2O- Online to Offline. They attract buyers via an online platform, and drive them to a local store to do the final deal. James Allen raised $140 million in April 2017, and was sold less than 4 months later, so technically they were acquired for $188-$200 million. It was said that by the end of 2017, James Allen would finish the year with just over $200 million in sales, so the acquisition price was a 1 time sale. Blue Nile was in the same position and valuation method. The top reason for such an acquisition is traffic, online value, and consolidation.

Diamond Investment Frauds

During 2017, fraud in the diamond world has not stopped, and in fact has increased. Many companies and individuals have established operations that solicit the sales of diamonds to individuals and potential investors that are looking to invest in diamonds, but intentionally mislead those investors. This has done a double effect of having investors lose faith in the diamond industry and also makes the diamond industry look like a fraudulent sector. If we want diamonds to be considered as a serious asset class on its own, transparency must increase and the “diamond investment” sector of the industry must also be regulated. Efforts by organizations such as the Global Diamond Investment Council are planning to see to the clearing of the cobwebs in this area, and aiding governments around the globe in eradicating diamond investment fraud to make the diamond investment industry trustworthy.

Lab Grown and Similar Man-Made Diamonds

Why should the diamond industry be afraid of lab-grown diamonds? Throughout 2017, further efforts were made by producers of lab-grown diamonds to create their own association, which is great. This means that they are getting organized so that their niche in industry can be structured. To compare, if we look at the leather industry, has that industry suffered because new materials have been invented that feel and smell like leather but are much less expensive? Even second and third generation leather workers have difficulties seeing the difference.

My only concern is that there are many lab-grown producers who are trying to pass off lab grown diamonds for natural earth-mined diamonds. This is much more frequent in the small melee diamonds in the 0.001 to 0.15 carats sizes, where higher prices are paid for natural diamonds and the authenticity of the diamonds may not be worth investigating because of the quantities in which they are bought and sold, and because of their physical sizes. Thankfully, there are more sophisticated machines that are being built to detect lab-grown diamonds from natural diamonds, which would make it easier and less labor intensive to catch fraud. Confidence and trust is a key factor to grow the diamond investment sector to where it should and could be. Only when there is widespread trust in diamond investments can the prices for investment diamonds truly explode.

Argyle Diamond Influence on the Diamond Industry

This year, the Argyle Diamond Tender by mining company Rio Tinto broke 33 years’ worth of price records. According to Rio Tinto, this year the average price paid for the diamonds tender is the highest ever. My assumption is that the average was much higher due to a few reasons. First, it could by that the top lots, also known as the Hero stones, garnered top prices. In some cases, they were sold for a very large price. This probably increased the overall average. The second reason could be that the tender is attended on an invitation basis only. Argyle has been increasing a cultivated number of retailers, private investors, and collectors who offer higher prices than the dealers that are invited. Argyle is probably being careful with top tier dealer clients as they need to ensure all participants are happy, including their own shareholders. As long as Argyle diamond prices are rising, the indications are strong that Argyle diamond investments are possibly the strongest in the diamond investment community.

Diamond Industry Outlook For 2018

Going into 2018, no matter what any analyst may claim about his or her opinion on how 2018 will proceed, it is still unknown to anybody what will truly happen. My position is that if we all take a positive position and outlook, then things will be better and will always improve. Working together for the same cause will end up benefitting everybody in the value chain, from mining companies to polishers, traders, jewelry manufacturers as well as, and most importantly, consumers and investors. If our approach will be to give the best value possible for the investor and consumer, we will end up being in a better position no matter what, and it will be a direct derivative.

Why? Because consumers and investors alike will just increase their discretionary money into jewelry, and investors will increase their capital portion into this industry when they see the positive outlook. This industry is probably one of the last few industries that investors have not yet explored and maximized their investments in. If we estimate that about $1 billion is invested in diamonds annually, this can easily be increased to $5 billion in a relatively short period of time. If investors would put in as much as they do in gold, then where would the diamond industry be? It would be revived and invigorated. If there is going to be a positive change to this industry, it must come from the industry first. The diamond industry is no different than the art world, and how much capital is poured into art? Sotheby’s and Christie’s have sold $1.1 billion in jewelry in 2017. Consider that Sotheby’s sold almost $890 million in Contemporary Art alone in New York, and Christie’s sold over $1.26 billion worth of art in 2 nights in New York just in the month of November… The power behind these numbers is astonishing.

All is this to say, that no one really knows where 2018 will be, but I am certain that the diamond investment industry has unimaginable potential moving forward, and we can all benefit, especially investors. Got any questions about the behavior of the diamond industry in 2017 or the projections for 2018? Contact us at info@investments.diamonds, or ask us in the comments!

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