Diamonds are an Object of Unique Investments

Diamond-based financial instruments flopped
 
Financial dealers are not interested in goods proper but in the market of contracts for goods and in their derivatives. During the crisis period when equities briefly turned two-bit in value, the financial brotherhood rushed to invest their funds (and those of their clients) into various derivatives hoping to weather out the storm in a safe haven. And in their eyes diamond-based financial derivatives should have looked rather tempting. Financiers and other people involved in the capital market began to invent various schemes which were to generate financial instruments based on diamonds. They cast their mind back even to the “standard one-carater” and tried to use it as a basis for the new financial tool. Non-profile journalists who did not understand the essence of things displayed easy readiness to announce worldwide a sensational advent of diamonds to the financial market.
 
However, attempts to launch diamond-based financial instruments (in their various disguise and under various schemes) suffer inevitable defeat.
 
The main thing in a diamond is its investment appeal
 
There is the well-known global mythology proclaiming fantastic utility of diamonds. It is the mythology for which De Beers spent tens of billions of dollars in the course of many decades. It was all about eternal value and eternal love… A little bit later Martin Rapaport and his colleagues helped this myth to acquire the most important elements for market promotion – they created a diamond evaluation system and started to quote current diamond prices.
 
Why do even thinking people not subject to the hypnosis of advertising slogans still buy mind-numbingly expensive diamonds? They simply invest in them. Grass-root buyers indoctrinated by the myth are apt to see in purchasing a diamond jewelry piece some outcry of their sole or emotional impulse. In reality they just submit to a very wise advertising action undertaken by diamantaires. And the other well-aware part of consumers also buys diamond jewelry though doing it consciously, correctly believing that the ad-doped majority will always be there to generate demand for diamonds securing in this way quite good prospects for diamond investments for all at once.
 
An important acknowledgement of the fact that the main thing in purchasing a diamond is its investment component is the existing and actually worldwide identical system of exact diamond evaluation. The price of diamonds in each of weight groups differs by tens of times; however stones do not give evidence of such a radical improvement in their consumer properties! It is possible to argue about how much a diamond with a light bluish shade is more beautiful than a diamond with a very slight yellow hue. It is possible to argue about how much scanty inclusions in diamonds reduce their beauty. However, it is clear that color shades are finally personal preferences and insignificant inclusions up to a certain level do not influence at all one’s visual perception of a stone. But these price sheets do prove to be so necessary for the market!
 
What is better: to buy with the same amount of money a jewelry piece with forty M/I3 diamonds or with one of the same size but featuring D/FL? To boost the ostentatious status of a jewelry owner it is better to buy the one with forty diamonds, but for the true status one will be enough. In other words, this differentiation became some kind of a symbol for people climbing up the “social ladder.”
 
Buying a diamond jewelry piece, consumers invest not so much into their capital, but in their image. However, investments into diamonds are direct investments into stones (i.e. in products bearing such stones) and by no means in any derivative financial tools on their basis.
 
Moreover, investments into diamonds (i.e. in one’s image) are desirable only then, when the status of diamonds proper is stable and absolutely faultless. And it is very bad if diamond prices in the market go down. For any market it is bad if prices for goods decrease, but for the diamond market it is simply inadmissible. The price for diamonds for the sake of “sustained life” of their market should grow by all means.
 
However, in any market prices are used to go upwards and downwards. It is the essence of market pricing. It means that to preserve a stable rise in prices in the diamond market it is a matter of principle to exclude the possibility of market pricing! The Rapaport Price List and even the price-lists issued by the Russian Ministry of Finance did exactly this thing – they dictated prices preventing their market formation influenced by the balance between demand and supply.
 
If the “bullish” trend in the rough diamond market was created by De Beers by way of artificially generated diamond scarcity (which was just another instance of market dictate instead of free pricing), in the polished market this work was carried out by the dictate of Rapaport Price Lists. Needless to say that this dictate was disguised as simply making public market research results.
 
Ideally, it would be very good for the diamond market if each diamond bought by someone disappeared once and for all and never re-appeared in the secondary market, so that never and nowhere its current market value could be checked! But for one very important exception: the diamonds belonging to crowned persons and various sorts of "stars," on the contrary, should get into limelight on the secondary market from time to time. They should be sold at public auctions and with maximum hullabaloo. Only so, using the attributes of diamonds belonging to eminent persons, it is possible and it is necessary to warm up the diamond market as such. Then it will be possible to gradually increase quotes in diamond price lists and this will be clear to every one.
 
As the London fixing for gold does not necessarily reflect the real balance between the world’s supply and demand for this metal, the Rapaport sheets, too, do not pursue such a task. Actually, Martin Rapaport has never reported to anyone on how much fairly he reflects the market balance. The premise that all his price sheets were only reflecting the real market is more likely to be just one more myth. It is not without reason that price changes in the Rapaport sheets quite often caused surprise and even protests on the part of diamantaires…
 
Then what kind of derivatives is there to discuss here? Financial dealers have simply not understood that the diamond market is not able to sustain price fluctuations in both directions for it will just collapse in this case. It should be exclusively a “bull” market, whereas derivatives will bring in “bears.” One important point is that financial dealers do not care a brass farthing about the diamond market. In the first place, they are equally successful in gaining their margin of profit both when the market is going down and when it is moving up. And secondly, for them it doesn’t matter if the diamond market will die – they will let it go and switch their gamble over to another one. It is just not their sorrow…
 
This was how the market of rough and polished diamonds was arranged and for decades it was the only way it followed. However, the global crisis produced a strong impact on the diamond market and its “stage directors” ventured … a revolution.
 
Crisis generates revolutions
 
It was very unfortunate that diamond prices did not resist in the crisis period. However, diamantaires were once again keen enough in this situation, but this time in a very surprising manner (and it is not excluded that this was apocalyptic for the future market). Martin Rapaport suddenly called to what virtually meant a revolutionary change in the diamond essence for the market. He said that the diamond business was about to sell diamonds all time at current prices instead of stopping trade and waiting for recovery of demand at high prices.
 
In other words, Martin Rapaport unexpectedly called to transform diamonds from goods with appointed pricing into goods with market pricing. Moreover, he decided to develop the technology of a market mechanism and in a rather efficient way, via the Internet. Also what was utterly surprising, he suggested making money on changing market prices for diamonds while they move either upwards or downwards.
 
The question is whether the world diamond market will be able to develop at diamond prices swinging up and down departing from the ever raising price pattern. I think it won’t due to the following reasons.
 
1. In the open market prices will fluctuate all the time and information on such fluctuations will become publicly available, including prospect consumers. The fundamental statement of the myth that diamonds can only rise in price will be left in the past.
 
2. If the market will cancel the “mystique” in diamond trade, this will be a blow to diamond mythology as a whole. Naturally, not at once and maybe in many years to come the status of a diamond in people’s consciousness will remain high. But in the long term this status will be deprived of any support if the myth nourished by De Beers will die in due course.
 
3. What will happen if the market type of diamond pricing will become more significant for the market than the role of indices dictated by Rapaport (as well as the role of all other such price sheets present in the market and similar in their essence)? May it be that the diamond grades based on diamond characteristics will thus lose their economic sense? For in fact they are just a conventionality for the sake of market structurization not reflecting true consumer values. May it be that transaction price will be defined only by the size of a diamond and circumstances of the transaction?
 
If Martin Rapaport will replace his appointed indices by market values of actual transactions formed on his web site, he will lose nothing it terms of his own business. But in this way the market of diamonds will become simpler and accessible to non-professionals. The market will expand and become much more competitive. And increased market competition will reduce prices.
 
Naturally, De Beers’ hardships also contribute to expanding competition in rough diamond trade. This kind of overlapping may produce a multiplicative effect, and then what will happen to polished prices?
 
No one should see that “the king is naked”
 
All the known attempts to launch a diamond as an investment derivative did not succeed because consumer value of diamonds traded in a “financial way” appeared much less than the artificial price of a “natural product” backed up by mythology.
 
The support rendered by this mythology to diamantaires selling diamonds at high prices was overwhelming. But for financial derivatives applied to diamonds the myth was inefficient. Investments in derivatives are different from investments “in one’s own image.” Such kind of investors need some profit from transactions with derivatives and not just boosting their image.
 
The attempts to launch a trading floor for diamond-based financial instruments have shown to the world that the “king is naked.” It is awful for the diamond market and it is hardly true that someone tried to undermine the market deliberately. Simply financiers have not perceived the essence of this market and its established pricing pattern. The rough and polished markets were created by smart people. However, financiers are all the time trying to “help” diamantaires. Besides, even short-lived profit is good for them, notwithstanding it may be at the expense of some other’s ruined game.
 
Financiers explained their failures simply – as it appeared to them these goods were not exchange-traded and their pricing pattern was too complicated. They have not understood their mistake up to now… Russia has already overcome this problem replacing the management in one well-known company which seemed to put an end to the idea of diamond-based derivatives in this country.
 
About zero investments into market development
 
But problems related to superfluous diamonds in Russia remained. If the state compelled to solve social problems in one of its provinces helps a certain company to organize sales for a greater part of its production unclaimed by the market, it is a huge success for this company and for the market as a whole. In this situation it would be hardly necessary and disingenuous to convince the state that it turned very wealthy due to such an action. In fact, the state has incurred the expenses not only for sorting and keeping the stones, but also for their subsequent sale, which may cost very dearly in absence of demand for goods.
 
Before the crisis, while rough prices were on the rise diamantaires worldwide were successfully investing their own proceeds and credits in rough and polished diamonds achieving quite a good profit rate by way of just re-selling the stones at a later date. This time has passed. Perhaps, it will return but so far it is hardly worth the trouble talking about any serious benefit from keeping a “diamond basket.” Instead, it may be quite the time to remember the international program of generic advertising for polished diamonds. Money will always be in short supply, but polished diamonds can simply become disregarded by consumers without this kind of expenses for advertising. And in this case ALROSA’s movement to IPO may turn out deprived of sense…
 
Vladimir Zboikov for Rough&Polished