Are you currently considering investing in the stock market, real estate, or mutual funds?
Although these are often the go-to markets for novice investors and traders, global economic turmoil will often cause significant fluctuations in the price of real estate and stocks. Not exactly the stability that most new traders are looking for.
In contrast, the price of diamonds has been steadily rising over the last number of years, irrespective of economic conditions, and offers a much more stable alternative.
In fact, did you know that the demand for rough diamonds is expected to grow from 1% to 4% annually? This means that diamond trading presents an excellent cash flow opportunity that most people are missing out on.
Here are the top 3 reasons why you should strongly consider trading diamonds in 2018.
1. The Diamond Industry Is Growing
What does the diamond industry look like today?
According to the Hong Kong Trade Development Council (HKTDC), sales of fine jewellery (in exports) will increase by 6% in 2018.
This is largely based on the strong demand for diamonds by consumers in the US, and an increasing number of growing middle class in India and China, showing a renewed interest in diamonds.
India has the potential for being the fastest growing diamond jewellery market through 2030.
Europe and Japan, on the other hand, are estimated to remain stable markets for long-term growth of diamond jewellery.
(Source: Bain & Company)
What are some of the factors that a growing diamond industry depends on?
As a trader wanting to venture into this lucrative market, it is important that you understand some of the key factors that form the foundation of the diamond industry:
1. Mining – The foundation for the industry is, of course, the mines from which raw diamonds are extracted. Currently, the biggest mines are located in Canada, South Africa and Russia. Mining companies face an increasingly complex geological and technical challenge as operations are forced to go deeper and into more difficult terrains. Mining companies are therefore looking at more efficient and advanced digital innovations to keep costs down.
2. Cutting and Polishing – India is currently the world’s largest centre for cutting and polishing. Due to the low-cost service that it provides, it hold’s the highest share in the industry.
3. Diamond jewellery retail – The continuous growth of the middle class in India and China has lead to an increase in demand for diamond jewellery. Digitalization and online stores have also played an important role leading to a significant growth in diamond sales.
4. Margins in the midstream – Diamonds will typically cross numerous hands before it finally reaches the hands of the consumer. In order to be competitive, midstream companies in the diamond chain have to work on very thin margins.
5. Industry Challenges – Just like any other industry, the diamond market is not without its challenges. Often overlooked are lab-grown diamonds and its potential impact on the market as a whole. Although the synthetic gem may be great for industry use (such as diamond cutters, for example), nobody really wants buy a lab-grown stone as an engagement ring or earrings. The challenge is to make sure these “fakes” do not become mainstream jewellery.
6. Supply and Demand Model – Similar to any other commodity, the diamond industry is subject to both short-term and long-term fluctuations. Short-term fluctuations are driven by any regional (or global) crisis, pipeline efficiency and midstream players. Long-term fluctuations are driven by consumer trends, overall GDP growth of developed markets and performance (and exploration) of mines.
2. Diamond trading can be hugely profitable
Why are diamonds so popular?
Big industry players like De Beers, has got a lot to do with it.
Slogans like “Diamonds are forever” and effective marketing strategies, means that we as consumers associate diamond gifts with love, eternity, elegance and the ultimate demonstration of appreciation.
It resonates with both the physical and emotional aspect attached to the gem. This is why a diamond engagement ring, for example, has become the norm.
So what are the advantages of diamond trading?
Although the above is what we traditionally perceive diamonds to represent, an emotional investment is only one of the precious stone’s benefits.
Trading diamonds, both at the amateur as well as the professional level, has numerous advantages:
1. Portfolio diversification – Diamond trading offers flexibility and allows the risk of an investment portfolio to be spread. It is a standalone asset and will have a price detachment from the rest of the investment portfolio (almost like a hedge).
2. Price stability – During economic turmoil, traders are more likely to first liquidate replaceable assets. This makes it unlikely for diamonds to suddenly flood the market and cause downward pressure on prices.
3. Long-term growth – Due to the fact that diamonds are rare and the demand is constantly increasing, the price of a diamond will consistently be on the rise.
4. Portable and rare – Diamonds are light, small and high priced. All of these factors make it a concentrated form of wealth.
5. Capital gain – The demand for diamonds are always increasing, therefore, more often than not, you will make a profit on a diamond trade, even in the short-term.
Do I need to have huge sums of money?
Even if you have a modest amount of money or some savings in hand, you could start trading diamonds.
Diamond prices have been observed to be stable even during inflation, currency fluctuations or during bank and institutional failure. So the risk of losing your money is greatly reduced by the simple law of supply and demand.
How do I choose the right diamond?
Raw and polished diamonds
The choice between a raw or polished diamond should be carefully considered. A raw diamond purchase has the potential to be very profitable one, but also comes with bigger risks. It’s difficult to judge the clarity and color of a raw diamond and to determine its true value. Also, the raw diamond could lose a lot of carat weight during the cutting process.
Polished diamonds, on the other hand, are easier to appraise and do not bear the risk of losing carat weight. So, unless you are venturing into the field of raw diamonds specifically or become more of an expert, it is best to start with polished diamonds.
Colorless vs. colored
There is a bigger demand for colorless diamonds which means the potential trading price will be higher. A colored diamond could increase its value only if its supply is running low (let’s say there are no more pink diamonds being mined) and they become rarer.
Should I buy diamonds online?
The growth in e-commerce means that online purchases now offers you the option of buying diamonds without having to leave your home. Many novice traders might find this as a much more comfortable option as well as give them more confidence.
If you feel you don’t know anything about the diamonds, it can be quite intimidating to go and talk to an ‘industry-expert’ diamond seller in person.
However, one of the major drawbacks in trading diamonds online is that the purchase and sale of a particular diamond are often less informed and carries a greater risk, especially for non-experts.
It will be hard to get a feel for the true value of a diamond and, although an online purchase might be more comfortable, selling a diamond online will be much harder. Where would you go to for starters?
So yes, diamond trading can be hugely profitable and online trading can make it much more comfortable. However, to offset the above drawbacks faced during diamond trades, and to mitigate many of the risks, you will need the right technology at hand.
3. Blockchain technology can simplify diamond trading
The advent of Blockchain is one of the key reasons why you should start trading in diamonds in 2018, as it has made it easier and more transparent than ever for novice traders to get into a traditionally exclusive market.
Blockchain technology can be used to create a distributed, immutable database of information and create an ecosystem where diamonds can be traded securely in a liquid marketplace.
And this is exactly what CEDEX, the world’s first certified Blockchain diamond exchange, will help you to do.
Utilizing Blockchain technology, CEDEX bridges the gap between the economics involved in diamond trade and the developing financial markets. What this means is that it eliminates the learning curve and allows diamonds to be traded similar to other commodity options such as shares, bonds, funds etc.
They provide a number of services, affording everyone the opportunity to get started with diamond trading, no matter their skill level:
1. Category trading: Groups diamonds into homogenous groups that make it easier to compare and ascertain accurate market prices for individual diamonds.
2. Shared investment: Diamonds can be sold as single Diamond-Smart Contract or as smaller multiple Diamond-Smart Contracts. In other words, there can be multiple owners to a single diamond.
3. Short selling: Similar to the practice of any other security, CEDEX offers the option to short sell the Diamond-Smart contract.
4. Basket Trading: The CEDEX platform has designed exchange-traded funds (ETFs) which are traded like any other conventional asset such as stocks or bonds.
5. Loans to Traders: Diamond-Smart Contracts could also be used as collateral to obtain loans.
To learn more about CEDEX's financial offerings download their detailed whitepaper.