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Are Colour Diamonds an Effective Store of Value in a Volatile Economy?

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The annual appreciation in colour diamond prices continues unabated since 1959!

According to industry experts in the diamond arena, the wholesale price of colour diamonds has increased in the region of 10% – 15% annually since 1959. There are myriad factors to consider with colour diamonds as an investment opportunity, not least of which is their store of value function. There are several important points to consider when investing in diamonds as a physical commodity, especially at this juncture in the global economy. With multiple headwinds converging in the form of massive monetary policy expansion in Europe and Japan and negative interest rates, fixed interest yields are now negligible. Stock markets are feeling the pressure with reduced demand in China fuelling reduced production in emerging markets. The net effect is lower aggregate demand which tends to fuel safe-haven assets such as gold and diamonds.

With the US presidential elections barely 2 months away, volatility is set to increase. Plus, there are upcoming presidential elections in Spain, and an embattled Italian banking sector which is playing havoc on the effectiveness of the ECB. Combined, this makes it difficult for investors to pick out individual assets which actually appreciate over time. It has to be remembered that central bank activity is generating a situation where interest rates are negligible, or negative. This naturally drives investors towards alternative assets such as diamonds and gold. The upside to fancy colour diamonds is that they allow you to increase your wealth over time and they have zero counterparty risk associated with them.

And since colour diamonds have a finite supply, it is not like the oil market where the industry is flooded. Fancy colour diamonds are strictly controlled by their rarity so price stability is maintained. As a case in point, a 1 carat internally flawless yellow diamond sold for approximately C$8,500, 5 years ago. Today, in 2016, that same diamond will cost approximately C$15,000. The rarer pink colour diamonds (a quarter carat) can retail for approximately C$30,000 if they can be acquired. It is the rarity of pink and yellow colour diamonds that makes them so valuable. The lower the supply of pink diamonds, blue diamonds or yellow diamonds, the higher the demand and the price.

Diamond Demand and an Imminent Fed Rate Hike

The short answer is that diamond demand, especially colour diamond demand, remains strong in spite of Fed rate hikes. The Fed FOMC routinely meets to discuss interest-rate policy, but has only raised interest rates by 25-basis points once – in December 2015. If the Fed strengthens the dollar by raising interest rates, this could the detrimental to the US economy. Nonetheless, diamond demand remains strong irrespective of the interest-rate, especially at these low levels. And when it comes to appreciation of diamonds, the more expensive diamonds tend to appreciate at a far quicker rate than less expensive diamonds. Therefore, it stands to reason that an investment in an expensive colour diamond will generate yields in a fraction of the time.

 

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