The idea to transform diamonds into an investment instrument has been thrilling the minds of marketers for several dozens of years, according to www.ifx.ru. However, the attempts to put this idea into effect were not much successful – because diamonds cannot be standardized. So far, there is only one unique investor which managed to derive profit from its investments into diamonds and this is Russia’s Gokhran.
 
Diamonds, as old wisdom says, do not turn cheaper over the years. It means that from the market point of view they could easily draw investments, along with gold or pieces of art. But reality has proved it again and again that relations with “eternal values” may hardly be reduced to pure commerce. In the opinion of Fyodor Andreyev, President of ALROSA, Russia’s diamond-mining state monopoly, all the latest attempts to use rough and polished diamonds as investment tools appeared ill-fated, and the only entity which managed to gain some margin from such “investments” was Russia’s Gokhran.
 
We have already learned it
 
People’s interest to diamonds as investment tools emerged long before the 21st century. The first such attempts were made by the market as early as the 1970s-1980s, although those attempts appeared of little success.
 
In 1971, the United States refused to back up the gold content of the dollar at the fixed rate of $35 per troy ounce. This resulted in a system of freely floating exchange rates. And in 1973 there occurred the oil crisis which shattered confidence in the dollar. In the conjuncture of instability and inflation diamonds seemed to marketers as reliable protection for their savings.
 
“At that time there was an attempt to make a high quality polished diamond about one carat in size a standard element of the currency system,” Vladimir Teslenko, an independent diamond market expert remarks. “There emerged specialized firms which offered “one-caraters” as investment objects. These firms offered investors one-carat diamonds in a sealed box with a certificate enclosed and pledged the buyer to assist in its resale after a certain period. Banks followed suit as well.”
 
Initially, the idea was greeted with exaltation, but the boom cooled down as early as 1974 when diamond prices slumped by 20-30%. However, in 1977 demand for investment diamonds was once again high reaching $600 million a year and by 1980 there were already operating more than 300 firms, their turnover coming up to $1 billion a year.
 
However, generally the market viewed the idea of investing into diamonds rather skeptically due to several reasons. In the first place, according to experts, a non-pro is not able to define fair price of a stone (and the number of professional appraisers in the world is not so great, while the opinion of each of them is subjective), hence such a person will not be able to take an independent decision about the time, place and method of sale. Secondly, the sale price of a diamond includes transaction costs, sales tax (10-20%), insurance and other payments reducing resale efficiency. Besides, investment diamonds do not yield dividends.
 
Vladimir Teslenko says that cautiousness displayed by De Beers during that investment boom strengthened the company’s authority in the diamond world. “The firm’s management immediately declared that it never considered and was not going to consider diamonds as a means of protection against inflation. The major purpose of De Beers is to promote natural diamonds for consumption,” he said.
 
Nevertheless, during the 1970s prices for almost all investment goods grew at a high pace. By 1980, polished prices went up 4-6 times on the average and for some categories more than 15 times.
 
“However, later everyone who joined this business lost their money,” Vladimir Teslenko notes. “In the early 1980s the economic situation changed with another lap of recession coming. Demand for diamonds dropped almost to zero.”
 
Subsequently, there were other attempts to create a mass market of loose investment diamonds. Real Diamonds International ventured a “diamond portfolio” consisting of 7 polished diamonds worth up to $5,000. It was supposed that Reuter Monitor would post prices for every standard “diamond portfolio” on a daily basis. However, this idea failed as well.
 
“The most relevant and successful dealings remained are those involving unique diamonds owned by royal families, Hollywood stars and other celebrities,” Vladimir Teslenko believes. “In this case auctions take place resulting in a rather good price for diamonds thus sold.”
 
Thirty years later
 
During the crisis period diamonds once again attracted investors.
 
According to Sergey Puntus, an expert of Scintilla Monaco, last year it was Swiss funds linked in particular to Credit Suisse which advanced the idea of investing into diamonds. “They held long talks with mining companies and rough dealers and wanted to buy their production with a view of placing rights for it at a later stage,” he informed. “But as a result the funds did not even generate the structure of their offering and could not decide what to buy and in what quantities”.
 
Rapaport’s idea to organize trade in polished diamonds via the Internet also had an essential investment component. “It was assumed that margin would be small, but all the same, in Rapaport’s opinion, it could be a source of fast money and also would stimulate sales,” Sergey Puntus explains.
 
Even De Beers seemed unable to resist it. Last spring, the Financial Times informed that De Beers had launched a campaign to promote diamonds as investment tools. Stephen Lussier, De Beers Executive Director of Corporate Affairs, said the company was approached by “half a dozen” of brokers representing funds and private investors. At that time the negotiations were “at an early stage” and subsequently there were no results announced.
 
One of such projects was also made public by Russian ALROSA. In March 2009, the company signed a cooperation agreement with UK Leader on establishing a market of investment diamonds in Russia. “This is an attempt to create a new class of investors which will put their money in a new product based on ALROSA’s diamond stocks,” Sergey Vybornov, the then CEO, explained.
 
There were lots of things planned to be done. First of all, it was decided to set up an investment club which would formulate principles and rules of diamond turnover with diamonds in the role of investment instruments. Secondly, the company intended to establish a unified center rendering services involving examination and certification of diamonds, insurance and reinsurance of risks, bank credits on the security of investment stones. Thirdly, there were plans to solve all possible problems related to the legal framework. The company even considered the possibility of issuing stock market instruments, in particular commodity market mutual funds, whose shares were to be collateralized by the value of investment quality diamonds.
 
Sergey Vybornov during the press conference at the presentation of this project said that both companies expected to establish a market of investment diamonds with a capacity of up to $500 million within a short term.
 
However, the project never went beyond plans. As Fyodor Andreyev explained to Interfax, the parties planned to create an “ideal diamond box” containing a high-quality polished diamond of 1 carat in size certified by the Gemmological Institute of America. And at this stage they could not come to understanding how to evaluate such a “box.”
 
Was the state the only winner?
 
In Fyodor Andreyev's opinion, the only investor which managed to put capital into diamonds and earn some income was the Russian state represented by Gokhran. As he said, the rough diamonds which ALROSA sold to Gokhran last year right now went up in price by 5-7%.
 
A source in Gokhran confirms this information though says that rough has gained value at current international prices. However, the price-list which Gokhran employs for its own calculations so far remains unchanged.
 
Besides, the rough stock bought from ALROSA so far remains at Gokhran, and such an amount of diamonds in any case will hardly be let out to the market lump-sum to avoid a landslide in prices. Vladimir Rybkin, Head of Gokhran, in his interview to Rough&Polished said they have to do a long work to sort and evaluate this stock, so the diamonds purchased from ALROSA would probably not reach the market before 2012.
 
ALROSA was reported to start massive sales to Gokhran in the end of 2008. In the course of 2009, the government bought a total of 32.5 billion roubles worth of diamonds from the company.
 
According to Fyodor Andreyev, the positive financial effect gained by Gokhran was first of all due to great amounts of purchased rough. “To make diamonds a good investment one should use an index method taking the whole product range from fine stones to “ten-caraters” - actually in the same way as they gamble on a basket of currencies,” he remarks.
 
In his opinion, diamond investment failures were caused by the mere fact that “everyone wished to gamble on small amounts, and what’s more, never being well versed about the industry.” “Besides UK Leader, we were approached by investment banks proposing to establish a fund of $100-300 million. But we need great volumes and investors ready to put up not less than $1 billion,” the company’s president believes.
 
Not clear
 
According to Fyodor Andreyev, the second key reason for failures is that diamonds are not a commodity, they are not standardized goods.
 
“At that time there was a drive for derivatives spurring retreat from classical economy. There was a feeling that it was possible to transform everything, including diamonds, into derivatives. People were full of euphoria. But it contradicts the elementary economic logic: exchange goods must be the object of investments,” he believes.
 
“Both in case of rough diamonds and in case of polished diamonds the major obstacle is how to make evaluation universal,” Sergey Puntus explains. “Investments into rough diamonds, in my opinion, are entirely impossible in the mode common for the financial market: there are over 20,000 rough diamond items, so various experts may grade one and the same rough differently and accordingly quote absolutely different prices.”
 
Purchasing diamond rough in any case requires preliminary examination and evaluation which exclude the possibility of a remote purchase or investing into a fund.
 
“The situation with polished diamonds is a little bit easier, but all the same there is no precise understanding about how the price is formed. Even one and the same gemmological institute can provide different evaluations of one and the same diamond,” he says.
 
Besides, in his opinion, the future of prices for both rough and polished diamonds is utterly unclear. “One of the fundamental problems today is the rise in prices for rough diamonds on a backdrop of stagnant prices for polished diamonds,” Sergey Puntus emphasized. “Taking into account that polished diamonds are the only possible product of rough diamond processing we are faced with a strong speculative component in this case. What is coming next is not clear.”
 
Participants of any fund need full and clear understanding of what is “in store” for their object of investments.
 
“To establish a fund, it is necessary to estimate and describe its advantages in a certain way,” Andrey Uspensky, Deputy General Director, UK Leader, remarks. “The evaluation should be fair for people are going to put up their money. Moreover, it should be made clear how people may abandon their participation if necessary. If it is an equity fund you may sell your shares at any moment. But demand for diamonds is a rather volatile phenomenon.”