Of Money, Diamond Funds and Transparency. No Room for Monkey Business

With the global economy out of the worst crises experienced in our lifetime, many financial institutions are looking to hedge their investments with a long-term, stable asset that generates a 10%+ annual yield. Alongside these financial institutions are a number of diamond firms that are gearing up to take an active role in this developing market.

For this market to come alive, a number of conditions need to exist: investors should be able to buy diamonds, have a place to sell them, and, most importantly, be able to track prices accurately. None of these prerequisites exist today for diamonds as they do for publicly-traded stock shares or orange juice futures.

In one case, Harry Winston Diamonds and Diamond Asset Advisors (DAA) teamed together to form a model that resolves the current shortcomings, as well as work out a number of other issues. DAA is raising $250 million, mainly from institutional investors, to buy diamonds. These are 0.50+ carat goods, DEF or fancy color, in VS+ qualities and Very Good cut grades. They are set in jewelry and offered at Harry Winston stores around the world. Once a consumer buys the jewelry, the goods are purchased from DAA. This resolves the three conditions described above, most importantly, a known and transparent price.

Not only that, but DAA can show investors very clear and transparent data. Harry Winston resolved a major issue – how to expand into new markets without spending hundreds of millions of dollars on a growing inventory.

This is an interesting model, hoped to generate investors a 13-14% annual return. There are of course, a couple of possible drawbacks. What if, at the next crisis, diamonds won't sell at the retail stores? In the last crisis, diamond sales declined, with prices of 4- and 5-carat stones falling the hardest. The answer is, as hard as they fell, they still did far better than real estate, and so while value was lost, it was not as much as other tangible assets.

There are a host of other models out there. One company simply bought a number of high value diamonds and semi-precious stones and added them to funds that own other assets. Liquidity during a tough time may be an issue, unless the fund managers have a purchase agreement with a diamond firm. It's not clear how some of the others plan to show the changes in the value of their goods.

This is just scratching the surface. Obviously, there are many models out there and many more will be devised. Some will be great, others less so; and clearly there are many hundreds of millions of dollars that are “trying" to enter the diamond industry. 

Is this good news for the diamond industry? What are the threats? Some fear that the relative price stability diamonds enjoy will be lost once quarterly performance will be expected.  While possible, this may only happen when diamonds become an openly-traded commodity, accompanied by a derivatives market.

Another threat is reputational. This may happen if diamond companies raise money form investors, with the pricing of the goods not fully transparent. If investors suspect price manipulations, it will harm us all.

On the up side, the industry almost desperately needs capital to grow, and institutional investors – protected by appropriate safeguards – are a good source for such funds.

The injection of cash is vital for the diamond industry to flourish. All we need to do is to carefully construct new intermediary bodies, develop mutually beneficial added-value ideas, and be honest & transparent with the prices… then it will work.