coloured diamonds as an investment
DESCRIPTION
A guide to investing in fancy coloured diamonds from Hanwood Holdings ltdTRANSCRIPT
Investing inFancy Coloured Diamonds
Investment grade diamonds represent approximately 1-2% of the global diamond market. The remaining demand comes from jewellery and for industrial uses such as lasers, drills and surgical equipment. Unlike precious metals, diamonds do not have a universal price per gram. The industry uses price guides such as the Rapaport Diamond Report, The Diamond Registry, Wholesale Diamond Price List and Ajediam Antwerp Diamonds Monthly. Institutions have varying standards which can be used in identification and pricing.
The highest returns seen in the diamond investment market have come from ‘fancy coloured diamonds’ which can be yellow, blue, pink or green. Some of these coloured diamonds have doubled in price in recent years due to a rise in demand and a decrease in supply. The largest producer of coloured diamonds is the Argyle Mine in Western Australia which is operated by Rio Tinto. With this mine set to close around 2016-2020, it is expected that the supply of coloured diamonds will be affected which will in turn affect prices.
Diamond shape plays a big part in diamond value with rounded diamonds as the most renowned shape of diamond. This is because they are the most common shape used in engagement rings. The demand for rounded diamonds for engagement rings gives them the highest liquidity and makes them the easiest to resell. Rounded brilliant diamonds are considered the most sparkly and usually display the diamonds qualities to its greatest potential.
The factor that most influences the price of a fancy diamond is its colour. For the majority of diamonds, the less colour the better. A completely clear diamond with no hint of colour will be considered more valuable than one with a slightly yellow tint. Once you get beyond a Z on the colour scale however (see below for more information on grading diamond colour), you move into ‘fancy coloured’ diamonds. These diamonds come in a range of colours and hues caused by differences in their formation. ‘Fancy coloured’ diamonds are more expensive than their clear counterparts and as such represent a better investment opportunity as supplies remain sparse and demand grows for these beautiful diamonds which are so unlike any other.Demand for investment grade diamonds is already outstripping supply, according to some industry experts this has been the case for the past 5 years. Diamonds have a number of properties which make them an attractive alternative investment.
Wealth PreservationHistorical performance of diamonds clearly demonstrates that diamond prices are trending upwards as supply lines are stretched and demand increases.
International ValueA diamonds value is recognised across the globe and is not affected by economic turmoil, quantitative easing or political unrest.
Low RiskA diamond will always have a value. It cannot become insolvent and cannot be damaged.
TransferabilityWith no official ownership records diamonds can be easily passed from one generation to the next without necessarily incurring charges.
DIAMONDS AS AN INVESTMENT
UNDERSTANDING DIAMONDS
All diamonds purchased for investment purposes should be accompanied by a grading certificate or dossier. This certificate outlines the findings of a professional and unbiased examination of the diamond’s attributes. It will validate the carat weight, colour, clarity and cut grades and contains the diamond’s exact measurements. Hanwood Holdings deal exclusively in diamonds graded by one of the following: Gemological Institute of America (GIA), International Gemological Institute (IGI), American Gem Society (AGS) or the European Gemological Laboratory (EGL). A certificate or dossier is not the same as an appraisal. Although a certificate will outline the characteristics of a diamond, it will not place a monetary value to that diamond.
There are four factors that determine the cost of a diamond. These factors are widely known as “the four C’s” and are colour, clarity, cut and carat weight.
Carat weight. A carat is the unit used to weigh a diamond and is equal to 200 milligrams (0.2g). One carat is subdivided into 100 “points” meaning that a diamond weighing half a carat weighs 50 points.
The word “carat” is taken from the carob seeds that were used in ancient times to balance scales. These seeds are so uniform in shape and weight that even today’s sophisticated instruments cannot detect more than three one-thousandths of a gram difference between them.
The process of diamond formation in the earth’s crust happens very rarely and the natural materials required are found only in very small amounts. It is for this reason that there are so few large diamonds and why larger diamonds have a greater value per carat. The price of a diamond rises exponentially relative to its carat weight.
Diamond cut. The cut of a diamond is very different to the shape of a diamond. While shape refers to the outward appearance of the diamond, the cut is a reference to the reflective qualities of the diamond. Diamond cut is perhaps the most
important of the four C’s. The angles and finish of any diamond are what determine its ability to handle light. A good cut gives a diamond its brilliance.
Anatomy of a diamond • Diameter. The width of the diamond as
measured through the girdle.• Table. The large, flat top facet of a diamond.• Crown. The portion of a cut gemstone above
the girdle• Girdle. The narrow rim of a diamond that
separates the crown from the pavilion. It is the largest diameter to any part of the stone.
• Pavilion. The portion of the diamond, below the girdle. It is sometimes referred to as the base.
• Culet. The tiny facet of the pointed bottom of the pavilion, which is the portion of a cut gem below the girdle.
• Depth. The height of the gemstone, from the culet to the table.
When a diamond is well-cut, light enters through the table and travels to the pavilion where it reflects from one side to the other before reflecting back out of the diamond through the table. The flashing, fiery effect this light creates is diamonds brilliance and what makes these previous stones so mesmerising.
Gemologists have developed a complex formula to find the ideal cut and maximise brilliance. These formulae involve the diamonds proportions, most importantly how the depth compares with the diameter, and how the diameter of the table compares with the diameter of the diamond. These differences in proportion can be difficult to discern for the casual observer which is why several grading methods have been developed to help consumers determine the cut of a particular diamond.
These are:
Ideal CutThis cut is intended to maximise brilliance, and the typically smaller table sizes of these diamonds have the added benefit of creating a great deal of dispersion or ‘fire’ as well. This category applies only to round diamonds.
PremiumPremium Cut diamonds are intended to provide maximum brilliance and ‘fire’.
Very GoodThese diamonds reflect most of the light that enters them, creating a good deal of brilliance. With these diamonds the cutters have chosen to stray slightly from the preferred diamond proportions in order to create a largest diamond. The result is that these diamonds fall slightly outside of some customers’ preferences in terms of, for example, table size or girdle width, though, in many cases many of the parameters of diamonds in the range will overlap with certain parameters of diamonds in the Ideal or Premium ranges.
GoodDiamonds that reflect much of the light that enters them. Their proportions fall outside of the preferred range because the cutter has chosen to create the largest possible diamond from the original rough crystal, rather than cutting extra weight off to create a small Premium quality diamond.
Fair & PoorA diamond graded as fair or poor reflects only a small proportion of the light that enters it. Typically these diamonds have been cut to maximise the carat weight over most other considerations.
ANATOMY OF A DIAMOND
The clarity of a diamond is determined by the number, nature, size, position and colour of the internal characteristics otherwise known as ‘inclusions’ and surface features referred to as ‘blemishes’. The fewer inclusions and blemishes, the greater the clarity and the more valuable the diamond. A diamond’s clarity is graded using 10x magnification under high-quality lighting by an experienced grader. The final clarity grade is usually determined by how easily the blemishes and inclusions are seen by the grade.
Diamond clarity grades are as follows:
• F/Flawless. The diamond is completely devoid of inclusions and blemishes • IF/ Internally Flawless. Minute blemishes, internally flawless • VVS1-VVS2/ Very very slightly included. Very very slight inclusions that are nearly invisible even to
experienced graders. • VS1 – VS2/ Very Slightly Included. These diamonds include very small flaws that can be seen only
by experienced graders • S1 – S2/ Slightly Included. Flaws are invisible to the naked eye but can be seen under magnification • I1 - I3/ Included. The flaws can be seen by the naked eye and hampers quality.
DIAMOND CLARITY
Diamonds are natural crystals of varying shapes and sizes. A skilled diamond cutter will take a rough diamond and produce a diamond of the greatest size with the fewest flaws and the most brilliance.
Round Brilliant DiamondsThis shape has set the standard for all diamond shapes and accounts for more than 75% of diamonds sold today. Its 58-facet cut, divided among its crown, girdle and pavilion, is calibrated through a precise formula to achieve the maximum in fire and brilliance.
DIAMOND SHAPES
Marquis DiamondsAn elongated shape with pointed ends inspired by the fetching smile of the Marquise de Pompadour and commissioned by France’s Louis XIV, who wanted a diamond to match it. It is gorgeous when used as a solitaire or when enhanced by smaller diamonds.
Oval DiamondsAn even, perfectly symmetrical design popular among women with small hands or short fingers. Its elongated shape gives a flattering illusion of length to the hand.
Cushion Cut DiamondAn antique style of cut that looks like a cross between an Old Mine Cut (a deep cut with large facets that was common in the late 19th and the early 20th centuries) and a modern oval cut
Pear Shaped DiamondsA hybrid cut, combining the best of the oval and the marquise, it is shaped almost like a sparkling teardrop. It also belongs to that category of diamond whose design most complements a hand with small or average length fingers. It is particularly beautiful for pendants or earrings.
Heart Shaped DiamondsThis ultimate symbol of romance is essentially a pear-shaped diamond with a cleft at the top. The skill of the cutter determines the beauty of the cut. Look for a stone with a well-defined outline.
Trilliant DiamondsThis is a spectacular wedge of brittle fire. First developed in Amsterdam, the exact design can vary depending on a particular diamond’s natural characteristics and the cutter’s personal preferences. It may be a traditional triangular shape with pointed corners or a more rounded triangular shape with 25 facets on the crown, 19 facets on the pavilion, and a polished girdle.
Emerald Cut DiamondThis is a rectangular shape with cut corners. It is known as a step cut because its concentric broad, flat planes resemble stair steps.
Princess Cut DiamondThis is a square or rectangular cut with numerous sparkling facets. It is a relatively new cut and often finds its way into solitaire engagements rings. Flattering to a hand with long fingers, it is often embellished with triangular stones at its sides.
A diamonds colour is measured on a scale ranging from D (no colour present) to Z (deeply coloured). Beyond Z is inclusive of diamonds that have rich and vibrant colours referred to as “fancy colours”. These ‘fancy coloured’ diamonds are often more expensive than colourless diamonds due to their beauty and rarity. Diamonds of known colour are used as comparison stones for colour grading other diamonds.
The colour of a diamond is the result of it’s composition and cannot be changed. A colourless diamond allows more light to pass through than a coloured diamond and therefore emits more sparkle. The formation process of diamonds is such that only a few, rare diamonds are truly colourless or ‘fancy coloured’. With the exception of ‘fancy coloured’ diamonds which are very rare and expensive, the whiter the diamonds colour, the greater its value. Fancy coloured diamonds are created through slight differences in the formulation process. Pink and red stones are the result of vast pressure, blue diamonds are produced through the inclusion of Boron in the formation, hydrogen causes violet hues and yellow and orange tints are created by the presence of nitrogen. These irregularities occur so rarely that fancy coloured diamonds are very rare and therefore very expensive.
The extreme rarity of ‘fancy coloured’ diamonds grows better recognised and more widely envied every year, yet the supply of stones remains miniscule. It is because of this that the value of ‘fancy coloured’ diamonds continues to rise, whether they are newly-cut or long held antiques.
COLOUR
Ordinarily as the demand for a product increases the price rises. This in turn attracts new suppliers who saturate the market with a similar product which in turn causes the price to return to a lower level. This very basic law of supply and demand does not apply to coloured diamonds because each and every one of them is truly unique. Fashioned by nature over many millions of years each coloured diamond, no matter its size or hue, has its own shade of colour and its own unique quality and therefore inherent value. The availability of Fancy Coloured Diamonds is minute in comparison to production levels with only 0.001% of diamonds in circulation falling into this category. Moreover, fine coloured diamonds have no fixed price, and as with paintings and fine art, set rules do not apply. Their true value will only be determined when they are sold.
Investing in rare coloured diamonds is a long-term investment. Fancy Coloured Diamonds are the most valuable gemstones on earth as determined on a price per carat basis. Research indicates that only one in every few hundred thousand diamonds possesses enough natural colour to be referred to as a Fancy Coloured Diamond. For this reason, Fancy Coloured Diamonds are purchased almost exclusively for the intensity and distribution of the diamonds colour, as opposed to white or colourless diamonds, where the cut proportions and clarity are the primary indications of value. Therefore as a general rule the more intense the colour, the rarer and therefore the more valuable the diamond is.
With no new significant diamond mine discoveries in the last two decades and expectations rates as slim to none. Prices have continued to increase at approximately 15-25% year on year; larger, rarer stones have seen considerably stronger performances and in some cases have doubled original estimates at auctions.
WHY INVEST IN FANCY COLOURED DIAMONDS?
The global demand for diamonds is set to continue to rise as emerging markets, predominantly China and India, continue to purchase rare fancy coloured diamonds in order to protect and increase their wealth.
There are numerous reasons why investment graded coloured diamonds have not fallen in value for the past 30 years. The main reasons are supply and demand fundamentals.
• Coloured diamonds are indeed rare; so much so that for every 10,000 carats that are mined, a mere one carat may possess fancy colour.
• Gareth Penny, ex Managing Director of De Beers was quoted in 2010 as saying that “if we continue to diamond mine at this rate we shall run out within 20 years”.
• Most mines are past peak performance; mining firms are actually cutting back in production to extend the life time of their mines. Indeed, The Argyle Mine, which supplies 90% of the world’s Pink Diamonds, is scheduled to close in 2018 and The Ellendale Mine which supplies the majority of the world’s Fancy Yellows is to stop production in 2014.
• Over the past 25 years more than 12,000 kimberlite deposits have been discovered throughout the world and less than 1% has contained enough diamonds to become economically viable. (Source Petra diamonds)
• Out of 170 diamond mining companies there are only 25 in production. (Source Bloomberg)• Diamonds have “the best fundamentals” said Evy Hambro, who manages the $6.6 billion World
Mining Fund in London for Merrill Lynch. “The gap between supply and demand is much greater compared to other commodities’. (Source Bloomberg)
• On average about 250 tons of ore has to be mined and processed before a mere 1 carat diamond is discovered.
• At the Ellendale mine in Australia, which is the world’s largest producer of yellow diamonds, the mine on average only produces in the region of 20,700 fancy yellows a year and the number of intense and vivid yellows are considerably less. (Source Telegraph)
• In the case of blue diamond’s approximately 3-4 million tons of ore have to be crushed and processed potentially to find a 1 carat blue diamond.
• Due to their rarity and beauty, coloured diamonds have been in demand for thousands of years.• Demand from India and China is expected to rise 20% each year for the next 5 years, catching up
with America as a major importer of polished stones. (Source De Beers) • Tiffany & Co in 2010 agreed a 25% price increase for yellow stones from their supplier in order to
incorporate yellow diamonds in their own jewellery range. (Source Tiffany & Co)• Institutions and sovereign nations are purchasing diamonds as a store of wealth and a hedge
against economic uncertainty and market volatility.• “Diamonds could very well outperform base metals in the coming years” said Andrew Ferguson,
who manages $313 million at New City Investment Managers in London. “Given the huge increases in demand and the imbalances in supply, I expect good returns.” (Source Bloomberg)
GLOBAL DEMAND
Even more so that white diamonds, each pink diamond is uniquely different. Because of this there is no price list that determines the value of pink diamonds. Prices tend to fall in a range associated with the diamonds position on the colour scale but prices are not always the same for similar stones. Paler pinks with secondary hues are more common and therefore cheaper than pure and intense pinks. For this reason buyers should focus on colour when considering an investment. Carat weight, hue and intensity determine the value of a pink diamond. Clarity and cut aren’t as important due to the extreme rarity of pink diamonds. Even I1 pink diamonds are sought after due to the extreme rarity of pink diamonds in general.When we talk about Pink Diamonds, the work “Pink” refers to diamond grading hues that range from reddish purple to orange. Difference in tone gives a diamond is pink appearance.
Pink diamonds are graded as follows:
• Faint Pink• Very Light Pink• Light Pink• Fancy Light Pink• Fancy Pink• Fancy Intense Pink• Fancy Dark Pink• Fancy Deep Pink• Fancy Vivid Pink
Fancy Vivid Purplish Pink is the most sought after hue in pink diamonds due to its extreme rarity. In fancy coloured diamonds, there are often 1-2 secondary colours in addition to their main colour. In pink diamonds these are most often purple, brown or orange. Pink diamonds with secondary colour will generally cost less than those that are pure pink.
Diamond buyers and investors tend to choose smaller intense pink coloured diamonds as opposed to the larger lighter colour for the same price. For investment reasons, the smaller more intense pink diamonds are worth more per carat than larger diamonds with weaker colour saturations. 1-2 carat intense pink diamonds are in the most demand and make for an excellent investment. Investors on a budget tend towards smaller (.25cts-.80cts) intense or vivid pink diamonds for similar percentage returns.The number of newly mined pink diamonds falls every year. Increases in demand and the relative short supply indicate the opportunity for significant price increases in the very near future. Pink diamonds have already seen an incredible upward trend in prices with their value having nearly doubled every 5 years and never decreased in value.
PINK DIAMONDS AS AN INVESTMENT
Pink diamonds are rare for a number of reasons
The first of these reasons is the unusual way in which pink diamonds are created in the earth’s crust.The process that creates the natural colour saturation of pink and purplish hues is so unusual and rare that even scientists cannot agree on exactly how or why these particular diamonds are coloured like they are. Pink diamonds experience high heat and pressure during their creation which affects their structure in a process scientists call “plastic deformation”. This process affects the crystal’s ability to absorb light giving them their pink, purple and brown colour tines. This phenomenon is extremely rare.
WHY ARE PINK DIAMONDS SO RARE?
The world’s primary pink diamond producer is the Argyle Diamond Mine in Western Australia. The Argyle Mine produces over 90% of the world’s pink diamonds. Even in the Argyle Mine however, pink diamonds are very rare. It is estimated that an entire year’s worth of production of pink diamonds that are over half a carat would fit in the palm of your hand.
The final reason for pink diamond rarity is the fact that The Argyle Mine is estimated to be fully exhausted within the next ten years. In light of these reasons it isn’t hard to understand why natural pink diamonds cost up to 200% more than colourless white diamonds.
Option 1 Total option weight 0.50 to 0.75 Ct Assorted pink and blue stones Price £5,000 Brokerage fee £99 Secure Transportation Fee £200 Storage fee (1%) £50 Total amount payable £5,345
Option 2 Total option weight 0.90 to 1.25 Ct Assorted pink and blue stones Price £10,000 Brokerage fee £125 Secure Transportation Fee £200 Storage fee (1%) £100 Total amount payable £10,425
Option 4 Total option weight 4.5 to 5.5 Ct Assorted pink and blue stones Price £50,000 Brokerage fee £625 Secure Transportation Fee £200 Storage fee (0.5%) £250 Total amount payable £51,075
Exit Strategy
As with any investment, it is important to realize a return at the right time and to be aware of the various exit strategies available to you before you invest.
Hanwood Holdings recommends that clients remain in the market place for at least 2-5 years to realise a profit. After this time you can exit the market place by selling your diamonds to any number of private investors, collectors, auction houses (eg Rapaport, www.diamonds.net), hedge funds and jewellers.
Hanwood Holdings can also facilitate a suitable buyer for your investment.
Option 3 Total option weight 2.25 to 2.75 Ct Assorted pink and blue stones Price £25,000 Brokerage fee £312.50 Secure Transportation Fee £200 Storage fee (0.5%) £250 Total amount payable £25,637.50
BUNDLE OPTIONS
Quotes
‘ There never seem to be enough to go around, which makes my job that much harder. Whether it’s their visual appeal, the prospect of a big jump in value, or just the desire to own something that almost nobody in the world possesses, these have become the gems that everyone covets.
‘ In the long term, De Beers asserts that the fundamentals of the diamond industry remain strong as demand will continue to outstrip supply.
‘ By 2016, global demand for diamonds will outstrip supply by 7 million carats.” (Comparable to the annual output of a massive mine.)
‘ There are more and more private collectors, clients looking for new investments. They are looking for top, top quality gem stones, to put their money into something that will not melt.
‘ While the supply of new diamonds is not expected to rise, the demand from India and China is expected to increase steadily.
‘ When times are bad, diamonds can hold their value better than real-estate and have the advantage of being portable.
‘ Diamonds have the best fundamentals [because] the gap between supply and demand is much greater compared to other commodities.” $6.6 billion World Mining Fund for Merrill Lynch.
‘ Diamonds have emerged as a haven investment alongside favourites gold and the Swiss franc, with surging demand from Asian buyers driving prices of the precious stones.
