Present vs Future: Investing in Diamonds

Posted by:
September 22, 2020

Introduction & Spoiler Alert

Liquid Diamonds has been building the technology and market share to enable a truly liquid market in certified diamonds for several years now. We believe that this, in turn, will enable certified diamonds to become a new asset class for investors.  But, in the course of our work, we have been challenged by numerous people skeptical of the very idea of diamonds as investments.  Below you will find a summary of such challenges and discussions.  Note that the original questions were from real people in the startup world, the investment world, or the diamond world.

Spoiler alert: The current problems with investing in diamonds, particularly for small and medium investors, are real. See this excellent Wikipedia write-up.  But Liquid Diamonds' rai·son d'ê·tre is to solve what we regard as the thorniest remaining issue: how to make the global diamond market truly transparent and liquid. This will be discussed in a future post.

Costs and Intrinsic vs. Subjective Value

So, are diamonds intrinsically valuable, or is this perception just the result of marketing?

Well, 20th-century campaigns such as "A diamond is forever" have been some of the most successful in history, and have been deeply ingrained in public psyches all over the world. But, no, it isn't just marketing. Humans have seen diamonds as a highly-concentrated and durable form of treasure for a long time.

Diamonds are scarce, portable and indestructible. The first diamonds in the world were mined in India over 2500 years ago. There are references of exceptional diamonds in the Ramayana and Mahabharata – epics of ancient India. Diamonds arrived in Europe with Alexander the great in the 4th century BC and were a symbol of succession in the Roman Empire. Marie Antoinette’s infamous “affair of the diamond necklace” only made them more popular and valuable.

Diamonds are inherently expensive to obtain.  Developing a diamond mine, the primary source of diamonds, requires an investment of over $500 million and takes roughly 4 to 5 years to make the mine commercially operational. Closure of a mine, once the resources are depleted, requires time and money. It is filled with soil and trees are grown. Some of the mines are near the arctic circle where temperature go below -40 degrees Celsius. Most mines are inaccessible in the winter or are far away from civilization in the middle of a desert. Even the secondary sources of diamonds, found in riverbeds or ocean crests, and are now getting depleted.

The cost of mining accounts for about 60% of the wholesale price of a polished diamond above 0.3 carats; mines can become economically unviable if prices dip by 25%.  To this must be added  the costs of cutting, polishing, grading, certification, marketing and profit at various levels in the value chain.

The Notion of "Objective Intrinsic Value"

Of course, in reality, there is no such thing as an objective intrinsic value for anything.

    Seller: This shovel is worth $27. Buy it.
    Buyer: I don't want a shovel; it's worth $0 to me. No.

To a seller, the value of anything--in any market--is what a willing buyer will pay for it. For a buyer, it is the price at which the seller of something he wants will part with it. Figuring out those values is a long topic unto itself, but the point is that monetary value is reflective of subjective valuation. It isn't created or determined by price lists, recent sale prices, or anything else besides the price at which the buyer and seller agree to transact.  This is true for gold, stocks, and real estate, as well as for diamonds.

Contrast - Objective Characterization

On the other hand, and in contrast to to other precious stones, diamonds are carefully and well-characterized by independent labs according to 40 some well-defined parameters such as shape, cut, carat, clarity, colour and fluorescence. It is also sub classified by inclusion types, cloud, fire and angles of different facets. Arguably, it is possible to precisely measure the quality of a diamond with all minor details without actually looking at the stone with a magnifying loop. Reputed independent labs such as the Gemmological Institute of America (GIA) certify them and laser inscribe a unique certificate number on the girdle of each diamond. New machines are able to record the “DNA” reflection to ensure it is the same diamond that a certificate was issued for.

What about De Beers?

Seriously, isn't De Beers artificially controlling the supply of diamonds? Aren't they a monopoly? Aren't they stockpiling diamonds somewhere so they can flood the market if they want to?  Aren't they really controlling the prices of diamonds?

The answers to the above questions would have been "yes" for much of the 20th century, when De Beers controlled up to 90% of the world's rough diamond supply. But their monopoly was broken up in 2005, and they are no longer even close to being one. By 2013, their market share had fallen to 33%; their competitors are now numerous and vibrant. So the answer is now "no" to each of those questions. Competition rocks!

How have diamond prices performed over time?

This is harder to answer than you might think. Consider the following graph from

Looks pretty good, right? But:

  • Fewer than 1 in a million certified diamonds in the market meet the criteria shown. So, it is hardly representative.
  • I can find visually identical diamonds in the market right now for 1/3 of the price shown in the above graph. Again, hardly representative of diamonds overall.

Or, consider the PriceScope average price by carat size:

Although the PriceScope graph only overlaps the Ajediam graph for a few years, you can see that they don't tell the same story. The PriceScope graph averages prices for diamonds with a huge range of values for color, clarity, cut, and other attributes. So, it is good for showing trends, but is hardly useful for pricing an individual diamond.

How does the price of diamonds compare to gold et al in the same time period?

The above graph from compares diamonds to gold and various stock indices.  This is actually pretty useful; it shows that stocks are more volatile, that diamonds are pretty steady in pricing, and that gold can appreciate much more quickly.

But this begs the question: if the return on diamonds aren't as good as for gold, then why would investors invest in diamonds instead of gold?

One way of looking at this is that gold has undergone a vast amount of appreciation which is still latent in diamonds, and that the reason is that there is not yet a liquid market for diamonds, whereas there is for gold. Although this argument is speculative by its nature, it suggests that creating a liquid market for diamonds could liberate this appreciation potential; see upcoming post from me on this subject.

Absent a such a liquid market, I frankly don't recommend diamonds as an investment for small and medium investors. For investors who are themselves diamond experts, or for high-net-worth investors who can afford the expertise of such experts, they can be a long-term, counter-cyclic, and stabilizing portion of their portfolio.

What about Lab-Grown Diamonds?

Are lab-grown diamonds going to replace natural diamonds? And what, if any, effect will they have on prices of natural diamonds?

Lab-grown diamonds are primarily created by "chemical vapor deposition", considered to be gem-quality, and cut and polished accordingly. So, although lab-grown diamonds are "chemically identical" (just carbon!) to natural diamonds, that doesn't mean they can't be distinguished from them. In fact, the natural diamond industry has gone to a lot of trouble to provide tools to do so.

The markets, marketing, and prices of natural and lab-grown diamonds have remained separate - just like there are parallel and separate markets for an original Monet paintings, lithographs, imitations and prints.

Natural diamonds are an extremely limited natural resource, justifying their traditionally high prices and conferring prestige on the owner / wearer. Lab-grown diamonds just don't do that; it seems unlikely they will take the place of natural diamonds in the foreseeable future.  There may well be a price influence of lab-grown on natural diamonds, especially in the lower-quality range of stones, where buyers may be seeking "bling" more than elegance or prestige.

Sources USED

Beyond the knowledge gained by working with folks in the diamond and startup world for the last several years, facts above are primarily drawn from the 2019 Bain Diamond Industry Report (Strong Origins: Current Perspectives on the Diamond Industry) and Wikipedia, both of which are public and readily available.