Diamonds: Not Only A Girl’s Best Friend, But An Asset Class

Dec 15 2009 | 1:24pm ET

By Saul Singer -- Over the last decade the global diamond industry has been focused on reinforcing the message that diamonds are the leading emotional and aspirational gift item in the mind of consumers across the globe. Millions of dollars in marketing expenditure is allocated on an annual basis to produce seductive and effective marketing campaigns which are of particular prevalence at this time of the year in the lead-up to the Holiday Season. Notwithstanding these efforts, the challenging trading environment that confronted the global diamond industry during 2009 is forcing it to seek alternative sales channels. One such avenue is the emergence of diamonds as an alternative investment asset class.

There has been a significant increase in investor interest and appetite for tangible alternative investments over the last few years with a plethora of funds coming to the market where the underlying assets are wine, art, stamps and the like. When compared to these other tangible alternative assets diamonds present a very compelling story. Beyond the fact that polished diamonds have the characteristics of an investable commodity including being a store of wealth that is categorized into homogenous asset classes and supported by independent grading certificates authenticating their physical specifications, the diamond industry is far ahead of other alternative assets in terms of market liquidity, price transparency and the sophistication of trading platforms. Moreover, the investment hypothesis for diamonds is clear and simple – demand is outstripping supply and will continue to do so into the medium-term because there hasn’t been a major diamond mine discovery in last decade.    

Investors looking for an exposure to diamonds have traditionally been limited to purchasing diamonds or diamond jewelry or investing in diamond mining stocks. With the major diamond mining companies being either unlisted such as De Beers and Alrosa or merely business segments within giant mining conglomerates such as BHP and Rio Tinto, investors cannot get an efficient exposure to diamonds. This has created an opportunity gap for professionally managed investment vehicles giving investors a true exposure to diamonds. Whereas in the past the barriers to the creation of an investment diamond market was perhaps price transparency and liquidity, with these issues being addressed by sophisticated real-time trading and pricing platforms, the major barrier today is in fact education and awareness. The diamond industry is renowned for its introspective and closed nature, however it is only a matter of time until professional asset and wealth managers realize that all of the pieces of the puzzle currently exist for the emergence of diamonds as a true and robust alternative investment asset class.

Given the turbulence on global financial markets and the underlying cautious consumer sentiment, diamonds are becoming much more than a girl’s best friend. By fusing the emotional aspect of diamond purchasing with the rational element of investing money in a valuable and steady tangible asset, the ingredients exist for the creation of a very powerful marketing message and the emergence of an exciting alternative ‘passion investment’.

Saul Singer is a principal at Fusion Alternatives an innovative investment house and the leading alternative investment asset manager specializing in investment diamonds.

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