Why should Family offices include Fancy Color Diamonds as an Alternative Investment vehicle?

The concept of a family office has been in existence for thousands of years, in one form or another. Most recently as the 18th and 19th century a major transformation took place and the concept became more structured. The objective is to maintain and grow not only the family assets but also to educate the younger generation how to continue to tradition and further grow the family wealth. In recent years, family offices had t turn to alternative investment products in order to further grow assets, reduce the traditional risks involved with stocks and bonds. An alternative investment can consist of hedge funds, private equity and the likes. Time horizon for alternative investments should remain long; and sometimes over several generations in order to maximize growth and return. In the last 10 years or so, family offices have been recommending their clients to invest in a new generation of alternative investments, also known as passion investments such as rare works of art, rare musical instruments, collectible items, and now, in Fancy color diamonds and precious Gems.

Fancy Color Diamonds have been collected by royalty and dynasties for thousands of years. They portray social status, and have been used to preserve wealth. During the last 50 years or so, more and more affluent people who have been accumulating tremendous amount f wealth, have been slowly buying these rare gems and diamonds as jewelry, not realizing that at the same time, their value has increased 10 folds or more. As the broader public becomes more aware and educated so is the demand for these rare diamonds. DeBeers has been the marketing arm for diamonds since its inception in 1888 by Cecil Rhodes.
British Royal Jewels

Fancy Color Diamonds make up a minute portion of global supply, at only 0.1%, but their value due to rarity is much higher, at roughly 10% or more. It is difficult to quantify since all diamond transactions are private. Even public companies that deal with diamonds, from mining companies to traders, do not disclose each individual transaction. We continue to see new stones never seen before at auctions.

Natural Fancy Color Diamonds are available in 14 distinct colors (colorless, white, gray, black, violet, purple, pink, red, orange, brown, yellow, olive, green and blue) according to Stephen Hofer, author of the “Fancy color Diamonds bible”. He started his career in the mid 1970’s well before fancy color diamonds were regarded as rare and special diamonds.
Fancy Color Diamonds     Courtesy: Leibish & Co.

One special category of diamonds are those that are mined at the Argyle mine in Australia. These extremely rare diamonds are considered a class of their own.
argyle-colour-chart-large     credits argyle pink diamonds

Fancy color diamonds are also the most concentrated form of wealth of any kind, as high as $10 million per gram. No other asset, natural, financial or virtual can claim that status.

Why invest in fancy color diamonds? For several reasons:

1)  Historically they have been a hedge against economic and political instability.

2) They are private and therefore are a discreet way of transferring wealth.

3) Due to their very high concentration of wealth, they can be easily transported.

4) In the next 10 years, demand rate will grow twice as fast as supply, and therefore price will increase.

5) They have consistently outperformed all major capital markets, other commodities as well as prominent companies such as coke, Samsung and Berkshire Hathaway for the last 20 years.

One important factor for family offices is relative market size to quantify liquidity. In 2011, global turnover was estimated to be between $202 billion and $232 billion. The distribution of this turnover was distributed among 6 major trade centers; New York, Antwerp, Tel Aviv, Dubai, Mumbai and Hong Kong. A new trading centre is coming on board in 2015 which will be situated in Panama. Every year, roughly $18 billion worth of polished diamonds are earthed.

In order to properly invest in fancy color diamonds, a specialist must be consulted for two main tasks; proper valuing a potential acquisition, and proper evaluation of the color. Two diamonds can be classified by GIA to be of the same color hue and depth of color yet will still have a difference in color to the eye.

There are several ways an individual can invest in this sector;

1) Acquire shares in public companies involved in the diamond trade; mining, trading, jewelry offering such as DeBeers, Alrosa, Rio Tinto, Petra Diamonds, Tiffany’s.

2) Acquiring individual diamonds directly from suppliers, at wholesale prices or better.

3) Invest in financial instruments backed up by the real asset, such as a diamond fund.

Each method of investments has its own set of benefits and challenges.
Historical performance of Fancy Intense Pink 1-2 carats vs. other investments

Courtesy Leibish & Co.

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