It is no secret that for the last few years, the diamond industry has been experiencing a severe drop in sales, a fact which has only been alleviated by the rise of the buying power of China’s middle class. Interestingly, incongruously with the finances of the rest of the world, the Chinese market for luxury goods has only grown of late, while in the rest of the world purse strings tighten. However, even this trend was not going to last forever. The diamond industry has once again found itself slipping as the Chinese market for luxury diamonds may decline. What is happening? How can we fix it?
A model with a yellow diamond in Sotheby’s Hong Kong Image credit: Sotheby’s
Before we elaborate further on the problem, it is important to note the most significant fact of all. There is a large difference between the colorless diamond market and the market for Fancy Color Diamonds. While the demand for colourless diamonds has fallen significantly, the demand for Fancy Color Diamonds has been stable and less impacted than for colorless diamonds. It seems that no matter what happens, these two kinds of diamonds behave independently in the market despite the fact that they are categorically similar. Therefore, when we say that the market for Fancy Color Diamonds has somewhat may have decreased, remember that it is nowhere near on the scale to the unfortunate numbers of the colorless diamond market, let alone from a value perspective.
As an active observer of the diamond market, it is crucial to point out numerous factors here that are at play, which exist independently but also have quite an impact on each other. The first factor to note is that while China’s middle class is indeed growing, and its total number of millionaires grows annually, even this good fortune may begin to slow. Last year’s Chinese stock market crash had a significant impact on the fortunes of many of those people who would have used their extra cash to buy diamonds, eliminating many customers. The funds that would have been available for leisure spending, especially in a market with strong demand for yellow and pink diamonds, were simply gone. Not all Chinese investors lost all of their money, but it still added to the overall trend. On the other hand, due to the significant swing in the stock market, there are those that at a certain point decided to actually acquire Fancy Color Diamonds (investment grade) in order to preserve their remaining wealth.
In addition, in recent years the Chinese government has been practicing stricter capital controls, with the restriction by banks of purchases exceeding $50,000 annually and the government clamping down on purchases above $5,000 in foreign exchange per day, according to the Financial Times. This push toward strengthening the Renminbi has affected diamond purchases directly because Fancy Color Diamonds are often at least $5,000 if not much more.
Another interesting development that caused the current situation began with the Chinese buyouts of major US firms in the last decade. With the success of many Chinese entrepreneurs, the desire to buy and invest heavily in major US companies rose in tandem, according to CNN Money. While this is not unheard of, the interesting result has been a large immigration of high level Chinese executives to the US on L-1 visas together with their families for high level executive positions in the newly acquired companies but most importantly, in search of the American Dream. This is literally emptying China of wealthy families, and along with them, their disposable capital for buying diamonds within Chinese borders.
The correlating rise in Chinese mergers and acquisitions into the US and numbers of Chinese expats in the US
Image credit: CNN Money
The Diamond Sales Market in China
This has all collectively led to a decrease in the sales of all companies that sell to China, but especially the leading Chinese diamond company, Chow Tai Fook. Considering that Chow Tai Fook is one of the biggest jewelry companies in the world, with a partnership with the renowned Rio Tinto Argyle mine as proof, there is little else to explain their current downward trend in sales. Despite their best efforts, their sales in China have decreased and we would venture to say that this can largely be attributed to the financial situation in their home country.
Due to the reality in China, it comes as no surprise that Chow Tai Fook has turned their sights outwards toward the US and the overall global market. Other countries which sell fancy color diamonds and colorless diamonds alike look bleakly at their Chinese sales and are waiting for a positive turn of events there.
What Can Be Done?
The answer to reviving the diamond industry will not come as a surprise to you if you are familiar with our research. When global finances are in turmoil, people of high net worth and financially conscious individuals alike look to put their money into stable, dependable assets in order to ride out the storm. There are a few options available, such as gold, platinum, and oil, but the standout asset in this category is investment grade Fancy Color Diamonds. We have written extensively about the value and price growth per gram of fancy color diamonds as opposed to any other asset in the world. Unlike traditional investments like stocks and bonds, Fancy Color Diamonds have unheard-of ROI due to their rarity and demand. If the diamond industry is ever going to recover around the world, the first step would have to be to reinforce and continuous education and the understanding that investment grade Fancy Color Diamonds are a secure and worthwhile investment. Then, once diamond popularity is reestablished from an investment prosepctive, sales of lesser value diamonds will ride the momentum as well.
An example of the comparison between the value in one gram of each of these assets, demonstrating how much more valuable a fancy color diamond is per gram! All asset values are taken from the same date and are verifiable on Yahoo! Finance and Sotheby’s
Got any questions about the state of the Chinese market, about the situation with the diamond industry, or the solution that will save the day? Ask in the comments!
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