How Did 19 Commodities Stack Up To Fancy Color Diamonds Over The Last 6 Years?

It is one thing to do a one year review of commodities, and prove numerically that fancy color diamonds are one of a handful of commodities that outperformed some others. It would certainly persuade investors that diamonds have a potential of being considered a viable investment. It is a whole different ball game when research is done over a longer period, to make this point even more valid, and that is exactly what we did! We painstakingly collected year after year of data on 20 commodities: colorless diamonds, cocoa, wheat, corn, soybeans, rice, coffee, sugar, orange juice, cotton, gold, silver, copper, palladium, platinum, iron ore, crude oil, heating oil, natural gas, and Fancy Vivid Blue diamonds of 1 carat in size. The chosen commodities were selected consciously. In addition, I wanted you to be able to conceptualize the value in this type of diamond relative to the most typical commodities in the market. Many of these options make the news on a regular basis, as does fancy color diamonds. Can you say with complete certainly how these commodities behaved comparatively from the years 2011-2016? Let’s dive into the data.

 

Iron Ore is Still the Biggest Loser!

 

We gathered intelligence beginning from 2011. We reviewed prices for the 20 commodities both on a yearly basis, as well as the aggregate price movement over the 6-year period. We wanted to see how each performed on a yearly basis, which will show price volatility, as well as the price change over the 6 years, for those investors that choose a hold strategy of at least five years (that is why we chose 6 years for our data). Why did we review on a yearly basis? We wanted disprove the illusion that diamond prices are too volatile, which has been especially strengthened because in the last few years, the industry has been shaken by various elements.

 

Although Iron Ore had the biggest comeback in 2016 with a 90% price increase, the largest of all 20 commodities, it still ended up being the biggest loser over the 6 year review with an overall loss of 53% of its value.

The % change in price for 20 commodities over the period 2011-2016

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The % change in price for 20 commodities over 2016

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Is Liquidity Really an Issue for Investors?

 

One of the two biggest concerns of investors about diamonds is liquidity, and the other is valuation. Ever since the creation of the Dow Jones Industrial Average in the late 1800’s, investors enjoyed more liquidity in the market over time, even though at some point the US government halted trading for a few months. Over the years, the stock market has seen its own “doom’s day” more than a handful of times. In some of these crashes, the Dow has lost over 60% of its value over as little as a 6-year period. What causes these huge drops in the market? We always hear the same terms: “fear” and “panic”, both being emotional reactions with real consequences. It is common that investors react according to their mood and emotional state. Is that a good thing? We all agree that it is not, and is not a hallmark of rational decision making. Nevertheless, investors keep on repeating the same mistake over and over. What if investors were not able to sell on the day they wanted? What if they had 3 days to change their minds because their emotional state would calm down? Would that have an effect? I am sure it would, and that many would end up deciding to keep their positions. Obviously, this would not be possible to do since that would bring havoc into markets, and the market would not function as smoothly as it should and as it does. But perhaps liquidity, or better yet, the speed of liquidity is not really a good thing for the retail investor? Most of the automatic trading programs are done by institutions who make billions just by practicing “instant trading”. Having less liquidity would actually prove to be more beneficial for investors at highly emotional times.

 

Being that they are less liquid, diamond investing would therefore benefit investors over a longer period of time.

 

The Biggest and most consistent Winner since 2011

 

Over the last six years, the best performer is the 1 carat Fancy Vivid Blue diamond. Not only has it made the largest return overall, totaling almost 74%, but it was also the only commodity to return a positive return every single year. Not every year was a hugely profitable year, but it was always positive. We can agree that investors would feel more comfortable knowing there is a consistency and positive result on a yearly basis, even if it was small. The only other commodity that ended up with an overall positive return over the last six years, was none other than orange juice. Maybe investors like to be healthy? Orange juice returned an overall just less than 10% over the 6-year period. All the other commodities returned negative double digit return over the same period. Colorless diamonds overall returned a negative 0.55% over the 6-year period. Not bad considering that the last 3 years, the industry has been in turbulent times. We did a similar review of diamonds versus commodities for the fiscal year 2015, and a review of the fiscal year 2016 as well.

The % change in price for 20 commodities over 2015

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The % change in price for 20 commodities over 2014

Image copyright: Diamond Investment & Intelligence Center

 

 

What Does the Future Hold for Commodities Investing?

 

If I knew exactly what would happen moving forward, I would be doing things differently, and so would all those that attempt to predict the future! We can only assess the future based on current fundamental information we have. So, what do we know about fancy color diamonds?

The % change in price for 20 commodities over 2013

Image copyright: Diamond Investment & Intelligence Center

 

The % change in price for 20 commodities over 2012

Image copyright: Diamond Investment & Intelligence Center

 

The % change in price for 20 commodities over 2011

Image copyright: Diamond Investment & Intelligence Center

We know that consumer education is only increasing about diamonds, and especially fancy color diamonds, by investors. We also know that more investors are willing to invest some of their assets, even the smallest portion, in fancy color diamonds, and so demand is gradually increasing. It is increasing at a higher rate than supply, and so fundamentally, prices will tend to increase faster. Investors still must be cautious and turn to fancy color diamond specialists who will guide them as to colors and intensities, but at the same time, investors must acquire at a good value to see some positive return over time. Not every color or intensity will be lucrative and like with any investment, proper research and consulting needs to be done to ensure viability. An investor may buy a very rare diamond, but if the investor will over pay for its value, it may end up not creating a positive rate of return once the decision is made to re-balance the investment portfolio. Buying directly from a manufacturer does not automatically guarantee a positive rate of return either. Investors need to consult with an independent consultant who does not own any diamonds, or at least does not sell diamonds that he personally owns, to eliminate a potential conflict of interest. The consultant must always take the position of the investors. Much of the diamond industry still operates behind a veil and it is important for the investor to have someone who is familiar with the nuances and is acting strictly on their behalf.

 

It is important to note that in the last few years, many entities have been starting to promote themselves as dealers, and providers of investment grade diamonds. and end up giving bad advise, or selling diamonds at inflated prices to investors. Both Investors, and the Industry must be protected from fraudulent activities, and so an independent body must be created for the protection of both sides, who will give guidance as to who may act on behalf of investors and manufacturers and understand both diamonds, and investments.

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