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Don't give up on diamonds

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam • 4 min read
Don't give up on diamonds
Buy shares in a diamond miner and not the rock, says Nirgunan, who is marking his 20th wedding anniversary next month / Photo: Bloomberg
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My 20th wedding anniversary falls next month. We may have a big bash. I am greyer and balder, but my wife has stuck with me. It has been “so far, so good”.

I have one complaint, though. The diamond ring I got my wife years ago is worth less today than in May 2004.

Diamonds cost US$4,900 a carat then. Today, they are US$4,200 ($5,717), which is an inflation-adjusted loss of 35%. The gold necklace I gave my wife is up 540% in real terms in that period.

I am not alone in making this disastrous investment. The main demand for diamonds is for courtship. Grooms are obliged to propose with a diamond ring. The practice is ingrained in the US, which is by far the largest market for the stone.

For decades, the South African company De Beers has maintained a stranglehold on diamond production. This is due to a marketing campaign introduced in the 1930s promoting diamond engagement rings.

The ad campaign was before my time. I, along with millions of others, fell under its spell. It emphasised diamonds’ solidity and shine.

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The toughness was projected as a symbol of eternal love. The shine was linked to love’s passion. The tagline “a diamond is forever” caught on.

Diamonds are precious and easily hidden. They are hoarded during uncertainty. People can kill for US$10,000 diamond rings.

For the last four decades, diamonds have broken the hearts of investors. They have been an appalling investment and not a store of value.

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Shining bright

Today’s diamond market seems ripe for a rally. Diamonds can protect couples from high inflation. The last half century has seen two periods of high inflation, both of which saw diamond investing shine bright.

Between 1978 and 1980, diamonds doubled to US$65,000 in today’s money. Gold and oil experienced a similar ascent. After the crash of September 2008, diamonds spiked by 21% until October 2010. As with the boom from 1978 to 1980, inflation fears drove the rally.

The post-Covid world and the late 1970s are similar. The fears of high inflation are high. Real interest rates could turn negative if rate cuts are enacted. As with gold, people may flock to diamonds.

China could add sparkle to diamond demand. China has copied many American customs. Presenting diamonds when proposing is one of them. Its share of the diamond market has tripled in the last decade to one-third.

This may be just the beginning. China has more potential bridegrooms than brides. The gender ratio is in favour of the males. In some cases, there are two suitors for each eligible bride.

A diamond may give a suitor an edge in more ways than one. It signals that the groom has the means to support a marriage.

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The diamond price collapse is curious. The supply of natural diamonds has been weak recently. Diamonds funded wars in Angola and Sierra Leone. Children have been conscripted as soldiers. A human rights campaign sought to restrict the diamond trade.

Since 2003, many countries have banned diamond exports linked to conflict. Traders must prove that their diamonds are conflict-free. Diamond supply has fallen 15% since the blood diamond ban.

Covid-19 affected the diamond supply. Over 90% of the world’s diamonds are processed in India, but processing has been weak for the last few years.

What has caused the diamond price decline? The ring finger points to synthetic, lab-grown diamonds (LGBs). LGBs are priced at around a 15% discount to natural diamonds, eating into natural diamond demand. One in 10 of the world’s diamond purchases are LGBs.

Diamond prices are struggling at the same level as in 2011. Diamond Miners are barely keeping their heads above water. DeBeers, the big daddy of diamonds, has announced that its rough diamonds sales dropped 23% y-o-y in 1Q2024. DeBeers is trading at half its book value.

Smaller diamond producers like Lucara, Petra and Gem Diamonds are trading at an even greater discount. Petra is trading at a 77% discount to its book value, and Lucara is cheaper. All three players are trading at roughly the value of the diamond inventory that they hold. This means that the market is completely discounting the value of the mines.

This sharp discount could entice the suitors. If I were getting married today, I would buy shares in a diamond miner instead of the rock.

Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era

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