In the movie Marathon Man, an escaped Nazi tortures a student by posing as a dentist. The torturer was extracting information on stolen diamonds by pulling teeth.

The diamond industry is rife with such atrocities. Diamonds are precious and easily hidden. They are hoarded during uncertainty. The precious stones are portable and carry immense value. People routinely kill for US$100,000 ($137,152) diamond rings.

The main demand for diamonds is for courtship. Grooms feel obliged to propose with a diamond ring. The practice is ingrained in the US, which is by far the largest market for the stone. The South African company De Beers has held a tight grip on diamond production. Proposing with diamonds can be traced to a marketing campaign by De Beers in the 1930s.

The ad campaign emphasised diamond’s hardness and its shine. The hardness was projected as a symbol of eternal love. The shine was linked to love’s passion.  The tag line “a diamond is forever” caught on.

Marathon Man was set in 1976. Diamonds then cost around US$$5,500 a carat, according to the Rapaport Diamond Index. Today, the price has doubled to US$10,229. That may sound like a hefty gain. However, adjusting for inflation, it has lost over 70% of its value since 1976. It has been an appalling investment and not a store of value.

Today’s diamond market seems ripe for a rally. Diamond’s status as a hedge against inflation has risen with Covid-19. The last 44 years have seen two periods where diamond investing shone bright. Both were times of high inflation.

Between 1978 and 1980, diamonds doubled to US$65,000 in today’s money. There was a similar bubble in gold and oil. After the crash of September 2008, diamonds rose 20% in the next two years. As with the boom in 1978-1980, inflation fears drove the rally. There are similarities between the Covid-19 world and the late 1970s. The fears of high inflation are high. Real interest rates are now negative.  This suggests that like gold, people may flock to diamonds in the Covid-19 era.

On the demand side, China could add sparkle to the industry. China has mimicked many American rituals. Producing diamonds when proposing is one of them. Its share of the diamond market has quadrupled in the last decade to one-third. It could rise further. China has a skewed sex ratio. In some cities, there are two suitors for each eligible bride. A diamond provides a suitor with an edge. It is a signal that the groom has money.

The supply of diamonds has been weak recently. Diamonds traditionally funded wars in Sierra Leone and Angola. Children have been conscripted as soldiers. Hence, an NGO campaign sought to restrict the diamond trade.

Since 2003, 75 countries have banned the export of diamonds linked to conflict. Traders have to prove that their diamonds are conflict-free. If not, the traders could be banned. Diamond supply has fallen 15% since the blood diamond ban.

Covid-19 has worsened the supply issues. Over 90% of the world’s diamonds are processed in India. The severe lockdown put 200,000 out of work. Processing has been almost decimated.

A sharp shortage of diamonds seems likely. There are stock market proxies for a diamond rally. De Beers, the patron saint of diamonds is owned by the London-listed Anglo American PLC.

There are signs that De Beer’s tide is turning. It reported that revenue in July was 50-70% of pre-Covid-19. With lockdowns easing, it could improve further. Its parent is at half its book value.

It may be better to sell diamonds than own them. Despite Covid-19 carnage, its Chinese retail store sales were 90% higher y-o-y in July. Tiffany has opened 34 stores in China. Operations elsewhere are returning to normal.

In our own backyard, TLV Holdings — a local jeweller — is trading at 0.2x P/B. TLV Holdings owns the Taka brand of jewellery. Its market capitalisation of US$20 million is a quarter of its stock of jewellery. SK Jewellery is another local jeweller that seems unloved at 0.3x P/B. A diamond rally may add some sparkle.

As with love, there are no guarantees in diamond investing. But, Covid-19 could finally make diamonds the investor’s best friend.

Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer (Exotix Capital)

Are diamonds an investor's best friend?

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