Diamonds Aren’t Just a Girl’s Best Friend: Diamonds as an Investment

The following article is published courtesy of: Israeli Diamond Industry Portal Blog

Author: Roe Kalb

Diamond giant De Beers thinks diamonds are not just the hardest material found in nature – soon they may also become the hardest material to find in nature.

The world’s biggest diamond producer recently issued a gloomy outlook on the sparkly gems, saying that world diamond sources are dwindling quickly –  too quickly – to meet long-term demand.

If the diamond miner’s assessment are true – and frankly, they should know, that means ladies may soon have to settle for smaller “bling” and gents should expect to spend a bit more when buying diamond jewelry for their female friends – after all, it’s all about supply and demand, right?

During the cold war era, the United States and the old DeBeers cartel hoarded large amounts of diamonds, but those stockpiles have long since disappeared.

Worldwide diamond supplies doubled between 1980 and 1999, as new mines such as Argyle in Australia and Diavik in Canada were found and made operational.

There is, also, the impressive amount of carats waiting in Zimbabwe’s Marange diamond field, but Zimbabwe’s political turmoil and the allegations of gross human rights abuses in the area have rendered those gems “diamond non grata.”

De Beers sees diamond supply tracing an “elephant curve” over the next two decades. That means that production will resemble an elephant’s back, tailing off gradually.

Global diamond production in the next few years is expected to reach 110-130 million carat. De Beers share is expected to be between 30 and 40 million carats.

The United States is still the biggest diamond consumer in the world, but China and India keep increasing their appetite for the shiny gem – hence the reason why De Beers has decided to limit its production permanently to no more than 40 million carats.

De Beers is still the most powerful player in the diamond field and its sales arm accounts for about 40% of rough diamond sales worldwide, so this strategy should allow it to continue influencing prices.

In 2008, demand for rough diamonds was about $13.4 billion globally and 2009 saw it fall to $7.5 billion, which forced De Beers to slash its production to a mere 24 million carats, earning it a $743 million loss in the process.

Demand, however, is expected to hit $12 billion this year, so De Beers has raised its Botswana mine production to 31 million carats.

Unfortunately for investors, De Beers is no longer publicly traded. Anglo American ADR owns 45% of the diamond producer, the Oppenheimer family holds another 40% and the Botswana government holds the rest.

Meanwhile, Rio Tinto ADR owns the largest stake in the Argyle and Diavik diamond mines. But the mining giant isn’t worth buying for its diamonds alone.

Harry Winston Diamond Corporation, however, is. The jewelry power house sells fine jewelry and watches in 19 locations, and owns a 40% interest in the Diavik diamond mine. As of 2009, it had produced 56.3 million carats.

Since it is a rough diamond producer, a polished diamond buyer and a retailer of fine diamond jewelry, the company enjoys unique profits.

It also puts it in a perfect place to take advantage of increased prices for rough diamonds.

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