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Gold Not All That Glitters - Diamonds Act as Hedge for Rich

  • Reuters

A Christie's employee poses with the 14.62 carats Oppenheimer Blue diamond during a preview in Geneva, Switzerland, May 12, 2016.

A Christie's employee poses with the 14.62 carats Oppenheimer Blue diamond during a preview in Geneva, Switzerland, May 12, 2016.

In a packed Christie’s auction room in Geneva, one could hear a pin drop as two anonymous bidders slugged it out in their quest to own the world’s most exquisite blue diamond.

The room in the Four Seasons Hotel des Bergues was filled with multi-millionaire collectors and diamond dealers, listening intently as the bidders, each speaking by phone to a Christie’s representative, took turns adding a few hundred thousand dollars in a tense struggle dragging on for more than half an hour.

When the auctioneer’s hammer came down, spontaneous applause broke out as the winner, who retained anonymity, bought the 14.62-carat Oppenheimer Blue for a world record $57.5 million for any jewel sold at auction. The sale some weeks ago was the latest in a series of world record prices per carat paid at auction for extraordinarily magnificent and rare diamonds.

With new fortunes being created around the world faster than at any time in history, more of this expanding elite of wealthy investors are looking at different ways of protecting cash that now earns close to zero percent interest in bank accounts, while asset market turbulence can wipe out millions in hours.

Some are eyeing rare diamonds as a best friend, or long-term haven at least. And it's no longer just a top table of "super rich" billionaires who are gravitating to this arcane world.

A second division of wealthy is emerging. They can’t afford the Oppenheimer Blue, perhaps, but they can take a stake in rare diamonds via specialist investment funds.

Professional investors’ club only

These gem specialists are keen to play up rare diamonds as "safety" investments, or at least a way to hedge against currency, stock and bond market volatility at a time of political and economic uncertainty. Britain’s shock vote last month to leave the European Union underlines their point.

"The big players are looking at diamonds in a different way," said Ehud Laniado, chief executive of Cora International, which sold the 12.03-carat Blue Moon diamond for $48.4 million at a Sotheby’s Geneva sale in November, a world record for any jewel sold at auction at the time.

"They are not looking at them just as a jewel, but as an asset that has a resale value."

Citigroup said the outlook for gold remained uncertain partly due to concerns about a possible increase in U.S. interest rates. In such a scenario, investors may look at a next-best alternative such as diamonds.

However, the diamond investors’ club is shut to most ordinary savers due to its complicated, insider nature - characterized by poor liquidity, a lack of price transparency and high fees. While some are making efforts to create a liquid market, the process has been slow.

Entry level for Sciens Coloured Diamond Fund II, one of the more established closed-end funds now shut to new investors, is $1 million. It invests in diamonds in rare colors such as red.

The fund, which manages around $50 million, uses trading and buy-and-hold strategies for long-term appreciation. One of its strategies is to improve the value of stones by finding a rare matching pair in the same color, size and shape. They are eventually sold to buyers such as jewelers and collectors.

Some funds also loan diamonds to jewelers who wish not to maintain a large inventory. If the jeweler decides to make a unique ring for a client, he can buy a diamond from the fund.

The Sciens fund, launched in 2014, rose in value by about 5 percent in the second quarter of 2016, said Philip Baldwin, managing director of Sciens Diamond Management BV. He and Mahyar Makhzani run the fund, based on the Caribbean island of Curacao.

"Color diamonds are considered a safe haven," he said. "Color diamonds are a hedge against inflation, currency risk, market fluctuations and political uncertainty."

Solitaire Diamond Co, another diamond-backed fund now closed to new investors, is backed by an assortment of white diamonds of high-grade clarity and cut weighing under 5 carats, which are certified by international laboratories such as the Gemological Institute of America.

Fred Sinclair-Brown, Solitaire fund manager, said it made a gross margin of 20 percent over the past 12 months, above expectations of 14 to 16 percent. He said he was planning another diamond fund for professional investors, this time possibly backed by colored gems.

Investors see sparkle in color gems

Prices of vivid and intense color diamonds have risen 10 to 12 percent a year on average since 1959, according to Baldwin. However, dealers said white diamond prices had not gained as quickly in recent years and were largely flat in 2016.

The most prominent white diamond to come to auction recently, the 1,109-carat Lesedi la Rona, failed to sell at Sotheby’s in London last month, highlighting that diamond markets are not bulletproof.

Diamond markets slowed in the second quarter as selective buyers pushed for deeper discounts. Polished inventory continued to rise and prices came under pressure, while rough trading remained resilient.

Despite a handful of diamond-backed initiatives, fund managers have struggled over the years to find the right investment vehicles for diamonds due to illiquidity, a lack of price transparency and high transaction fees.

"I am very dubious about diamond-backed investment because the price of diamonds is not listed anywhere and the market is too illiquid," said Edmund Shing, strategist at BNP Paribas and former global equity fund manager of BCS Asset Management.

Fund managers pointed to very separate markets for white diamonds. While white diamonds can be correlated to the commercial market for bridal jewelry, color gems are in a unique investment category. Part of the problem with diamond investing is that different categories make it difficult to compile generic prices.

A recent Citigroup poll found that about one-third of the respondents were willing to invest in a diamond product having homogeneity and liquidity.

Martin Rapaport, head of the Rapaport Group, which has its own polished diamond price list widely used by the trade, is trying to create a more liquid market for investment-grade diamonds by developing a transparent price structure. He hopes to launch a fund backed by diamonds within a couple of years.

"Diamonds can be a good investment, but you have to be careful," he told Reuters. "You need to know the bid/ask spread, the price you can sell diamonds back on the same day."