IG Index Head of Research Anthony Grech offers in-depth analysis into a range of topics so you can improve your knowledge of the financial markets. These free topical reports, accessible to account-holders only, track the historic performance of various markets.
Here's a taste of our latest report on the price of diamonds. You can access the full version in the TradeSense Databank found in the PureDeal platform. See other research articles by Anthony Grech.
Where next for diamond prices?
Growing affluence throughout the developing world, a slowdown in new discoveries and a renewed search for alternatives to traditional assets have made diamonds an increasingly attractive investment proposition.
This report looks at trends in the diamond market and concludes that prices will continue to be driven higher by greater demand from developing countries and a scarcity of new supply. We also look at three large diamond companies and potential mis-pricings in valuation.
Investing in diamonds
Physical diamonds
The non-fungibility of diamonds makes them a more problematic investment compared to gold, silver and other metals. Each stone must be individually examined and valued, and a gem may fetch a different price depending on the expert. As a result, acquiring a collection of sufficient size may require greater effort on the part of a private investor than the purchase of gold bullion. One practical advantage of diamonds, however, is size; they require less space than gold or silver bullion, reducing storage costs.
Diamond Funds/ETFs
The unique characteristics of diamonds and their market have meant that only one listed fund dedicated to diamond investment exists – Diamond Circle Capital, which was launched in 2007 and is managed by Diapason Commodities Management. In 2010 the portfolio’s valuation declined by 1.73%, which the company attributed to the result of thin trading in the market. Currently there are no Exchange-Traded Commodities (ETCs) for diamonds, although DeBeers was reported to be considering the creation of a diamond ETC. An ETC tracks commodity prices, allowing exposure to the commodity without having to physically own the underlying asset.
Diamond mining companies
The other way to take a position in diamonds is to invest in companies that are actively engaged in mining them, as the price of the commodity and the value of the company are tightly linked. In this report we analyse the three largest UK-listed companies that mine only diamonds, considering their market capitalisation against the Merrill Lynch Lifestyle and Luxury Index (MLLLI), a leading indicator of diamond prices. While other larger miners such as BHP Billiton and Anglo American also mine diamonds, this is only as a small part of a more diverse portfolio of mining activities, so the link between diamond prices and company performance is significantly reduced.
The future of diamond prices
Predicting the future price of diamonds is not an exact science, however several conclusions can be drawn about the likely direction of prices in the short-to-medium term:
- Increasing affluence in the developing world: rising per capita GDP in countries throughout the developing world puts diamonds within the reach of more and more people. Demand will be driven by the two emerging giants of India and China, but increasing incomes will broaden the market for diamonds to even greater swaths of the global population.
- Economic recovery in the developed world: as developed economies begin to recover from the financial crisis and recession of 2008-2010, consumers will have more disposable income to spend on luxuries. The USA is likely to remain the world’s largest consumer of diamonds for the foreseeable future, and thus the primary engine behind world demand for the stones will be the economic performance of the American economy.
- Fewer new sources of supply: as existing mines run ‘dry’ and the number of new discoveries continues to decrease, availability will continue to decline, driving up the price.
Follow your views
Whether you think diamonds will continue their steady rise, or foresee a slump at some point in the future, IG Index gives you the opportunity to back your opinions and profit from them if you turn out to be right. You can take a position on any of the individual companies mentioned above, on the mining sector as a collective group, as well as on commodities, forex and a wide range of international indices.
To read the full report, open an account and get set up in minutes. For details of the markets available through an IG Index spread betting account, please see our Range of Markets pages.
The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.
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