Background information about the profitability of diamonds

The below data & figures are the result of extensive market research & financial analysis provided by Bain & Company and the Antwerp World Diamond Centre (AWDC). These data & figures confirm the anticipated price increase for diamonds.

Diamond price evolution

This chart shows a comparison between diamonds versus other commodities. The prices of polished diamonds have been more stable than those of silver, gold, platinum and some other commodities, most importantly gold. The main reason for this, is that many investors speculate on gold which causes unnatural price fluctuations.

Diamonds are not entirely free from price fluctuations. After the start of the economic crisis, diamond prices dropped because consumer spending was very restricted. Diamonds quickly recovered when the economy came back up to speed.

Recently, we witnessed a drop in prices. This drop followed a series of new banking regulations for the diamond industry that were imposed after the crash of the US housing market. It forced diamond cutting companies to liquidate large parts of their reserves in order to improve their solvency. This temporary, non-structural over supply of diamonds currently exert a downward pressure on diamond prices.

In addition to regular production, in 2015 and 2016 diamond cutting companies unloaded $5 billion of inventory accumulated in 2013 and 2014.

In the past the diamond market has always recovered quickly. During large macroeconomic crises, prices start to rebound in 18 to 24 months. The current cycle may be shorter. As soon as the oversupply of diamonds is consumed by the market, diamond prices should quickly recover to their historical price trajectory, which shows a very stable increase.

If we look at the diamond supply chain, it is clear that diamond cutting and polishing companies are under pressure from both ends. This part of the supply chain has the lowest margins and are still pressured by their suppliers and their clients. The diamonds mines have a very strong position and push their goods in the market, it is a seller's market on that end. On the other end, retailers apply pressure on the diamond cutters and polishers because consumers are becoming more and more price conscious, on this end it is a buyer's market.

Challenges create opportunities

One of the biggest challenges for the diamond cutters and polishers to stay profitable, is to quickly adjust their production on the demand in the market to avoid building up reserves. New banking regulations force companies to liquidate reserves before looking for additional financing.

Since consumer demand is impossible to predict, companies will continue to build up reserves, that in due time need to be liquidated. This cycle of heightened demand followed by oversupply, generates a harmonica effect on diamond prices. This can be an added benefit for the diamond investor and can help maximize your return.

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