Diamonds An Investor’s Guide By Joseph Lipton, CEO, Secured Worldwide LLC Edited by Jocelynn Smith, Sr. Managing Editor, The Sovereign Society
Diamonds An Investor’s Guide
By Joseph Lipton, CEO, Secured Worldwide LLC Edited by Jocelynn Smith, Sr. Managing Editor, The Sovereign Society
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IAMONDS have fascinated us for centuries — almost as long as gold. We love the sparkle, the brilliance, the remarkable strength, the unique color or even the complete lack of color, and the rarity.
For decades we have been told that diamonds are forever. And Marilyn Monroe was the one to convince us that diamonds are a girl’s best friend. Diamonds were first a status symbol, worn only by royalty and nobility. But thanks to the jewelry industry, diamonds quickly became proof of a person’s commitment to another human being or the depth of their love and appreciation. Diamonds are used to broker a life-long commitment (also known as the engagement ring), to celebrate the anniversary of that commitment (such as a diamond pendant, bracelet or yet another ring) and to celebrate a major life achievement. But due to their rarity, beauty and uniqueness, diamonds have another great characteristic that is frequently overlooked by many investors — they remain a fabulous store of wealth. Loose diamonds have been an investment alternative of choice for centuries. Many of those fleeing Nazi or communist oppression sewed loose diamonds into the hem of their garments as a means of protecting and transporting some of their wealth in the face of confiscation. Transportability of wealth and value density is obviously the reason for this. For example, $100,000 of gold is 92.5 ounces, which is 5.8 pounds at today’s prices. Five pounds of diamonds would be worth more than $63 million. As the global economy grows more uncertain in the face of higher interest rates and rising geopolitical tensions, it is important that you diversify your assets beyond just stocks and bonds. Diamonds represent a collectible that is not only an excellent store of wealth but are easily transportable. This report will examine the precious gem, new developments within the industry and key ways that you can take advantage of this rising asset class.
History of Diamonds It is believed that diamonds were first gathered in the rivers and streams of India as early as the fourth century, but even in those early days, the rare gem was reserved only for the very wealthy. The diamond made its way along the Silk Road to Europe where it still remained in the hands of the royalty and the nobility. The adoption of the precious gem was slow, with the first instance of one appearing in jewelry being in 1074, where diamonds decorated the crown of Hungary’s queen. In fact, France’s King Louis IX established a law during the 13th century that reserved diamonds only for the king. While the giving of an engagement ring has long been a tradition, it wasn’t until 1477 that the first diamond engagement ring appeared when Archduke Maximillian of Austria gifted his would-be wife Mary of Burgundy with a diamond-decorated ring.
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As more diamonds made their way into Europe from both Asia and South America, the gems starting trickling down from royalty and nobility, showing up among the merchant class during the 17th century. But it wasn’t until the late 19th century that diamond production reached such heights that more people without extravagant wealth could finally afford to own diamonds. The diamond’s long trek through history, held mostly in the tight fist of the aristocracy, helped to cement the gem’s place as a status symbol. And it is only now gaining its place as a recognized investment vehicle.
The Supply-Demand Dilemma The uniqueness of each diamond and its rarity have made it a repository of value. But diamonds are incredibly hard to find and bring out of the earth. More than 250 tons of ore must be mined in order to produce one carat of gem-quality stone. In fact, 75% to 80% of all mined diamonds are used for industrial applications while less than 20% of diamonds mined are gem quality. Of the diamonds pulled out of the earth, less than 2% are considered “investment diamonds.” In fact, the precious gem is facing a supply-demand issue that will make owners of diamonds very happy. Diamond supplies are in decline, with rough diamond production estimated to fall by more than 50% by 2030 from current levels. A December 2015 report from Bain & Company forecasts global supply of rough diamonds to decline on average of 1% to 2% per year from 2015 to 2030 due to the aging and depletion of existing mines, while relatively little new naturally-mined supply will be coming online soon. Mines such as Argyle — the third-largest Diamond mining in Madagascar. diamond mine by volume — in Australia and Ekati in Canada have reserves for only seven years. Furthermore, major mines in South Africa and Botswana have an estimated lifespan of only 10 more years in reserves. In addition, in the last 20 years, no new economically viable mines have been discovered and diamond exploration budgets have been severely cut over the past several years. While supply is on course to continue to shrink, demand continues to rise. Bain forecasts that world roughdiamond demand will expand at an average annual rate of approximately 3% to 4% during the next 15 years. The United States, China and India are forecast to remain major diamond jewelry consumers in the near future, helping to drive demand higher. In fact, a recent report by CNBC stated a 10% to 12% annual growth rate for diamond demand in India and China. Diamond prices have recently suffered a pullback, with prices of polished and rough diamonds tumbling 8% and 15%, respectively, since the beginning of 2015, but that matches a similar decline in the price of gold, which has suffered a loss of nearly 10% in 2015. However, according to Bain’s report: In the long term, both polished and rough prices are driven by macroeconomic fundamentals that remain positive. Prices took 18 to 24 months to rebound after the previous economic turmoil of 2001 and 2009. The current situation, featuring positive macroeconomic factors, is decidedly different. Prices are likely to recover faster this
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time as accumulated stocks are worked down, assuming conscious management of production levels by roughdiamond producers and polished-diamond manufacturers as well as continued consumer demand. And while diamond prices have taken a hit recently, they have averaged steady growth over long periods of time, making them a great candidate for investment. As growing demand in various regions around the globe matches with shrinking supply, prices for the gems will rebound. Furthermore, diamonds have been gaining a slow acceptance within the investor community as a viable asset class. In 2013, a group of hedge fund traders founded the Investment Diamond Exchange, which is based in Los Angeles. The diamond exchange focuses on the trade of diamonds solely for the purpose of investment. Chicago-based GemShares entered into partnership with Nasdaq OMX Group in 2013 to develop “GemShares Global Investment Grade Standard Diamond Basket Index.” The purpose of the partnership is to create an exchange-traded fund backed by diamonds. In addition, the Singapore Diamond Exchange (SDiX) just launched trading with authorized dealers, continuing the development of diamonds into an new asset class.
The Trouble With Diamonds Over the long term, diamonds have historically appreciated at a rate slightly greater than inflation, proving their worth as a store of value. Diamonds, however, never evolved into an asset class because of the snowflake problem: No two diamonds are exactly alike. As a result, there is no linear pricing of different sizes, such as two quarter-carat diamonds won’t necessarily equal the value of one-half carat diamond. By contrast, you know that one 20-gram bar of gold is worth the same as two 10-gram bars of gold. In addition, prices and transactions have historically been dealer-driven, with no price discovery or transparency, limiting their appeal to professional investors. Furthermore, the complexity of assessing and pricing each stone, the problems of storage and insurance, and the difficulty of resale were barriers to the private investor. Yet, changes in the marketplace, technology and the availability of information are helping to remedy many of these problems, making diamonds more viable as an asset class for investment.
Diamonds as an Investment The world is changing quickly, but not in such a way that most citizens feel secure about their wealth. The United States government is saddled with more than $18 trillion in debt and the Federal Reserve has begun a brand new cycle of rate hikes, which will only increase interest payments on the government’s existing debt. America has attempted to stage a recovery from the Great Recession, but it has been uneven and fragile. Highpaying middle-class jobs have been replaced by low-paying jobs and temporary positions. While oil prices have plummeted, the cost of housing, education, medical care, insurance, legal services, child care and more have all gone up. In fact, the Chapwood Index — an independent index that follows the price of 500 of the most commonly purchased items — shows that inflation in America ranges from 5.7% to 13% depending on where you live in the country. Americans are in a tough crunch and rising interest rates put the recovery in a precarious position. What’s more, the new shift in interest rates threatens to create a currency war. Other pressures facing traditional financial assets include rising geopolitical tensions around the globe with Russia, ISIS and the continued specter of terrorism. Asset classes, including equities, bonds and even real estate, are highly correlated to the stock market and the global economy. If the United States, Europe or even China start to suffer a significant economic slowdown, stocks and bonds can and will be hit.
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However, diversifying your portfolio to include other types of tradable, portable and tangible investments such as collectibles provides you with protection against the turmoil that is building. An investor might put 2% to 5% of their liquid wealth in gold and silver (for example), and a similar percentage in other tangible assets or collectibles, such as stamps, coins, wine or even diamonds.
What Makes a Good Diamond Whether you are looking for an engagement ring or maybe a different diamond gift, the jewelry industry has been quick to pound into the heads of everyone the four C’s — carat, cut, clarity and color — as how to best judge a diamond. • Carats are the units of weight used for diamonds. Each carat is divided into 100 points. One carat equals 0.2 grams. A carat is weight, not size. Furthermore, a well-cut diamond may appear larger than a poorly cut diamond of equal weight. Large stones are much rarer than small ones so the cost is not proportional to the weight. A one-carat diamond will cost more than twice what a half-carat diamond will cost and the divergence grows as weight increases. • Cut is where the skill of the diamond cutter lies. The cut creates the maximum brilliance and scintillation from the rough stone. Previously, the main priority was to get the largest gem possible from the rough. Now, the cutter is more likely to aim for maximum brilliance. A well-cut diamond is worth far more than a badly cut stone of equal weight. Shape is also an aspect of cut with the most fashionable shapes, currently round and square, commanding a premium over less fashionable ones. • Clarity denotes the number of flaws in a diamond. These are formed as the diamond is being created deep in the earth. Internal flaws are known as inclusions, external ones as blemishes. Flawless stones are incredibly rare and beyond the price range of all but the very rich. The important point here is not that you will be able to see the flaws, but that they may affect the brilliance and sparkle of the stone. • Color is graded on a scale from D to Z. A diamond graded as D will be colorless, the most desirable and the most expensive. However, the difference between it and a stone graded E is not noticeable to the nonexpert and even an expert needs a comparison stone to see the difference. At the bottom end of the scale, a Z diamond would be noticeably yellow. In general, investment-grade diamonds are polished diamonds of the highest colorless (D, E, F) grade and clarity (IF, VVS1, VVS2), with weights ranging from 1 to 10 carats, triple-excellent grading (excellent cut, excellent polish, excellent symmetry) and no fluorescence. When investing in a diamond, it is also important to have it graded by an authority on diamonds that also has no vested interest in your investment. Two key diamond-grading labs are Gemological Institute of America (GIA) and the Confédération Internaitonale de la Bijouterie, Joaillerie, et Orfèvrerie (CIBJO). The GIA was started in 1931 and is the world’s foremost authority on diamonds. The nonprofit institute is a leading source of knowledge, standards and education in gems and jewelry. It published the first diamond grading reports, becoming the international jewelry industry’s benchmark. What’s more, in 2007, it created the 4Cs and international grading system materials for customers.
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The Danger of Synthetics Synthetic, man-made or laboratory-grown diamonds have been prevalent in the news of late. While chemically identical and structurally similar to naturally mined diamonds, they have not commanded the same price in the market. Furthermore, synthetic diamonds have never been accepted as investment grade and investors do not want them as collectibles. This has forced manufacturers of these stones to market them at significantly lower prices, adopt “green” messaging and promote their use in lower-priced jewelry. To avoid synthetic diamonds, it is important to purchase only GIA-graded diamonds to insure that you are acquiring a gem that was pulled from the earth rather than grown in a laboratory.
Buying Your Diamonds You have multiple options when it comes to buying loose diamonds for investment purposes, though popping down to your local jewelry probably shouldn’t be your first choice when you consider the potential for considerable markup and the frightening lack of transparency when it comes to pricing. One group that you should consider when it comes to diamonds is VULT. VULT is a world-changing innovation designed for buying and selling diamonds, gifting diamonds and preserving wealth. In an uncertain world, VULT may provide breakthrough security for you and your family’s financial future. Through technology, VULT has transformed diamonds (of opaque, uncertain value) into a transparent, equitable investment opportunity. VULT provides diamond collections that are standardized, understandable and fungible. Each VULT case holds only GIA-graded, ethically sourced, natural diamonds. Each diamond weighing between 0.5 to 2.6 carats is guaranteed to be in the D to F color grade and is identifiable by the laser-engraved GIA certificate number on its girdle. All diamonds are in the Flawless to VS1 clarity range and cut quality is graded triple excellent. But VULT offers far more than just a diamonds. VULT is a groundbreaking technologically-advanced system that includes a case no bigger than the palm of your hand, six proprietary layers of security and three modes of authentication that assure the integrity of the diamonds and protect your investment. For VULT owners who take possession of their VULTs, the VULT app authenticates both the VULT case and the individual diamonds within. Any VULT unit registered online is part of the system. Units sold independently of the VULT.com system may be reauthorized at any time by any current owner for a small registration fee. Owners can use the VULT app (available for Apple and Android products) anytime or log into their optional accounts on the VULT website. Owners must enter the unique VULT serial number engraved on the front of each unit. A patented multifactor identification and authentication process is built into the VULT units and is part of the trading platform. Verification includes patented optical signature recognition systems. If you buy a VULT on VULT.com from a previous owner, you may reauthorize the unit with your own information — if you wish to register. Similarly, if you buy a VULT from a previous owner outside of VULT. com, you will need to reregister/reauthorize it if you want to make use of the VULT trading platform. Of course, that doesn’t mean you can’t take your diamonds from the case. As owner of the diamonds, they can be removed to be used or sold privately, but doing so compromises the integrity of the unit.
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Each VULT is completely fungible with every other VULT within its same model class. Every VULT can be instantly recognized, authenticated and transparently priced, allowing VULT owners to list and sell their VULT with privacy and complete confidence. VULTs are being introduced in four dominations: • White — $25,000 • Blue — $50,000 • Black — $100,000 • Gold — $250,000 After the initial launch of each denomination, prices may vary, based on the underlying value of the VULT diamonds in the wholesale market and the supply and demand of the consumer for a particular denomination globally. In late 2016 the company will offer owners storage of their VULTs within a global custody system, using vaulting facilities in eight major cities around the world, provided by partner, Malca-Amit: Bangkok Hong Kong London New York Shanghai Singapore Toronto Zurich The location and status of each VULT held in custody can be verified 24/7 via the private MY VULT page on our website and through our smartphone app. Each VULT is backed with a Title insurance policy that covers the authenticity of its diamonds. The owner can also take delivery of the VULTS. The case can be picked up at a VULT sales offices or delivered fully insured to owners in most countries. A purchaser residing in one country may accept delivery of their fully insured VULT in another country, subject to export and import regulations. What’s more, VULT offers an added layer of protection for your privacy. Each VULT is certified as genuine on the basis of its multilayered unique features, not its registration data. You do not have to register or have identification to own a VULT.
The Exit Strategy As with any investment, it’s important to have an exit strategy in place so that you can lock in profits. Due to a lack of a central exchange and general price transparency, it can take a little work to track down the change in price of diamonds. Some good resources include Bloomberg News as well as Ajediam Antwerp Diamond Monthly, Troy Diamond Report, The Gem Guide and the Rapaport Diamond Report produced by Martin Rapaport. A collector who purchases a VULT could also use the VULT Exchange (launching in January 2016), available through www.VULT.com, to track current pricing information. Pricing is discoverable via the VULT.com trading exchange 24/7 and is purely market-driven.
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In addition, investors can sell through the VULT Exchange, through eBay or any similar mechanism that provides an electronic sales platform, or to their neighbor over dinner in a local restaurant. Remote authentication of a VULT guarantees integrity of the diamonds for a transaction. Should you choose to use the VULT Exchange to sell your diamonds, there are naturally no guarantees that your VULT will be sold at the price you demand. However, because VULTs are transparently priced and may be bought or sold at any time on VULT.com, a naturally liquid market will exist. VULT.com will also act as a limited market maker in order to further boost liquidity. If you have taken possession of your VULT and you sell it using the VULT Exchange, the company will arrange for insured pickup and the delivery of funds by wire to your approved bank. This seamless liquidation costs 1.5% of the transaction amount, a fraction of the 15% charged by the auction houses globally. Over time, VULT should increase in value as a collectible for many reasons, including the probability that increased trading will result from price transparency — which has never been possible in the diamond industry before — and because the diamond market is at a temporary low, as discussed elsewhere in these notes.
Final Thoughts In these uncertain times, when you are looking for avenues to diversify your assets out of the typical stocks, bonds or even real estate, collectibles are a tangible, uncorrelated asset class that offer growth as well as asset protection. What’s more, of the various collectibles, diamonds are easily portable — more so than an art collection or even gold bullion. Historically, diamonds have been traded privately through dealers using private negotiations, similar to how the U.S. bond market traded until recently. The lack of a central exchange and price disclosure left investors in the dark and exposed to unwarranted bid/offer spreads. VULT addresses all of these issues, although it will take time for trading volumes to build to institutional levels. VULT is offered by Secured Worldwide LLC, which was formed in November of 2013. It operates a majority owned subsidiary, Secured Worldwide Limited, in Hong Kong. Since inception, the company has been in product and platform development mode, launching limited early access sales on October 1, 2015. The company is headquartered in New York City, and can be contacted at: Secured Worldwide, LLC 50 West 47th, Suite 910 New York, NY 10036 1.212.847.7866
[email protected] Secured Worldwide, Limited Unit 3308, The Center 99 Queen’s Road Central Hong Kong 852.2129.0128
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