Fancy Color Diamonds And Their Investment Potential

Harvey Harris is a leading color diamond expert. His book 'Fancy Color Diamonds' provides excellent insights into the origin and nomenclature of color diamonds + the colorful characters in the industry. It's educational, instructive and entertaining. A must read. The following is an excerpt from the book.

(via Fancy Color Diamonds, 1994) Harvey Harris writes:

It takes a different breed of investor to buy fancy colors, just as it takes a different breed of dealer to specialize in them. Indeed, a fine fancy color diamond can’t be thought of as an investment commodity in the same way as gold bullion is. Rather, it is collector’s acquisition (like painting or piece of sculpture) and is inseparable from connoisseurship. In the 1980s, connoisseurship reached new heights with the full emergence of the Pacific Basin as an industrial colossus and the unbridled creation of wealth during the takeover and leveraged buyout binges that highlighted Ronald Regan’s presidency. Although connoisseur money was attracted to spectacularly large and somewhat rare coloreless diamonds, the magnestism of ever rarer fine fancy color diamonds in all sizes proved stronger. Believe it or not, this author’s experience has shown that when it comes to fancy color diamonds, it is easier to sell a $2 to $3 million stone, than one that costs $20000 to $30000!

With the exception of very large stones, white diamonds do not lend themselves to connoisseurship. Their rarity is relative, constantly undermined or at least disproved by the need for cartel control to preserve their value. The rarity of fancy color diamonds, on the other hand, is absolute. These gems do not benefit from or need the De Beers monopoly to attain or maintain value. Dealers and connoisseurs alike know that most of these stones are already above ground in places often as hard to find as a kimberlite pipe (the site where most rough diamonds are found).

As a result, the fancy color diamond dealer must build a network of contacts in far-flung realms of the gem world if he or she is to be ensured of even the meagerest inventory. That nexus of contacts of course includes the De Beers monopoly which occasionally mines or buys important colored diamond rough. But it just as often extends into the open market where rough appears from countries that are nonaligned, or only partially aligned, with the cartel.

If the fancy color diamond specialist could rely on De Beers and the open market for supply, there would probably be far more specialists—and not just because supplies would be adequate enough to support more traders. Dealers used to what is essentially a monolithic one-stream market would be spared the constant search for goods that characterizes the fancy color diamond dealer’s life. The best possibility to secure fine specimens of rare colors is to know specialists in fancy colors, who have access to all markets, including goods coming out of large, important estates throughout the world. Trustees for these estates, often representing royalty or celebrities, sometimes wish to dispose of magnificent pieces. While nowadays, increasingly many of these stones are offered to auction houses, they often come through dealer intermediaries acting on behalf of owners who require anonymity.

Recently, I was approached directly by a Belgian diamond cutter versed in fancy colors, who was a friend of the owner of a 1.27 carat beautiful green diamond that he had polished, and that had been locked away for 28 years. Of the second of the two near identifical colors, and nearly equal weight stones cut from thte same piece of rough, the first had sold for $500 per carat in 1962! Now its twin, kept all these years as a curiosity, was up for sale at a strong six-figure price, and well worth it.

If the thought of paying several hundred thousand dollars for a stone that would have cost less than $500 three decades before tempts a double-take or if you dismiss such appreciation in value as simple evidence of modern day hyperspeculation, the fancy color diamond business is probably not for you. Specialists in these gems learn fairly quickly not to look back in time because remembrance of past prices invariably induces paralysis in the present. As I have been heard to say in these last five or six years, ‘the crazy prices of today—are the sane prices of tomorrow!’

Since the 1970s, prices for the finest fancy color diamonds have nearly always seemed outrageous in the context of the moment—and every fancy color diamond specialist can tell you of at least one lost opportunity to purchase a truly magnificent stone because he or she initially balked at its cost. Such failures of nerve seem, in retrospect, rites of passage into the world of fancy color diamonds. I had my initiation in late 1975 when I passed up a chance to buy a 12.01 carat, magnificent pink round stone, of fine clarity, that was as notable for its size as its color after the stone’s owner (Harry Winston) asked what seemed an unreasonably strong price of $600,000 ($50000 per carat) for it. Today, Winston’s heirs could ask $400,000 per carat for the same stone in its American or European jewelry salons and find eager, willing buyers!

In hindsight, it seems obvious why fancy color diamond dealers must learn the hard way about price/reality! Almost all start out as specialists in colorless diamonds. In that sector of the market, the general rule is to stand on principle and let goods go, no matter how much one needs or wants them, once their asking price exceeds the bidder’s daily definition of what is fair or rational. Dealers frequently boast that they have the self-discipline to refrain from buying stones if their owners don’t show a certain flexibility regarding price.

But self-discipline in the fancy color diamond world often involves taking leaps of faith; not refusing to budge. After all, the dealer in colorlress diamonds can indulge in the notion that something very similar to, or nearly identical with, the stone he refuses, will shortly come his or her way. The fancy color diamond dealer cannot entertain such a sentiment. Therefore, one of the first lessons to learn is to think in a manner that very often runs contrary to that in white diamond world. That’s not easy because it means transcending a certain mental conditioning that prizes obstinancy over derring-do—perseverance over risk. This mindset pervades the diamond world.

According to this mindset, when prices for fine colorless diamonds rise with any kind of velocity, it is viewed as speculation. Given the abundance of these goods, and the hoarding of them in the trade that has invariably accompanied every steep climb in prices since the 1940s (when dealers stockpiled melee because of wartime shortages), the term is apt. But the term is not apt for the steady acceleration of fancy color diamond prices since the mid 1970s because these goods are too rare and expensive to lend themselves to dealer hoarding or manipulation.

In April 1989, when 16 pink diamonds from Australia were sold at Christie’s in New York, trade dabblers in fancy colors were alarmed and even angry at the above market prices paid for small, often highly-included stones. Only later, when they learned that 10 of the diamonds had been bought by persons of the general public, did they realize that those prices, which had seemed a little irrational from a dealer-to-dealer standpoint, were perfectly rational from a private buyer’s perspective. That Christie’s sale signaled the fancy color diamond’s emergence as a full-fledged connoisseur item. In a time of soaring art and antiquities connoisseurship, when Andy Warhol lithographs that sold for $400 in the mid 1960s captured $40000 or more at auction 25 years later, or Swatch watches bought for $35 in 1983 brought $15000 at watch auctions 8 years later, prices paid at auction for far rarer sub 1 carat pink diamonds began to make sense. But to dealers trying to evaluate such prices from the narrow niche of their own wholesale market experience, there seemed to be no justification. But, here again, dealers were simply the products of the diamond market’s culture—and their thinking reflected the function of auctions experienced until that time.

For more than a decade, diamond dealers had used auctions mainly as a way to buy white and Cape diamonds consigned from the public at below market prices. Suddenly they were confronted with a type of diamond—namely, fancy colors—that consistently sold for above market prices! What’s more, many of these diamonds came from dealers who knew their goods would receive far higher amounts in the highly competitive auction milieu than in the more controlled and restrictive confines of an office. When it came to fairly common colorless and Cape diamonds, auctions were usually buyer-friendly events. But when it came to extremely rare fancy colors, auctions were usually seller-friendly!

It is no coincidence that the Australian pinks sold by Christie’s were consigned by Argyle Sales, the marketers of the best goods from Australia’s mammoth Kimberley diamond mines. For the first time in history, a diamond mining company had sold directly to the public. While this precedent frightened many in the trade, Argyle shareholders applauded the move. And no wonder. It is estimated that Argyle netted 10 – 20 percent more for the 16 diamonds it sold directly to collectors than would have been realized if sold to dealers. It was a profitable experiment. The ploy however, would only have worked with rarities such as pink diamonds. Until Australia’s Kimberley region diamond mine came on stream in 1985, producing around 30 million carats of mostly industrial quality diamonds, pinks were among the rarest of all diamond colors, found mostly in very tiny quantities in India centuries ago and later in Brazil and South Africa. Of these pre-Australian pinks, the vast majority were so pale that gemologists classified them either as ‘faint’ or ‘light’ in terms of saturation, tints more than hues. The few gems that possessed sufficient body color to be considered colored stones almost never earned the stand alone designation of ‘fancy’. Usually, they were judged ‘fancy light pink’.

Australia became the first producer of pink diamonds with hues so saturate that they routinely merited the designation of fancy—without any qualifiers. Here, however, it is important to stress the momentous impact these diamonds had on the world market.

From its onset, Argyle Diamond Sales Limited understood and exploited the unique psychology of the fancy color diamond market. Although the vast majority of the mine’s stones are sold out to the De Beers cartel, Argyle is allowed to keep the very best and biggest of its pinks. Nothing over 2.79 carats (rough) went to De Beers. Although this is now changed, (by agreement in 1991) Argyle is able to retain all that it desires of its pinks. Since 1985 it has cut the top 6000 carats of its production at its own cutting factory in Perth. This includes white, yellow, brown, as well as pink stones. Of this material (around 60 carats per year) so far never more than 83 stones, have been true, fine fancy pinks!

To ensure that it received the highest prices possible for these gems, Argyle reserved them for company-run annual sealed-bid auctions, which is called ‘tenders’, inaugurated in 1986—the first occurred in Antwerp, Belgium, and subsequent ones in Geneva, Switzerland. ‘The list of attendees at these invitation only sales reads like a ‘Who’s Who’ of world’s leading fancy color diamond dealers’ wrote gem journalist David Federman in his essay for Christie’s catalog devoted to Argyle’s 16 pink diamonds sold in April 1989. He continued, ‘Pitting these specialists against one another has resulted in rather breathtaking prices for both Argyle’s ‘tender’ stones in particular and its pinks in general.’

But even so, it was a London jeweler, Laurence Graff, who captured the two main spoils of that 1989 sale—a 7.05 carat pear-shaped fancy blue, and 3.14 carat fancy purplish-pink cushion-cut that went for $2.09 and $1.26 million, respectively. By paying prices many of its colleagues in the audience thought far too high, Graff was forced to make a ‘leap of faith’ that is uncommon among conventional diamond dealers, but all too common among the few in the trade who share his passion for fancy color diamonds.

Decodeme

I think deCODEme is the world's first service to offer a comprehensive genome scan and online analysis of your unique DNA profile. My concerns include security factors + interpretation skills. Many won't be able to accurately interpret the results. But still I think this is a brilliant idea.

Useful link:
www.decodeme.com

A Lensless Microscope

(via Wired) I found the article on a lensless microscope that Caltech researchers have designed for automatically sorting out cancerous cells in body in the journal Proceedings of the National Academy of Sciences interesting.

Go to http://blog.wired.com/wiredscience/2008/07/mini-microscope.html for further information.

H. Tracy Hall

H. Tracy Hall, the creator of man-made industrial diamond, has passed away at his home in Utah, U.S.A. He was 88.

Useful link:
www.htracyhall.org

My eyes caught the flashing light from dozens of tiny crystals. My hands began to tremble; my heart beat rapidly; my knees weakened and no longer gave support—I knew that diamonds had finally been made by man.
- H Tracy Hall

May God bless his soul. Rest in peace, Tracy Hall.

Forevermark Diamond Grading Laboratory

Forevermark, a De Beers marketing company, has announced the opening of Forevermark diamond grading laboratories in Antwerp, Belgium and Maidenhead, UK. The labs will grade only Forevermark selected diamonds providing added value to Forevermark business partners, as well as consumers.

Useful link:
www.diamantaire.forevermark.com

Random Thoughts

When a blue chip becomes a blue duck, the loss is severe.

- Alan Geddes

Innovative Videogames

I found The Virtual Army Experience, a traveling exhibit of the U.S. Army, intriguing. Even though it may be perceived as an innovative tool to teach teamwork, rules of engagement, leadership and high-tech equipments, if not properly utilized the concept may boomerang, really. I think the The Virtual Army Experience-like videogames could be useful teaching business methodologies and social skills.

Useful link:
http://vae.americasarmy.com

Everything Is Cinema

Everything Is Cinema: The Working Life of Jean-Luc Godard by Richard Brody is an interesting biography on Jean-Luc Godard's artistic journey. A must read.

Jacob Rothschild

The conversation with Jacob Rothschild, an avid art collector @ http://www.economist.com/daily/columns/artview/displayStory.cfm?story_id=11825979 was brilliant and insightful.

I can’t stop collecting, I’m afraid.
- Jacob Rothschild

Heard On The Street

Traders and professionals are one thing, and their twists and turns give us insights into the behavior of markets. Main street is a different story.

Random Thoughts

In college …I avoided science, math, and accounting-all the normal preparations for business. I was on the arts side… As I look back on it now, it’s obvious that studying history and philosophy was much better preparation for the stock market than, say, studying statistics. Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage. All the math you need in the stock market…you get in fourth grade.

- Peter Lynch

Tuesdays With Morrie

Tuesdays with Morrie: An Old Man, a Young Man, and Life's Greatest Lesson by Mitch Albom is a fascinating book on lessons he learned from his dying college professor. I think it's also a reminder to appreciate the simple, little things in life. A must-read.

Useful link:

www.albom.com

Madinat al-Hareer

(via Wiki) Madinat al-Hareer is a proposed 250 square kilometer planned urban area in Subiya, Kuwait, an area just opposite Kuwait City which, upon construction, would include the Burj Mubarak al-Kabir , the world's tallest structure, a natural desert reservation of 2 square kilometres, a duty free area which will be beside a new airport, in addition to a large business center, conference areas, environmental areas, athletic areas, and areas that concentrate on media, health, education, and industry. The City of Silk will also include numerous tourist attractions, hotels, spas, and public gardens. As of this time, it is unclear as to the scope of this project, if it has received any approvals, or if it has the required funding; however, the city will be built in individual phases with total completion within twenty-five years. The development will cost an estimated 25 billion Kuwaiti Dinars (136 billion USD).

Useful link:

www.madinat-al-hareer.com

We are not dreamers at all when we talk about investing $132 billion. We’re thinking on a different plane because we cannot afford to think like everyone else. We’re thinking about something that might seem unimaginable. We’re going to outmaneuver everybody who is going to remain in the old mode of thinking about economic prospects.

- Sami Alfaraj, President, Kuwait Center for Strategic Studies, www.kuniv.edu.kw

Ambitious + Contemporary architecture + Highly motivational. I hope the Silk City would be operational on time.

Unique Bordeaux Collections

The Antique Wine Company is offering limited-edition collections of the finest vintages from each of Bordeaux's eight most illustrious châteaux. Go to www.antique-wine.com for further information. Don't miss it.

Useful links:
www.chateau-margaux.com
www.vins-bordeaux.fr

Art Market Update

Souren Melikian has an interesting update on the state of the art market + the new economic environment @ http://www.iht.com/articles/2008/07/26/arts/melik26.php

A must read.

The Country Girl

I accidentally came across the movie, The Country Girl (1954) directed by George Seaton, and decided to watch. Bing Crosby + Grace Kelly + William Holden were brilliant. Grace Kelly won the Oscar for Best Actress for her role as the singer's long-suffering wife. In fact I am a huge fan of the trio, Bing Crosby, Grace Kelly, and William Holden. A must-see movie for classic movie fans.

Useful links:

www.imdb.com/title/tt0046874

http://bingcrosby.com

Vatican Splendors

The Vatican Splendors exhibition will be on display at the Minnesota History Center in St. Paul, Minnesota beginning September 27, 2008. To be notified when advance tickets go on sale, go to www.mnhs.org/vatican

Useful links:
http://vaticansplendors.com
www.mnhs.org

A must visit.

Random Thoughts

What we . . . refer to confidently as memory. . . is really a form of storytelling that goes on continually in the mind and often changes with the telling.

- William Maxwell

How true!

Fine Wine Market

I found the article on fine wine market @ http://news.bbc.co.uk/2/hi/business/7521282.stm intriguing. In fact the fine wine market craze parallels more recent big diamond, rubies and emerald purchases by the rich and famous speculators. Amazingly buying wine through auctions, like gems and jewelry are becoming increasingly popular.

Useful links:
www.zachys.com
www.auctionconsultants.net

Wine is the new must have thing of the ultra-rich. Nothing says 'I'm rich' like pulling a $10,000 (£5,000) cork out of a bottle and in cultures like Asia and Russia that sort of behaviour is really a part of new wealth.
- Scott Zenko

With art you can collect it and enjoy it at the same time. Unless you are into the pleasures of simply looking at bottles the only way to enjoy a wine collection is to open the bottles and consume what' s inside, so you have just destroyed the value, if you will, of that particular piece of your collection.
- Douglas Barzelay

We believe wine is there to be drunk. We will try and make sure that the market is a bit more fair than simply one person having complete control and using it as a commodity really, as opposed to various bottles of slightly intoxicating fermented grape juice, which is really what we are talking about in the end.
- Simon Berry

The Gridlock Economy

The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Live by Michael Heller is a brilliant book on the tragedy of the anticommons (a phrase I like) + too many people blocking each other from creating or using a scarce resource. How true!

Useful links:
www.gridlockeconomy.com
www.law.columbia.edu/fac/Michael_Heller

A must read.