IndexUniverse: How do diamonds compare to gold, as an investment?
Schellhas: Historically, diamonds have proven themselves to be significantly more stable than other tangible assets, such as gold and silver, largely because diamonds have almost no exposure to speculative capital [roughly 1 percent]. Gold, on the other hand, has a speculative investment share of approximately 40 percent, and as result, is highly volatile.
Diamonds are more of a noncorrelated asset and they're a great hedge against inflation. Additionally, they're a play on global growth—as global growth increases, so will consumers' purchases of luxury items.
IndexUniverse: What makes the diamond market move?
Schellhas: Diamonds are a supply-and-demand-driven industry, just like any other commodity. Diamond prices are currently being supported by the rising incomes of middle-class populations in emerging markets like China, India, Russia and Brazil. Developed economies like the U.S. and Europe are relatively flat with regards to the growth in diamond demand—in the U.S., diamond demand is growing at approximately 3 percent a year.
Meanwhile, in countries like China and India, demand is expanding at an incredible rate and really driving unprecedented demand for diamonds. These countries not only view diamonds as jewelry, but a lot of the people purchase them as a source of wealth too.
In China alone, diamond demand has a compound annual growth rate of 32 percent since 2005.
Even more interesting is the fact that industry experts across the board agree that the supply of diamonds will at best remain unchanged throughout the decade, because all major diamond mines are at peak production. In fact, even if a large diamond mine were to be discovered, it takes roughly eight to 13 years of development before a mine can begin to produce diamonds, since diamonds are mined in some of the most remote and inhospitable areas on earth.
IndexUniverse: Are synthetic diamonds a threat to physically backed diamond investments?
Schellhas: For consumers to embrace synthetic diamonds on a large scale, the price of high-quality synthetics would have to dropconsiderably. Regardless, the vast majority of consumers are only interested in natural diamonds, so it is highly unlikely that synthetic diamonds will have any kind of measurable impact on the price of natural diamonds over the next decade.
IndexUniverse: When people are investing in physical, natural diamonds, where are they investing, geographically?
Schellhas: Africa, Canada, Australia and Russia are the primary mining sources for diamonds in their rough form.
Once they're taken out of the ground, they're sold to cutting and polishing factories around the world. Those cutting capitals are Israel, Antwerpand India. China is also emerging as a cutting and polishing center simply because the labor there is cheap.
IndexUniverse: How do you see physical diamonds fitting into the broader scale of commodity investments?
Schellhas: The current state of the global economy is highly conducive for owning diamonds. Diamonds provide investors with a stable and highly transportable storage of wealth, while offering an attractive profit potential based on the tremendous growth potential of emerging economies. With the prospect of significant investment capital flowing into this asset class in the near future, it becomes clear why diamonds are positioned to be the best-performing tangible asset of the decade.