Friday June 7, 2013 11:07 AM
(Kitco News) - With gold prices taking it on the chin of late, the door for diamonds as a physical investment has begun to open.
Diamonds, generally thought of as a jewelry gift for a special - or in some cases apologetic - occasion, are seeing an opportunity in the world of metals-dominated physical investment.
"We're right on the cusp of this developing," said Matt Manson, president and chief executive officer of Stornoway Diamond Corp. (TSX:SWY), a company that is looking to bring Quebec's first diamond mine to production by June 2016.
"The target in the future is to have 15-20% of world diamond demand be people purchasing diamonds for just this purpose, for physical diamonds as an investment vehicle," Manson said. "People have been trying to look for the mechanism to create diamond investment vehicles and right now it looks like the moment for doing this. This is one of the big themes in the diamond business right now."
Manson said the idea of diamonds as a physical investment is not a new idea; it's been happening for quite some time, especially in China. He pointed to high net-worth individuals buying a single impressive stone or a small portfolio of stones, comparing these types of investors to people who buy art or fine wines as an investment.
However, there are challenges with diamonds becoming a physical investment option. The main one is determining the worth of a diamond since there's no set value as they range in carats and sizes.
"There are some inherent technical challenges of doing it with diamonds, and principally the challenge is 'what is the value of the diamonds you've got?" Manson said. "With gold that's easy, you know what the value is but with diamonds it's more technically challenging."
A step in the right direction for Manson has been the appearance of Exchange Traded Funds for diamonds.
"These diamond ETFs are the beginning of something where this broadening," Manson said.
Manson also described wealth creation in China's middle class as a main catalyst for diamond demand, seeing an upward trend following the country's growing Gross Domestic Product.
"Basically you've got a society that's becoming less focused on spending money on necessities and more able to spend money on discretionary products," Manson said.
"As GDP increases, the share of GDP that's going to discretionary spending by affluent Chinese families on things like travel, communications, personal items, is growing."
Coupled with a growing GDP, Manson sees a finite supply of gem quality natural diamonds and all the forecasts for mine supply are roughly flat and declining long-term.
"So if you've got a consumable product that's drawing in the main markets of the world with GDP and you've got a flat supply, you get long term prices going up, and that's what we've seen for the last ten years," Manson said. "Nominal diamond prices have increased 8-9% a year, and, on a real basis about 3-4% per year since 2003, and similar growth is expected in the future simply because of that GDP growth and flat supply."
Tied in with this are the Baby Boomers in China and India during the 1960's and 1970's, which are now reaching that key 45-64 year-old demographic who typically spend money on diamonds.
"A young man in his 20's buying a diamond engagement ring is spending what he can afford to spend on the ring, but, a man in his fifties buying an anniversary band is often spending what he wants to spend to buy that piece of jewelry," Manson said.
According to stats cited by Allan Hochtreiter and presented by Stornoway, Chinese and Indian Baby Boomers will total 720 million people by 2020.
"If you scratch the surface of diamond supply and demand you can get very optimistic very quickly about it," Manson said. "And that's why we see this demand for diamonds as an investment class."
Stornoway Roadwork To Renard Project Moving Along Well
Stornoway has been working on its 97-kilometer Renard Mine road to the company's Renard Diamond Project located 250 kilometers north of the Cree community of Mistissini and 350 kilometers north of Chibougamau in the James Bay region of north-central Québec.
"We're able to build our 97 kilometers from both ends, from the camp south and we're building it from the Eastmain River north," Manson said. "We're coming in well within the schedule. We're projecting right now, and it's still only 22% complete, we're projecting we'll be coming within budget as well."
This road is an extension from the 143 kilometer road that the Quebec government is building towards the Otish Mountains. Manson said the 143 kilometer road is nearing completion with some work left to do on grading. The road is can be used by vehicles.
Updates from March 27, indicated mineral resources stand at 23,755,000 diamond carats while inferred resources total 17,454,000 diamond carats.
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By Alex Létourneau of Kitco News firstname.lastname@example.org