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The Case for Diamonds:A Brilliant Alternative Investment!

Presented By:Laurent MathiotCEO of AdAmiA BVBAAntwerp, April 2013

I – What is an Investment Diamond?


Among the 25% of polished diamonds used as gemstones, only 2% are eligible to be considered investment grade diamonds because of their top quality features according to the “4 C’s” grading: such a rarity is the main factor for an everlasting demand, not met by supply and thus a continuous price appreciation!

Features of an investment diamond:Shape: Round (brilliant)Carat: More than one CaratColor: D, E (Exceptional White), F, G (Rare White)Clarity: FL, IF (Flawless), VVS1, VVS2 (minute inclusions that are very difficult to see under a 10X loupe)Cut: Ideal, Excellent or Very Good


- GIA in New York (Gemological Institute of America)

- HRD in Antwerp (Hoge Raad Voor Diamant)- IGI in Antwerp (International Gemological

Institute)Certificates and valuations from the Gemological Institute of America (GIA) have the widest international acceptance. For this reason, a certificate from this organization is a great advantage in later diamond sales.

Other reputable and professional diamond institutes include Hoge Raad Voor Diamant (HRD) and the International Gemological Institute (IGI). A laser engraving of the certificate number on the girdle of the diamond is a further confidence-building factor. While engraving is not absolutely essential to be able to identify a diamond with certainty, it is occasionally popular with private investors.

To provide a concrete example of rarity: the world production of premium cut diamonds in D Color and IF Clarity from 1 to 1.49 Cart is less than 900 Carats per year meaning less than 750 stones! To produce these 750 exceptional diamonds mining companies must dig more than 800,000,000 tons of Kimberlite, the rock which rough diamonds are found!

Investment diamonds must be purchased in a sealed package, accompanied by an authenticity certificate established by the independent laboratories which are recognized worldwide.

The certificate address the criteria of quality, examined by one of the following official independent institutions:

II – The Top 10 Reasons to Invest in Diamonds


II-II A Great Store of Value

Like any long-term tangible asset, diamonds also offer a hedge against inflation because they retain their intrinsic value irrespective of currency changes. This has been demonstrated through many studies that show how diamond prices have preserved purchasing power for their owners over long periods of time.

II-I A Diamond Does Not Go Bankrupt

Diamonds still hold an intrinsic value and have for millennia, for they are tangible assets and not a paper asset that relies on the assurance of a third party and represents their debt. Diamonds have one fundamental quality that renders them unique compared to other financial products: they do not present any credit risk. Upon taking possession of one’s diamonds, an investor is no longer exposed to the failure of a third party. Like gold, a diamond is a tangible asset that can be liquidated at any time.


II-III An Universal Asset

Unlike other gemstones, diamonds are valued according to a catalog of internationally applicable criteria. Diamonds are sought after all over the world, and wherever they are the same criteria are used to establish evaluation. Assessment criteria for diamonds have been defined by various international gemological laboratories (G.I.A. was the first in 1931) and are structured around four main concepts (cut, color, clarity and carat).

The Rapaport Diamond Report, a tool designed specifically for professionals, allows for the financial value of any stone to be established. Created in 1978 by Martin Rapaport, a member of the World Diamond Council, these lists of diamond prices have today become the basis for all global diamond transactions. Because of their universal appeal, diamonds are one of the major investment alternatives. They can be used everywhere in the world as a form of payment in transactions, all the more so when their value is established and recognized.


II-IV A Diamond is Forever

Diamonds are the precious stones with the greatest hardness. Unalterable and indestructible, diamonds cannot be affected by natural elements, such as humidity or temperature: they are not subject to any preservation risks. Its integrity is preserved for centuries. Investment diamonds therefore present the significant advantage of not requiring any management fees!


III-V The Market Fundamentals are Very Bullish

Although diamond mining has already surpassed its global peak, global demand continues to rise considerably. A study by the Antwerp World Diamond Center (AWDC) predicts that demand for diamonds will double by 2020 as diamond supply stagnates at best, thus leading to a significant increase in diamond prices. Increased demand: The AWDC experts predict annual growth of approximately 6% assuming that demand for diamonds will continue to rise steeply as wealth grows in the extremely populous developing economies of India and China.

Demand for diamonds in these countries is forecast to equal that of the USA – previously the largest gemstone market in the world – by 2020. In addition, diamonds are particularly sought after as an investment in periods of economic instability; this trend boosts demand even in times of economic crisis.

Declining supply: Although demand for diamonds shows continued strong growth, diamond supply is growing by a mere 2.8% p.a. because many major diamond mines are already depleted and to date no comparable new deposits have been found. Global volumes of mined diamonds have been declining since 2003. While new deposits of diamonds have been found, they are all in inaccessible regions, requiring complex methods such as extremely costly offshore mining on the sea bed.


The techniques developed allow to analyze the effects of any factor, economic, cultural or political upon diamond trade including demand (both regional and global), supply (rough being mined), manufacturing techniques, prices (rough and polished) and stocks. The forecasting model, allows for the comparison of Demand, Supply and Stock Changes to produce forecasts of prices for each of the rough and polished categories followed. The price forecasts give a central forecast for diamond prices for the next five to ten years.

II-VI A Performing AssetDiamond prices have risen steadily throughout the past 50 years of 5 to 10% annually on average. Even the 2008 financial crisis triggered no more than a slight decline in prices for some carat sizes, which was more than compensated for by their appreciation in subsequent years. See Price trends since 1960: The example of a one-carat diamond in brilliant cut of excellent quality in color D and clarity IF shows the strong and relatively consistent increase in diamond prices in US dollars over the period since 1960: a one carat diamond with the best 4C characteristics is currently valued at around $30,000, while it was valued at only $15,000 in 2002, a 100% increase in 10 years!

Forecast of future diamond prices have been computed by Diamond Forecast LTD, using a scientific econometric model incorporating a database designed to be a central depository for all information relating to the diamond industry. The database contains history and forecasts for the macro-economic factors that have a bearing upon the diamond industry.

The model yields a potential doubling of the price of polished diamonds from 2012 to 2022. A base case scenario for the next 10 years of a return on investment (ROI) of 10% p.a. seems conservative and consistent with historical data.



II-VII A Diversification AssetInvestment diamonds are a long-term investment that generates capital investment appreciation. The diamond market is negatively correlated to other financial asset types thus offering diversification benefits when added to an investment portfolio. Also, the diamond market is purely physical, does not generate unstable derivative products and not linked to currencies: it is, therefore, not bound by geopolitical considerations or potentially related manipulation.


II-VIII A Stable Asset, Even in Time of Crisis

Investment diamonds are a very stable investment. Its volatility is about half of the volatility of gold. Furthermore, compared to other assets, the low volatility of polished diamonds is marked by a high degree of regularity in its progression thus generating an optimal “risk-return” investment. An examination of diamond prices in the years 2008 and following clearly shows that the overall minor declines in price had already been made up by 2010.

For example, prices of one-carat diamonds did not fall at all although their price appreciation stagnated for a short period. It can thus be seen that diamond prices fluctuate far less than the prices of conventional stocks and shares.


II-IX The Highest Concentration of ValueDiamonds concentrate the maximum value in the smallest possible form. Sealed investment diamonds are very easy to transport. By way of explanation for a top rated 4C diamond:

This can be strikingly demonstrated in a comparison with gold: for a top rated 4C diamond: 1 gram of diamond is worth 1 million dollars US, which is the value of 20 kilograms of gold (based on a gold price of 50.000 dollars/kilogram)!


II-X The Owner is the Bearer

Diamonds are the most confidential investment that exists for the owner is the bearer: the purchase of diamonds is not subject to registration requirements, enabling the owner to preserve anonymity more easily. Unlike gold or property, diamonds have never been subject to prohibitions on ownership or confiscation.

As a consequence, it is an investment product that is easily passed from generation to generation. This brings a further heritage-related dimension of wealth to add to its financial relevance.

III – How to Invest?

III-I Investor Considerations

III-I-I Budget & Asset Allocation

A preliminary consideration for each potential investor is to assess a specific budget for the acquisition of diamonds. Although there are many parameters to factor in while deciding on an investment budget, a key element to consider is the relative weight of the potential investment compared to investor’s total portfolio/wealth.

Investment diamonds are alternative investments and transportable “hard assets”, such as precious metals. It is widely established that a private investor should allocate at least 10% of total net worth into hard assets, up to 20% in times of crisis. It is our recommendation to split this allocation half in gold bullion half in diamonds.

III-I Investor Considerations

III-I-III Investment Profile: Conservative or Dynamic?

What is the main purpose of the investment considered: to protect one’s wealth in these times of massive debt burdens and financial crisis or to seek a dynamic asset able to generate capital gains over the years? The beauty of diamond investing is that investors can get both protection and profit but to achieve such a remarkable performance, diamonds should be carefully selected according to the following guidelines.

III-I-II Time Horizon: Long Term or“Trading Scenario”?

Another crucial parameter to look at before investing is the maturity or time horizon anticipated for holding a given investment, before considering selling it. Diamonds must be reviewed as long term investments, not for short term “trading” purposes. Although one could successfully buy a top quality investment diamond at a bargain price and sell it back with a profit in a relatively short time period, this “trading” scenario is not the most common for private individuals who are not professional “diamantaires”. We do recommend a minimum holding period of three years at least whilst considering the investment diamonds option.

III-II Which Diamonds to Select?

III-II-I Common Features: “4C” & Certificate & Laser

When purchasing an investment diamond, several prerequisites must be fulfilled: as seen in the definitions section, the features of an investment diamond are:

Shape: Round (brilliant)Carat: More than one caratColor: D, E, F, GClarity: FL, IF, VVS1, VVS2Cut: Ideal, Excellent or Very Good

Also, the stone must be delivered with an original certificate from one of the following official independent grading institutions: GIA, HRD or IGI. A laser engraving of the certificate number on the girdle of the diamond is highly recommended to associate the stone with the certificate. Finally, a tamper-proof seal provided by the institution to carry the stone is definitely a big plus and makes it so much easier to store and transport the stone.

III-II-II Main Value Driver: Carat

A very important consideration to bear in mind while investing in diamonds is the exponential factor related to the weight expressed in carats (1 carat equal to 0.20g). The price per carat of two similar stones increases exponentially with its carat weight. In other words, one 2 carat diamond is much more expensive than two 1 carat diamonds of the same “4C” features. For example, a diamond that is double the size of another similar can be up to four times the price!

This makes the carat weight the main value driver of a stone and for a given budget, it makes sense to buy heavier stones. However, specific studies on the variation of diamond prices have shown that smaller stones, such as 1 carat, are more stable and do not

decrease in price in times of crisis (such as in 2008), whereas 2 or 3 carat stones show minor declines that are made up after about 2 years. These 2 or 3 carat stones gain more in times of general price appreciation than 1 carat stones. So a general rule of thumb would be to stipulate that 1 carat stones are a more conservative investment option while 2 or 3 carat stones are more dynamic.

For a given budget, and depending on the investment profile, it is recommended to consider the purchase of either the largest possible stone or a portfolio of smaller 1 carat stones that would also provide a better liquidity in the future.


III-II-III Other Value Drivers: Color, Clarity & CutCarat weight, of course, is not the only factor determining value and prices. One should be very careful about the three other C’s: Color, Clarity and Cut. As a general rule, it may be considered that the whiter, the purer, the better cut the diamond is, the faster the price will appreciate because of the rarity effect we have previously described.

However, diamonds that are not the very top graded but “investment grade”, such as F/G colors and VVS1/2 clarities tend to catch up the price appreciation of top graded stones but it takes more time. Since these stones are bought for lower USD per carat prices, they offer a better “quality / price ratio” in dollar terms and can be considered more dynamic investments whereas top graded stones are, in comparison, a more conservative investment option.


III – How to Invest?

III-IV Liquidity Considerations

Selling a diamond is another crucial challenge for a private investor. As we have seen before, diamonds are meant to be long term investments that can be passed from generation to generation. However, any owner of investment diamond(s) should be in capacity to sell this asset within a reasonable time and at a fair market price.

Although it is possible to address directly, the market in order to sell a diamond (through multiple options such as auctions, local jewelers, Internet market places…) the possibility exists that this will be a time consuming process with no guarantee of obtaining a fair price, many “professional” diamond buyers being opportunistic and seeking cash strapped sellers to offer a meager bid price…

We at AdAmiA are committed to offer a true liquidity to our customers and therefore, we will make an offer to repurchase any diamond sold by us.

Our offer will be based on current market prices and conditions and we are proud to assert that this will be a competitive offer because of the following compelling reasons:

1- AdAmiA is a member of RapNet, the world’s largest diamond trading network, with about one million stones on the platform, located in 80 different countries, thus offering wide opportunities to market a stone at the most efficient price.

2- AdAmiA’s CEO is a member of the Diamantkring of Antwerp, the oldest and leading diamond exchange “bourse” and member of the World Federation of Diamond Bourses, thus having the privilege of physical access to the 26 diamond exchanges in the world, another key consideration to market a diamond at the most competitive price.

3- AdAmiA’s CEO is a former private banker and wealth manager and therefore entertains a wide network of high net worth individuals that can be offered an attracting opportunity to purchase a great diamond for either investment or jewelry purposes.

4- AdAmiA’s CEO is an alternative investments specialist with a trading office in Paris on the prestigious Place Vendome, home of the most luxury jewelers in the world such as Cartier, Van Cleef & Arpels, and Boucheron. Such jewelers are always potential buyers for top quality gemstones.

Contact Information

Office in AntwerpAdAmiA BVBADiamond Plaza

Hovenierstraat 55, B.662018 Antwerp, Belgium

Phone: +32 (0) 3.205.92.21

Office in Hong KongAdAmiA BVBA

Two International Finance CentreLevel 19

8 Finance Street, Central Hong KongPhone: + 852.2251.1672

Office in New YorkAdAmiA BVBA

3 Columbus CircleNew York, NY 10019

Phone:

info@investment-grade-diamonds.comwww.Investment-grade-diamonds.com

In 1989, having graduated from ENSAE as an Actuary, he started his career at Banque Paribas as a Financial Analyst in the Asset Management department, responsible for creating (through econometric and actuarial modeling) a tool to aid investment decisions. This work contributed to the launch of one of the first guaranteed capital structured funds in the Paris financial market.

In 1993, having obtained an MBA from Wharton School of Business, he served as Chief Financial Officer at L’immobilière de Crèdit, a financial company authorized by the Bank of France and supervised by the Banking Commission.

In 1997, he became Deputy Director General of La Foncière de Participations, managing a team of 50 employees and carrying out numerous asset arbitrations aimed at wealth structuring, as well as the implementation of the Group’s investment strategy. In 2001, with this strong experience, he specialized in the area of Asset Management and became CEO of a Family Office located in London. It is in this context and in view of the troubling situation in global financial markets that he led, in 2007, a major cross-sectional study around one subject: new strategies in global wealth protection. The conclusions of this work brought to light the relevance of tangible assets like gold and diamonds. After successfully starting AurAriA, an ecommerce site selling investment gold, in 2009, the continuity of these reflections on alternative investments led him to start AdAmiA in 2012.

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