Diamond pricing: Learn the lessons of history or history will repeat itself

Suddenly, diamonds are looking interesting again. The cutbacks in diamond production last year, allied to the substantial fall in manufacturing capacity in India (the major diamond cutting centre) as a result of the pandemic, against continuing strong retail demand for diamond jewellery has cleared out the billions of dollars of rough and polished inventory overhang in the mid-stream.

No new obvious sources of supply whilst demand continues to be strong and for the first time in more than a while, rough and polished diamond prices are rising strongly.

So why aren’t a wave of early investors pouring into diamond stocks? Why aren’t the bars around Bay Street abuzz with talk of new diamond investments? Only five years ago, the combined market capitalisation of the larger Canadian diamond miners — Dominion Diamonds, Mountain Province Diamonds and Stornoway Diamonds — was C$2.8 billion.

The answer is that while diamonds may have been “a girl’s best friend” for Marilyn Monroe, if you were an investor in the diamond mining space, it’s been anything but fun, in fact for many it turned into a nightmare.

What did investors miss? This is an incredibly important question to answer if they are not to make the same mistake again.

The first point is a macro one, which was beyond any investor’s control. From mid-2011 until the middle of last year we had been in a bear market for diamond prices. But since August last year polished diamond prices are up around 12%, and by many accounts are continuing to rise.

Diamonds are a complicated business; the market lacks transparency, ore bodies aren’t uniform and rough diamond pricing is opaque, so more than almost any other resource sector, the pricing framework needed to be accurate. It wasn’t.