Diamonds are an attractive option for investors looking to diversify portfolios because they don't move in relation with other assets such as commodities and stocks, according to David Riedel, President of equity research firm Riedel Research Group.
“Over the past decade cross-asset correlations have nearly doubled, (but) diamonds have exhibited very low correlations to other assets making them an attractive source of diversification. They have almost no correlation to anything else – commodities, gold, equity markets,” Riedel told CNBC on Wednesday.
In 2011, the RapNet Diamond Index (RAPI) for one carat polished diamonds rose 19 percent outpacing gold , which rose 10 percent. And supply constraints are expected to take diamond prices even higher in the coming years, says Riedel.
He estimates demand for diamonds will grow 50 percent between now and 2015, driven by consumption in the United States, China and India, while production will rise by just 24 percent.
“Diamond mines tend to be most productive near the surface, and like a funnel become less productive as you go deeper,” says Riedel, which restricts supply.
Demand out of the U.S., which currently accounts for 40 percent of global diamond purchases, is set to strengthen alongside the pick up in its economic recovery, he said.
The rise in household income and the young population in India and China will support demand out of these two countries, which are already the world’s top two consumers of gold jewelry, says Riedel.
“We expect cultural trends throughout emerging markets to drive demand for diamonds further. A major trend increasing demand among the Chinese is a desire to display wealth,” he said.
Addressing the growing supply of synthetic diamonds, which are available at a fraction of the cost of natural diamonds, he says the former will not impact demand for the latter.
“There is a growing supply of synthetic diamonds but there is a certain cache and investment value in natural diamonds and we think that will continue.”
Sotheby's annual spring sale of “Magnificent Jewels” in Hong Kong this week highlighted Asia’s booming interest in diamonds. The highlight of the auction was the sale of an 8.01-carat blue diamond ring for $12.7 million - the second highest price per carat for a blue diamond at an auction.
When choosing between buying a diamond ring and loose diamonds as investment, Riedel says they both “work” and retain value.
Top Miner to Divest Diamond Operations
Last week, the world’s biggest miner BHP Billiton indicated it was considering selling allor part of its diamond assets, however, Riedel says this does not reflect a vote of no confidence for the precious stone.
“For them (BHP) diamonds are a very small part of big mining operations that they have. Diamonds are a niche play and there are some good ways to play them, but not among the big, major miners around the world,” he added.