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Financial Times - De Beers Diamond Company Woos Safe Haven Investors

13 july 2009

De Beers has launched a global campaign to convince investors that diamonds are an alternative to gold as a safe-haven investment, writes The Financial Times.

Below is the full article published yesterday by The Financial Times:

The move is a sign of the pressure on the world's biggest diamond miner to find new markets following the collapse of traditional sales. Stephen Lussier, De Beers' executive director for corporate affairs, told the Financial Times the group had been approached in the past two months by ‘half-a- dozen’ brokers linked to sovereign wealth funds and wealthy individuals. He refused to identify them but said talks were in early stages.

But analysts and investors said that the closed nature of the diamond market made them a much less attractive option than gold. Chaim Even-Zohar, an industry expert who runs Tacy, an Israeli diamond consultancy, said De Beers, which is weighed down by $3.6bn of bank debt, has been scouting for new sources of sales because of a collapse in demand which is expected to force the company to cut production by 40 per cent this year.

"De Beers are leaving no stone unturned to find buyers," he said.

The privately-held company, whose biggest shareholders are mining giant Anglo American, the government of Botswana and South Africa's Oppenheimer family, had sales last year of $6.89bn.

One emerging markets fund manager, who invests in commodities, said: "When you have people asking questions about gold's intrinsic value, it's difficult to see a bankable case for diamonds as a store of value."

Brock Salier, mining analyst at Ambrian, a London-based resources investment bank, said the uncertainty that has gripped equity and currency markets had sparked demand for "hundreds of millions of dollars of something they can stick in a vault," such as diamonds. An anonymous private buyer at a Geneva auction this week paid a record $9.5m for a rare blue diamond from Petra Diamonds' Cullinan mine in South Africa.

But Mr Salier added that diamonds represent a much riskier investment than gold. Unlike the yellow metal the stones, traded through auctions and private tenders, have no public market price and there is no instrument investors can use to hedge against fluctuations. One Johannesburg mining executive suggested De Beers was targeting Saudi Arabia, which is in the process of creating what could be the world's biggest sovereign wealth fund.

But De Beers said Gareth Penny, its chief executive, had not had any meetings with the Saudis during a recent visit to the Gulf, "nor are we aware that anyone has made a presentation to them on our ideas". State-backed funds in oil-rich Middle Eastern nations and Asian exporters flush with foreign exchange cash have been investing huge sums in western assets in recent years but have suffered losses of late, notably in US financial stocks.

"They've been so badly burned in equities they are likely to look further afield into holding resources and buying resource companies," said Nigel Rendell, senior emerging market strategist at RBC Capital Markets.

"China has been stockpiling commodities. I wouldn't be surprised if other sovereign wealth funds are doing the same." But he added: "Diamonds are of limited interest to a lot of people because of the difficulty in buying and selling. Gold remains the ultimate hedge." 

The drop in traditional demand for diamonds has De Beers taking a "serious look" at an alternative market for the stones - diamonds for investment, a company spokeswoman confirmed to National Jeweler.

De Beers spokeswoman Lynette Gould said over the last few months, a number of people - both representatives of high-net-worth individuals and funds--have approached De Beers expressing interest in investing in diamonds as an asset, likely due to the recent investment boom in commodities.

"These approaches," she said, "have caused us to have a serious look at this opportunity."

Gould notes that while De Beers traditionally has not been interested in diamonds as an investment - fearing that it would cause price volatility and speculation that could ruin the market for the stones as a luxury product - the "changing business environment" has the diamond giant changing its tune.

"Diamonds for investment could offer an, as yet untapped, further source of demand," Gould said.

Gould's response came after an article appeared on Friday in London's Financial Times, stating that De Beers has launched a "global campaign" to convince investors that diamonds are on par with gold as a safe haven for investment.

Gould, however, stopped short of calling De Beers' current interest in diamonds as an investment a "campaign" on the same level as the enduring-value campaign it used to promote diamonds this past holiday season.

"It's just something we're looking into, very early days," she said.

She also noted that De Beers' "core messages" around diamonds as the ultimate symbol of love and romance aren't changing.

"Diamonds are always in fashion, like the little black dress of jewelry," she said. "They're elegant and timeless. These are foundations on which our industry is built and should always be front of mind."

As a result of the recent crisis in global financial markets, investors are searching for alternative assets, according to israelidiamond.co.il. Rather than being solely focused on ways to maximize their capital gains, they are all seeking tried-and-true strategies for preserving wealth. Many of them have chosen to invest in natural colored diamonds.

NUWire Investor states that a capital preservation strategy is the path that responsible investors should choose at this time. The website points out that there has never been a better time to consider investing in rare colored diamonds.

Diamonds, particularly Fancy Color diamonds, have an extremely high value despite their diminutive size and weight. A two-carat intense fancy yellow diamond is worth approximately $25K, and weighs less than 1/70 of an ounce. If the need arises, millions of dollars worth of diamonds can be concealed and transported on one's person. Diamonds were traditionally used as a medium to discreetly transport wealth across troubled borders.

The keen investor will note that natural colored diamonds have a solid history of steady price appreciation. Just recently, the Wittelsbach blue diamond went for $24.3 million at Christie's in London, setting a record price for any diamond or jewel sold at auction.  In December 2008, Sotheby's New York sold an oval-shaped, vivid yellow diamond weighing 36.99 carats, for $71,870 per carat.

Demand for Fancy Color diamonds has skyrocketed in recent years. NUWire Investor states that this phenomenon is partially due to consumer awareness regarding the natural rarity of colored diamonds - out of 10,000 carats of diamonds mined only one carat will turn out fancy colored. The rarest Fancy Color diamonds are red, blue, green orange and pink. The supply of colored diamonds is declining while demand is increasing, clearly a great opportunity for investors as prices continue to climb.