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MORE ON SYNTHETIC DIAMONDS

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I did a blog post in January on synthetic diamonds moving into the jewelry pipeline. Both Gems and Gemology (the publication of the Gemological Institute of America) and Rapaport are full of articles lately on synthetic diamonds.

It seems that synthetic diamonds are very appealing to Millenials for several seemingly good reasons. “Lab created diamonds resonate particularly well with a Millennial audience…because they are beautiful, responsible and affordable,” say Lara Ewen in Rapaport magazine. She is correct, they are cheaper than natural, mined diamonds. The discount at the present time is 20 – 25% and that could mean paying $15,000 for a 2 carat diamond rather than $20,000. Also, there is no mining involved and so there is no environmental damage involved in producing the product.

Buying a lab created diamond also gives one certainty that the diamond is not a “conflict” diamond, meaning that it was not mined in an area controlled by African rebels and the profits from the sale not used to kill women and children in a civil war.

And then there is the technological wizardry. Millennials seem to like the idea that a diamond can be made specifically for them in an 8000 degree reactor; that they can dictate the shape and form it will take and watch the process from inception to final product. It is high tech, sustainable and environmentally friendly.

AH, and therein lies the rub. Synthetic gem quality diamonds are a very new TECHNOLOGICAL product. And like all new technological products, the price is certain to fall. So, if you pay $15,000 for a synthetic 2 carat diamond instead of $20,000 for a natural one, and 5 years from now the same synthetic diamond is selling for $5000, how will you feel? Martin Rapaport thinks that synthetic diamond prices will fall by 50% in 2 years and that there is no reason why ultimately the price won’t decline to the levels of cubic zirconia or moissanite.

The reason for this is that there is a potentially unlimited supply of synthetic diamonds with new players rushing to get into the business and rapid technological improvement decreasing the cost of making the product. On the other hand, natural diamonds will retain their value and continue to be a store of value not only because they are beautiful but because they have natural scarcity. The rarity of beautiful, natural diamonds relative to demand will cause prices for these stones to remain high.

For more on the future of natural diamond prices, see my blog post below on the subject.

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A PERFECT DIAMOND?

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It is not uncommon to hear people say that there is no such thing as a perfect diamond. But there is such a thing as a “D” color, Flawless diamond. A “D” color is the highest color grade in the color grading scale of the Gemological Institute of America (GIA), by far the most widely used diamond grading scale in the world. A “D” color diamond is, by definition, a Type IIa diamond, having no nitrogen or boron impurities because such impurities would impart some color to the stone. And only 2% of all natural diamonds found in nature are Type IIa, giving you some idea of the rarity of such a stone.

“Flawless” is the highest clarity grade in the GIA’s clarity grading scale. A Flawless diamond has no visible imperfections at 10X magnification. In reality, it has no visible imperfections at much greater magnifications since the labs power way up to see what they can find and then power down to see if it is still visible once they know where it is.

The GIA annually takes in for grading half a million diamonds over 1 carat and says that less than one half of 1 percent are either D, Flawless or D, Internally Flawless. The American Gem Society says that less than one quarter of 1 percent in their laboratory get graded either D, Flawless or D, Internally Flawless.

These stones are as perfect as the existing grading system can accommodate and obviously exceedingly rare. Christie’s and Sotheby’s each list only about 25 to 30 stones, 2 carats or above, sold in all their venues worldwide for each of the past four years. They are in huge demand from people who want to buy the very best and sell for tens of millions of dollars. More on that in my next post…

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2ND LARGEST DIAMOND EVER DISCOVERED

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Several months ago, I wrote a blog on the large diamonds being discovered by the Lucara Diamond Corporation at their Karowe mine in Botswana.  It is now being reported by several media outlets that they have discovered the 2nd largest gem quality rough diamond ever found.  Pictured in my facebook post on this, it is 1,111 carats and is 2nd in size only to the Cullinan I which was 3,106 carats.  This new gem is the largest rough diamond found in 115 years.   It is roughly the size of a tennis ball, measuring 65 x 56 x 40 mm.  It was too big to fit in Lucara’s in house scanner and will require a larger 3rd party scanner to render into 3D.

Plus, it is reported to be a Type IIa diamond.  Only 2% of all natural diamonds are Type II.  So here is the difference: Type I diamonds contain impurities of either nitrogen or boron which give the diamond different amounts of color depending on the number of these trace elements replacing carbon in the crystal lattice. Type IIa diamonds contain none of these trace elements and so, unless there is distortion of the crystal lattice structure, the diamond should be colorless.  It certainly looks so in the picture.  The possibility exists here to manufacture one or more diamonds of fabulous size and quality that will sell for tens of millions of dollars.

Lucara’s stock price increased 32% on the news of the discovery, adding $150 million to its market value.  Plus, that wasn’t the only good news for Lucara.  During the same week this diamond was discovered, they also unearthed rough diamonds of 813 carats and 374 carats.  The 813 carat diamond is the 6th largest gem quality diamond ever discovered.

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SYNTHETIC DIAMONDS IN JEWELRY

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Synthetic diamonds are diamonds grown in a laboratory rather than being found (i.e. mined) in nature.  They are real diamonds.  They have the same chemical composition and crystal lattice structure as those found in nature.  But they are grown in a laboratory using one of two different methods.  The High Pressure High Temperature (HPHT) method mimics the way diamonds are grown naturally in the earth’s mantle about 100 miles beneath the surface of the earth, where high temperatures and pressure transforms carbon into diamond.  The HPHT laboratory method uses big presses to create the heat and pressure necessary to do the job in a much shorter period of time.

The other method is called Chemical Vapor Deposition (CVD).  It uses microwaves to bombard a carbon infused cloud which causes carbon to rain onto a natural seed crystal and grow into a diamond. This is a relatively new technology.

Diamonds have been grown in laboratories for both experimental and industrial uses since the 1970s. These diamonds were industrial grade and the labs had difficulty growing diamonds that were large enough and high enough quality to be used in the jewelry trade.  Growing diamonds in the near colorless range that the jewelry trade demands was especially challenging. That, however, is changing.

Rapaport magazine reports that the New Diamond Technology facility in St. Petersburg, Russia produced a 60 carat rough diamond in 2015 using their HPHT method which set a record as the largest laboratory grown diamond ever. They also produced in 2015 a 32.26 carat, colorless, high quality rough diamond from which was cut a 10.02 carat square emerald cut diamond which has graded out at E color and VS1 clarity.

The NDT facility has over 50 HPHT presses which can produce 5000 carats per month. Up to 16 colorless crystals weighing 6 to 10 carats each can be produced in each press in a cycle taking 10 to 12 days on average according to the Rapaport report.

In addition, there are many new players in the diamond growing business.  Labs in China, Germany, India, Russia, the United States and Taiwan are growing diamonds up to 2 carats polished and in very good qualities.  These diamonds are now moving into the jewelry trade pipeline and will present challenges to jewelers who will need to be able to identify them. Obviously, there will be big trouble for any jeweler who unwittingly sells a lab grown diamond without identifying it as such.

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The Rapaport 100 Carat Diamond Club Registry

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The latest issue of Rapaport magazine has an article on diamonds that are known to be 100 carats or more.  Rapaport maintains a Registry which lists the diamonds known to be 100 carats plus, along with other known information such as the mine it came from, the size of the rough it was cut from, where it was sold and for how much, who owns it, etc..

There are 65 diamonds on the Registry. The oldest is the “Koh-I-Noor” which dates to 1304 and is part of the British Crown Jewels.  There are 2 over 500 carats, the “Golden Jubilee” at 545 carats and the “Great Star of Africa” at 530 carats. There is one at 407 carats, one at 317, 6 at 200 plus carats and the rest are between 100 and 200.

Laurence Graff, the London jeweler owns or has owned 12 of the 100 plus carat diamonds. Robert Mouawad, the Lebanese jeweler has owned 5 of them. Several are in the British Crown Jewels and several are in the Iranian Crown Jewels.

The modern era of colossal diamonds (the 5th “C”) dates only to 1990 and the sale by Sotheby’s of a 101 carat modified pear shaped diamond which was purchased by Robert Mouawad for $12.7 million (named the Mouawad Spendour).  This sale set off a “stream” of sales of colossal diamonds over the next 25 years, usually for millions of dollars, and made the auction houses of Christies and Sotheby’s the preferred venue for such sales.  These diamonds are usually named to establish the “provenance” of the stone.

There are large diamonds being mined at the Letseng and Karowe mines in Africa and there are wealthy individuals, especially Russian, Chinese and Arab, who wish to own “trophy” diamonds.  This portends a future of more sales of colossal diamonds for fabulous prices at spectacular auction events in the houses of Sotheby’s and Christies.

 

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What’s The Difference Between an Appraisal and a Lab Report

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I have customers who confuse laboratory certificates with appraisals and that is entirely understandable.  A laboratory report is independent, third party verification that the gemstone in your jewelry (ring, for example) is, in fact, really a (for example) diamond; that it has the measurements and carat weight specified in the report as well as the color, clarity and cut specified.  The laboratory report usually describes the single most valuable part of the piece of jewelry being appraised but it does not assign a dollar value to it.  Some laboratories do have partnerships with appraisal firms and provide an appraisal for the gemstone by itself as a separate document.

But most appraisals are for finished pieces of jewelry and so there is always the mounting  which adds value and sometimes side stones which do as well.  If the piece is designed and manufactured by a famous and popular designer, that can add significant value, especially if the piece is signed.

So, a well done appraisal includes most of the information that is on the laboratory report but includes additional information as well on the mounting, side stones, designer, etc. and assigns a dollar value to it.  That dollar valuation can vary significantly depending on the purpose of the appraisal; but that will be the subject of a future post.

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Big Diamond Discoveries

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Rapaport is reporting that the Lucara Diamond Corporation has very recently uncovered a number of very large diamonds at their Karowe Mine in Botswana.  The largest is apparently the 336 carat irregularly shaped diamond pictured below.  Also, uncovered over the weekend of August 18th were diamonds weighing 184 carats, 94 carats and 86 carats as well as a 12 carat diamond that appears to have a pale pink color.

The Lucara Diamond Corporation is a relative newcomer to the diamond industry, tracing its origins to an oil and gas company in Colorado in the early 1980s that merged several times with other companies and reorganized in British Columbia in the early 2000s. It then acquired several diamond mining properties in southern Africa.

The Karowe Mine is the most promising and productive thus far. Rapaport reports that, “since the recovery of the first large diamond from Karowe in 2013, Lucara has found 216 other diamonds that have sold for more than $250,000 each; 12 of them for above $5 million each.”GetImage

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THE FUTURE OF DIAMOND PRICES

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In my last blog post, I discussed how, contrary to popular myth, diamond prices do not always increase. In 2014 and 2015, diamond prices were down.  But what does the future hold for diamond prices.

There was an article in Rapaport magazine last November which addressed this issue. It reported on the expectation of DeBeers’ executives that the annual supply of rough diamonds mined is about to peak and plateau at around 160 million carats.  By 2030, they expect the annual supply of rough diamonds mined to decrease to around 115 million carats.

There is some finite supply of diamonds in the world. In 150 years of exploration, only 60 commercial mines have been discovered and only 7 of those are major producers.  As the end of the commercial life of the existing mines appears on the horizon, diamond mining companies’ have resorted to exploring all over the world, often in extremely remote locations with brutal climates (i.e. northern Canada and Siberia) and “challenging natural obstacles” to overcome in unearthing diamonds.

The costs of exploring and mining in these new locations is significant.  One DeBeers’ executive even suggested that, “maybe all the diamond mines have already been discovered.”

Add to this scenario,the emerging markets in India and China caused by their increasing prosperity and growing middle classes. This will add significantly in the future to the demand side of the equation.

So, we have an utltimately limited and annually declining supply of rough diamonds that is increasingly expensive to find and extract. This will be combined with growing populations of people who believe they can afford and who will increase demand for diamonds. If this future of limited and declining supply combined with increased demand materializes, diamond prices will increase in the foreseeable future.

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DIAMOND PRICES

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Many of my customers think that diamond prices always increase.  And for much of the history of the diamond industry, that was pretty much true.  When I first started in this industry in 1992, Debeers controlled about 80% of all the rough diamonds coming into the market.  For decades,it was Debeers company policy to manage the supply of diamonds to the trade, increasing it sometimes and withholding at others, in order to maintain stable and modestly growing diamond prices.  The reason the Hull Loan System accepts only diamonds as collateral on loans is that, historically, diamond prices have been very stable, which is what you want in collateral: stable value.

But now, the three largest diamond mining companies, Debeers, Alrosa and Rio Tinto together only account for about 60% of the rough coming into the market.  There are more players and more competition.  In many ways, 2014 was a very different year for the industry.  Demand slowed, especially in China (a big emerging market) resulting in increased competition among manufacturers to sell their inventory and declining prices as a result of that competition.  At the same time, the diamond banks tightened credit terms to the diamond manufacturers, insisting on greater financial transparency and less casual accounting practices from them, and refusing to finance 100% of their rough purchases as they have in the past.

As a result, Rapaport magazine reported that polished diamond prices fell for the 3rd consecutive year. The RapNet Diamond Index for a laboratory graded 1 carat diamond fell 8.7% in 2014; prices for a 3 carat fell 6.6%.  Smaller diamond prices declined too: 0.30 carat by 6.5%.

While the 1st quarter of 2015 was better, the decline resumed in the 2nd quarter as reported by Rapaport: “RAPI (price index) for 1 carat diamonds fell 1.6% during the second quarter of 2015 and was down 15.3 percent from a year earlier.”

This discussion relates entirely to interdealer markets: where wholesalers and retailers buy from manufacturers, not to retail prices. But it is these markets, the prices that retailers, especially, have to pay to acquire inventory that determines loan value.

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How Cut Affects Loan Value

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People sometimes use the terms cut and shape synonymously.  But cut means more than shape and the Rapaport Price List has different price matrices for round and fancy shape diamonds.  The Price List is actually for well cut diamonds.  That has a more exact meaning in the case of round diamonds than it does for fancy shapes.

A really well cut round diamond has a table (top facet) that is between 55% and 59% of the stone’s diameter, a depth that is about 59-60%, star facets that are greater than 50% of the length from table to stone edge and lower girdle facets that are 80% or more of the length from the girdle to the culet.  It will also have very good symmetry and polish meaning that the facets will be similarly shaped, not misshapen and be free of scratches, nicks, abrasions, etc.  The Rapaport Price List is meant to be a starting point for negotiations between dealers for diamonds with actually somewhat more lenient standards than these.

While the cut of a diamond may be the most important factor in determining the optics of a diamond; how much brilliance, scintillation and dispersion the stone shows, it has the least effect on loan value. That is because there can be jumps or declines of hundreds of dollars per carat as you move from one clarity or color grade to another on the price list. And, since I am appraising most collateral in the mounting, it can be easy to be off by a grade on the color or clarity.  The mounting limits your view, hides inclusions and masks color.  So I rarely assign a premium to a well cut diamond since the Price List is for well cut diamonds anyway.

I have taken in as collateral many diamonds over the years that were cut in the 1950s, 60s and 70s that are deep and have large tables.  These were cut at a time when manufacturers were more concerned about cutting the largest diamond from the rough rather than the best. If the optics are reasonably good, I usually do not downgrade the loan value because there will be buyers for the stone.  If the optics are poor I will discount the loan value and I have even refused to accept as collateral stones that simply do not have the optical effects that we look for in diamonds and think of as beautiful.

Old European cut diamonds can be beautiful but they are an excuse the dealers use to offer 75% of what they would for a modern round brilliant cut diamond. And so their loan value reflects that market reality. Good cut in fancy shapes is somewhat harder to define but is affected by the length to width ratio of the stone, its depth and the attractiveness of the curves.