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Diamonds

Diamond is a rare, naturally-occurring mineral composed of carbon. Each carbon atom in a diamond is surrounded by four other carbon atoms and connected to them by strong covalent bonds. This simple, uniform, tightly-bonded arrangement yields one of the most durable substances known.

Diamond is a fascinating mineral. It is chemically resistant and it is the hardest known natural substance. These properties make it suitable for use as a cutting tool and for other uses where durability is required. Diamond also has special optical properties such as a high index of refraction, high dispersion and high luster. These properties help make diamond the world's most popular gemstone.

Diamonds are not native to Earth's surface. Instead they form at high temperatures and pressures that occur in Earth's mantle about 100 miles down.

Most of the diamonds that have been discovered were delivered to Earth's surface by deep-source volcanic eruptions. These eruptions begin in the mantle and on their way up they tear out pieces of mantle rock and deliver them to Earth's surface without melting. These blocks from the mantle are known as xenoliths. They contain diamonds that were formed at the high temperature and pressure conditions of the mantle. The ore that usually contains diamonds is called kimberlite. Mines do need very specific grinding and milling systems, so they don’t destroy the larger and more valuable stones. For example, the very large 1111 carat stone recovered by Lucara Diamond Corp in 2015 is rumoured to be actually part of a much larger stone but got cut in the process unfortunately. Lucara is already aiming at $60M for just that one diamond so it is clear that size matters in the diamond industry.

Pricing diamonds is a fairly complex endeavor, as is stated on www.pricescope.com, a site devoted to everything on diamonds:

Diamond prices are based on the following criteria:

  1. Carat - The weight or size of the diamond.
  2. Color - The purity or lack of any other hints of color.
  3. Clarity - The absence of internal imperfections.
  4. Cut - The proportions and relative angles of the facets
  5. Shape - The shape such as round, cushion, princess, emerald, etc.
  6. Market supply and demand
  7. Grading - Reports from labs such as GIA, AGS, IGI, EGL, HRD

Supply and demand

Diamonds are, outside the industrial cutting industry, usually bought by the rich and wealthy, and therefore are relatively shielded by economic downturns. As diamonds have a more or less functioning supply/demand mechanism, compared to for example gold which is purely sentiment-driven, a significantly lower demand can have strong impact on diamond prices.

For the last few years, demand has been dominated by fresh Chinese inflow of capital, as the expanding Chinese economy created many extremely wealthy individuals who like diamonds as a safe harbor of value and an investment, even more than gold. With the current downturn of China, Chinese demand wasn’t as robust as many had anticipated, and most diamond prices started to come down slowly over 2015, as can be seen on this chart, again made by www.pricescope.com:

As I don’t expect the Chinese economy to return soon, if ever, to growth percentages at or above 7%, I don’t expect the number of Chinese millionaires to increase in such a way that  diamond supply/demand fundamentals could be distorted in such a way that prices could be going up meaningfully in 2016, despite the little recovery in Dec 2015.

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