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A Diamond is Forever Recycled

Friday July 12, 2013 13:56

In March 1999, De Beers’ “A Diamond is Forever” trademark eclipsed Nike’s “Just Do It” and Wheatie’s “Breakfast of Champions” and was awarded the Ad Age slogan of the 20th century.   A generation later, this message still resonates with diamond consumers, and could have an effect on the industry that De Beers did not originally anticipate.

The initial target of the De Beers marketing campaign was the U.S. baby boomer generation; those born in the middle of the twentieth century, around the time World War II was concluding.  This explosion of middle class Americans embraced the De Beers campaign, making the U.S. the largest consumer of diamonds in the world. But, as this generation begins passing down their “forever” diamonds to new generations, these “recycled” diamonds could compete with the 50 million carats of new gem-quality diamonds estimated to be mined this year (See Figure 1.1).  

Figure 1.1
Recycle Numbers.jpg
Source: Bain & Co., Tacy LTD, Kimerbly Process, Paul Zimnisky analysis
*Based on an estimation of 130M carats mined in 2013, of which only approximately 40% will be of gem-quality, with the balance being industrial grade.
**See: http://www.kitco.com/ind/Zimnisky/2013-06-19-How-High-Quality-Synthetic-Diamonds-Will-Impact-the-Market.html

Buying approximately 40% of the global supply for over 20 years, the baby boomers could possibly hold over a half a billion carats that could end up in the hands of new owners in the coming years.   These carats will be gifted to family members, or resold, the later having the greatest impact on industry dynamics.  Carats that are sold back to dealers and retailers, are often recut, reshaped, reset, and resold as “new” diamonds.

While difficult to quantify, the global recycling of diamonds has probably grown from less than 5% to closer to 10% over the last decade, with America and more specifically the baby boomer generation the major driving force.   But, even at the high end of estimates, recycling of diamonds relative to supply has been minimal compared to the recycling of other store of value assets such as gold -of which approximately 35% of supply comes from recycled sources. 

Diamonds are unique in that they come in tens-of-thousands of varieties making price discovery and thus sell-backs challenging for non-professionals.  However, with the anticipation of an unprecedented amount of secondary market supply becoming available, some retailers and pawns are preparing to cater to sellers as astute businesses see the opportunity at hand.   From the perspective of a retailer, they can buy a diamond from a wholesaler at a premium, and resell it at a greater premium, or they can buy-back from a consumer at a discount, and resell at a premium, essentially doubling their margin.  Its no coincidence that “We Buy Diamonds for $$$” signs are beginning to appear ubiquitous in the U.S.

As an anecdote, I recently surveyed some independent jewelers in New York City’s diamond district, and it is was not difficult to find a jeweler willing to buy a diamond at a 15-20% discount from the price that they would sell a similar stone.  It appears as if people are “hitting this bid” as quite a few of the stores disclosed that up to 25% of their current inventory is recycled.   New York’s diamond district is probably one of the easiest places in the U.S. for consumers to sell back a diamond, compared to malls and retail centers where most mainstream “corporate” jewelers still do not buy-back.

While baby boomers may drive unprecedented diamond recycling, it’s worth noting that diamond recycling is by no means a new phenomenon, it’s just rarely discussed.  For example, the selling of a diamond engagement ring in an attempt to erase a memory after a divorce, or the pawning of diamond jewelry to payoff a debt, is by no means a new concept (See Figure 1.2).   But historically, sales such as these have not occurred frequently enough to noticeably impact the market.

Figure 1.2
Recycle Reasons.jpg
Source: Paul Zimnisky analysis
*Melee is a term for very small diamonds usually used to embellish jewelry.

Investment in diamonds is becoming increasing popular, especially in Asia, as high-net-worth individuals are buying the rarest high-quality diamonds and holding them strictly as a store of value. These diamonds are temporarily taken off of the market as they are held in anticipation of price appreciation, and eventually “recycled.”  The investment community for diamonds is still very small though, estimated to represent less than 1% of current diamond demand (for comparative purposes, gold investment represents 40-50% of current gold demand).  

While it is difficult to quantify the overall impact of recycling on the diamond market given that most transactions take place in private, the quantity of recycled diamonds is rising and will probably continue to grow.

What’s the silver lining for the diamond industry? Even with an additional source of supply coming from recycling, new emerging market middle class demand is so strong that global demand will still probably outstrip supply over the next decade-plus.

By Paul Zimnisky

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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