A Diamond in the Rough Conditions

Economic conditions are looking rough these days, with the US still trying to scrape out a semblance of a recovery, and the swan-diving fortunes of Greece, Spain and Ireland causing heartburn for the world’s political leaders, bankers and investors. Evidence abounds that China and Hong Kong are succumbing to the stress – economic growth is hitting the skids and asset prices are falling faster than many pundits are comfortable with.

But at least if you are the Martian Pink diamond at a Christie’s Hong Kong jewelry auction, you’re still looking mighty pretty. The 12.04 carat pink stone is the largest round fancy pink diamond in the world. It was named in 1976, the year of its world debut, when the US sent a satellite to Mars. The gem’s color was thought to be similar to that of the planet. Tuesday was the first time in 36 years that it has re-appeared on the world scene.  At the Hong Kong auction, the rock sold for 40% above its pre-auction estimate, at US$17 million. It was the most expensive lot and a bright spot in an auction that went so-so in comparison with recent events in Hong Kong.  A couple of other gems sold for above their estimates – a pair of diamonds which were 10.88 carats each ($4.2 million) and a six carat Burmese ruby ring ($3.3 million).

These premium one-off rarity purchases run counter to recent trends affecting luxury jewelry companies, which are experiencing headwinds after years of sparkling growth from Chinese and emerging market demand. Chow Tai Fook, a Hong Kong/China based jeweler that was the world’s most valuable jewelry chain (it’s not Tiffany, folks) on its initial public offering (IPO) debut in December 2011, has slumped to an all-time low, trading 35% lower than its offering price. Graff Diamonds, an ultra-high end London-based jeweler, has scrapped plans for a US$1 billion IPO in Hong Kong, citing adverse market conditions. No doubt, postponement is the right call. Graff has a highly concentrated and lumpy business profile, with only 20 customers accounting for 50% of its $650 million in revenue. Furthermore, half of the company’s value is embedded in its inventory. It would take investors with a rock-hard faith and constitution to believe that both sales growth and inventory valuation will continue to grow in a global market that has turned to jelly. Lastly, Tiffany’s management has also recently provided warning to public investors of lower sales forecasts, due to softening demand from China and Korea.      

The value of diamonds is based on the illusion of scarcity. It is an illusion created by controlled, rather than actual, supply. And while there will always be a few individuals out there who will pay any price for a scarce luxury such as a Martian Pink diamond, another commodity gaining even greater scarcity these days is investor confidence. And, like gemstones, when fear floods the market, prices are bound to sink. Sometimes, like lead.