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Creating a Hub for Fancy Color Diamonds
Q&A with Eden Rachminov, chairman of the Fancy Color Research Foundation
Dec 26, 2014 8:00 AM
By Avi Krawitz
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RAPAPORT... The Fancy Color Research Foundation was launched in November to promote transparency and enhance consumer demand for fancy color diamonds. The foundation has access to data collected over the past decade about the fancy color diamond market and has developed a price index to track changes in price for pink, yellow and blue diamonds. Rapaport News recently spoke with Eden Rachminov, of Rachminov Diamonds 1891, who serves as the chairman of the foundation's board:
Rapaport News: What motivated the formation of the Fancy Color Research Foundation?
ER: There has always been a lack of information about fancy color diamonds. With rising demand, we found that jewelry retailers lacked the tools to sell these goods.
Jewelers know how to sell colorless white diamonds because you can tell which stone is better simply by looking at the grading report. However, this is not the case in fancy color diamonds. Two stones with the same report can have completely different values and retailers really don't know how to cope with this.
So there was this void which influenced many misconceptions in the fancy color diamond market. People would put the emphasis on the wrong things like clarity, which is completely incorrect for fancy colors.
The foundation was established to bring transparency to the market. We want to create a uniform language between miners, wholesalers, retailers and collectors in order to fill this void and bring real substance to the fancy color diamond market.
The foundation is a non-profit organization that is completely independent with a board that corresponds on a regular basis. The majority of our proceeds will be re-invested in research and education programs and the remainder will be donated to the Make-A-Wish Foundation.
Rapaport News: What are the main activities of the foundation?
ER: Our main activity is research as there are many subjects relating to the fancy color diamond market that have never been dealt with and require study.
We have developed the fancy color diamond pricing index, which is based on a collection of data from the market. We’re also striving to find out how many retailers are working with fancy color diamonds.
In another research project, we conducted a study to gain a sense of how rare each segment of the fancy color diamond market is. A lot of data was received from the Gemological Institute of America (GIA) about all the stones that were submitted to its laboratories since 2002, describing all aspects of these diamonds including their clarity, color, size, shape and intensity. With that data we were able to develop an algorithm to tell us exactly how rare a stone is. This feature is not on the website yet but it will be one of the tools available from the foundation.
Rapaport News: Are you working according to a set budget?
ER: It's not a lot of money. Private money was invested at the beginning, but from now on it's being funded by paying members only. We already have paying members so we don't really have an issue.
We charge $1,800 for a single membership but stores are also signing up so that their sales people can use information from the foundation’s research in their stores. When a sales person has a meeting with a customer they want to show him how rare fancy color diamonds are. This is especially relevant for Chinese consumers, who are very interested in the investment aspect of the purchase. If they have a specific question about investments, they can refer to the foundation’s website which acts as a third-party, objective body that shows how well fancy color diamonds have performed. It's a tool that retailers can use to enhance their selling process.
Rapaport News: What sort of market analysis are you providing?
ER: One area of analysis is on stones offered for sale at auction, both before the sale and after, because the auction numbers have a huge effect on retail sales. For example, everyone gets very excited when there is a record price for a stone sold at auction and it boosts interest.
However, in the real world, these are not record-breaking prices because these diamonds are selling at much higher prices at retail than at auction. The pear shape, 9.75-carat, fancy vivid blue, VVS2 diamond that recently sold for $3.3 million per carat is an amazing stone, but the person who bought it actually paid the retail price for the stone.
That is an insight that most people don't have. So we analyze the results of the auctions. Sometimes there are stones that are sold at very low prices and people question why retailers are asking so much. But they don't know that the stone that sold for so little at auction had a huge problem. Maybe the clarity or the fluorescence of the stone was not strong enough.
Rapaport News: It seems that the foundation is geared toward the high-end investment market. Is your research accounting for more commercial-quality goods as well?
ER: The lower end of the fancy color diamond market is traded in places that are not so transparent. You'll never see those goods sold at an auction or at the large retailers. They are usually mounted in jewelry and somewhat hidden. So it's difficult to relate to the lower end and it's not as sexy.
Rapaport News: Explain the mechanisms used in the pricing index.
ER: The index is published every quarter. There are 63 segments in the index, which is comprised of carat size, color and intensity or saturation levels.
The index is for yellow, pink and blue diamonds, without regard to shape, and it covers 1-carat, 3-carat, 5-carat and 10-carat sizes. We will be adding 1.5-carat, 2-carat and 8-carat sizes soon. There are three saturation levels accounted for: fancy, fancy intense and fancy vivid.
We have a list of the largest wholesalers who deal in fancy color diamonds and we collect pricing data from them each quarter to formulate the index. They each get a partial list of those 63 segments to fill in a price based on what they are willing to pay for the diamonds in each segment. We don’t provide them with all of the variables because we don't want each wholesaler to have the full range of pricing data. So each quarter they contribute to a different part of the price index.
No one knows who else is on the list because we don’t want them to speak to each other and set prices. The data is collected and combined into one algorithm that creates an average for the index before it is sent to be audited by Citrin Cooperman, a New York-based accounting firm. Once the audit is complete, the index is published to our members.
The index was developed from proprietary access to tens of thousands of diamond transactions completed since 2005. Users can compare the various categories of color diamonds over the past decade, as well as their performance against the Dow Jones Industrial Average, the S&P 500 index, gold and colorless diamonds. The index shows that fancy color diamonds have increased in value by 167 percent since January 2005 and have outperformed other investment categories.
Rapaport News: Does the foundation give guidance in pricing?
ER: No. There's no price list for colored diamonds. Everything is indexed to a base of 100 set for January 2005. We’re not providing retailers with a tool to set prices, but what they can do is use the index to appraise their inventory. If they bought a diamond at a certain date and want to know how much it is worth today, the index shows how the diamond has appreciated in value. In that way you can actually evaluate your inventory.
Rapaport News: What has motivated such growth in demand for fancy color diamonds?
ER: Wealthy people always want something that nobody else has. In colorless white diamonds, no matter how expensive the diamond is, it's fairly easy to find a similar stone. That is not the case in fancy colors. When a consumer buys a fancy color diamond they always have the feeling that they have something unique.
Rapaport News: There are a lot more diamond dealers holding inventory of fancy color goods than before. Has that created a bubble dynamic whereby dealers are driving up prices?
ER: It's not a bubble because the consumer demand is there. The only problem is that these general diamond dealers are paying a little bit more than the specialist fancy color wholesaler. They want to be part of the game, so they have to pay a little bit more in order to get the goods and attract people to come buy from them.
Rapaport News: How have profit margins been affected considering that rough prices have increased, and wholesalers are buying fancy color polished at higher prices as well?
ER: We try to keep margins consistent. It's been a bit more difficult to do with yellows in the past two years. But the most important thing is the margin that retailers can gain. They're making a much better margin on fancy color diamonds than they are for white diamonds.
Rapaport News: How has the market been in 2014?
ER: The first three quarters were good. It has been a bit slow for everybody more recently because of the issues related to the anti-corruption campaign in China.
The government is chasing almost everybody who has money, because they want to know how you made that money. So everyone has been keeping a low profile for the past several months.
Rapaport News: Has that not affected the price of such luxury gift items?
ER: I'm sure it affected demand for wines, cigars and similar products. However, the effect on fancy color diamonds has been minimal as our product is selling anyway. If you had 100 buyers for every stone in the past, maybe you have 80 today.
It's more of a psychological crisis than an economic one because you know there is money out there. The Chinese government has been changing personnel so it's going to take another six or seven months before it will be behind us. Then it's going to boom because they have been waiting to spend for so long.
Rapaport News: What are you expecting in the next decade in terms of developments at the foundation?
ER: My feeling is that the foundation is going to become the main hub for fancy color buyers. By that I mean business to business (B2B) buyers, not privates. It will set the language and market expectations. People will have to look at the site in order to trade, and I think it will give a lot of confidence to the market.
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Tags:
Avi Krawitz, diamonds, Fancy color diamonds, Rachminov, Rapaport
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