For girls, maybe for women, diamonds remain long-lasting best friends on their ears, wrists or fingers; maybe they are not the same best friends for investors. Fabrizio De André – one of the most famous Italian singer-songwriters in his “Via del Campo” said, nothing sprouts from diamonds; from manure sprout flowers”; the question is if from diamonds sprout capital gains or at least expectation of returns. From my personal point of view of a cold and rational economist, diamond trading operations carried out through financial intermediaries represent an opportunity and a risk, like for any expense devoted to an investment opportunity. Forgive me, but the approach drives my contributions to this magazine! As a husband, within my financial possibilities, I executed my job exactly for the ears, wrist (one) and fingers (2) of my wife and not as an investment along 25 years.
Changing the point of observation, let’s examine another approach to the matter. Diamonds are a commodity around which exists an important market that involves dealers and brokers of any kind. I will dedicate my attention only to the most serious, suggesting a close evaluation, both if you buy them like a jewel or as an investment. In the first field, the market is illiquid and not transparent. In second, it must be studied with the support of expert advisors. Spreads between purchases and resales are high and not controlled by any authority or registered independent appraisers. Many of these are dealers or clearly connected to them. De Beers searches, processes from the rough stone and sell. Oppenheimer abandoned the market in 2012, selling to Anglo American (a searcher). Rapaport Group is an international network of companies providing added-value services that support the development of ethical, transparent, competitive, and efficient diamond and jewellery markets. Neither a dealer neither a broker, but an independent advisor.
The diamond market has an official headquarters in Antwerp in Belgium, where most of the sale of diamonds for all the jewellers in the world takes place. There passes 75% of rough diamonds and 60% of those processed. The major diamond traders are Orthodox Jews, Jain Indians, Fleming Protestants and Russian Orthodox and when a deal goes through a handshake is worth more than a signature on a piece of paper, indeed the handshake alone counts as a closed contract. The word given in this closed and oligarchic world, unique in its kind, is very important. After the handshake, they wish “mazal” (good luck) also to close negotiations of hundreds of thousands of euros. Here a bad payer can be denied access to the market and a sign is placed on a common blackboard informing others of the non-payment. The supply chain in the Belgian city is enormous. In Antwerp, there are four diamond bags; in the city, there are 2,500 registered dealers, plus professional gemologists and cutters, those who work in security services and shipping. However, this is a wholesale market, completely different from retail markets, where written rules, contracts and formalities are compulsory.
Some years ago, several Italian commercial banks offered to their customers the opportunity to buy diamonds as an asset class, involving categories of clients not fit to the needed amount, to the volatility of their prices and without monitoring the price of the sales and the commissions requested for the transactions. Consequently, now we need to solve many litigations, even if in some cases, banks decided to reimburse unsatisfied customers. A serious problem in terms of reputation, also because we realized a huge problem of inadequate experience of the sellers, managed by a merchant of diamonds that played with a dominant position. Nonetheless, banks raised high revenues that alerted Authorities. Indeed, the Bank of Italy received reports from consumer associations and single customers on diamond buying and selling transactions carried out through bank branches. Given that the Consolidated Banking Act (TUB) transparency protections provided for customers do not apply to the marketing of diamonds through the banking channel because they are not financial instruments, an in-depth study on the subject has been launched with CONSOB and the Italian Competition Authority (AGCM).
CONSOB, in drawing the attention of the public and intermediaries to the potential risks of buying and selling precious stones, even in cases where these are carried out through bank branches, has clarified that these operations are not subject even to the discipline of the Consolidated Law on Finance (TUF), except in special cases. By virtue of the specific competencies that are attributed to it by the law, the Italian Competition Authority has imposed sanctions for unfair commercial practices against some companies specialized in the sale of diamonds and certain banks. Although it does not constitute a banking or financial activity, the marketing of diamonds can still generate operational and reputational risks for banks that they must oversee. Based on the reports, the Bank of Italy asked the banks for detailed information on selling the diamonds. It turned out that most of the intermediaries have, in the meantime, suspended or stopped this activity.
In any case, the Bank of Italy has sent a communication to the banks to remind them that they, even when they intend to provide services that are not of a banking and financial nature, must pay the utmost attention to the cognitive needs of customers. In the case of the marketing of diamonds, banks, in addition to considering the financial characteristics of the customers to whom the purchase proposal is addressed, must ensure adequate checks on the adequacy of prices and prepare procedures aimed at ensuring maximum transparency on the characteristics of the reported transactions, such as the commissions applied, the actual commercial value and the possibilities of resale of precious stones. The Bank of Italy, therefore, underlined that it is important that potential customers receive from the banks that propose the sale of diamonds the information necessary to carry out the operations in an informed way and that the banks are responsible for putting in place all the necessary controls to ensure that this activity is carried out in full compliance with the rules. A bad experience that influenced the whole market with debates still active. When you buy diamonds as an investment, you cannot touch them, they are closed in a box to maintain the soundness of the original certification.
It would be better, as a paradox, in this case, to buy a digital diamond like a Not Fungible Token (NFT) when and if those transactions are managed with the requested awareness. Manage them with care, please! Beautifulness, together with financial performance, often are not friends for girls and for anyone else.
Edit by Giuseppe G. Santorsola
Full Professor Chair in Asset Management,
Corporate Finance and Corporate & Investment Banking.
Parthenope University of Naples