Diamonds and Gold – A Common Past, Present and Future – by By Paul Stothart

Paul Stothart is vice-president, economic affairs of the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues. www.mining.ca

With due respect to cobalt and coal, it is fair to state that diamonds and gold are the world’s two most prestigious minerals.  They are the minerals that hold the deepest emotional meaning among consumers, with traditional and cultural ties to commitment, union, luck, love and marriage.  They are also the minerals that are most indicative of personal wealth, affluence, sophistication and social status.  These two minerals and the corresponding industries have long shared a number of similarities in terms of the surrounding market-drivers, price mark-ups and social pressures.     

For example, the fundamental driver of the global market in both gold and diamonds is jewelry.  According to the World Gold Council, fully 68% of the world’s demand for gold over the past five years was for use in jewelry.  While the delineation is less exact in diamonds, it is estimated that gem-quality diamonds used in jewelry account for over 80% of the value of the world diamond market. 

A second point, and the converse from the above, is to note that the industrial application market for diamonds and gold is relatively modest in size.  Only 14% of world gold demand stems from industrial uses (while the remaining 18% is for investment purposes).  While there are important industrial uses in dental, electronics, medical and environmental fields, and growing potential in nanotechnology, these industrial uses for gold face the challenge of being commercially feasible at raw material price points that are currently well north of $1000 per ounce. 

Of mined diamonds, less than 20% of production value is destined to industrial markets – principally for uses such as cutting, grinding and drilling that utilize the extreme hardness characteristic of diamonds.  Synthetic diamonds, since their invention in the 1950s, have found broad industrial application and serve to reduce demand and prices for mined industrial diamonds.  In industrial uses, synthetic diamonds are around six-times more prevalent than mined diamonds. 

A third shared characteristic, and again flowing from the dominant jewelry end-use, speaks to the importance of psychology, emotion and image to the end-value.  Driven by these non-quantifiable variables, the value of carefully managed marketing can be seen in the estimate from Rio Tinto that the diamonds produced and released to the world market in a recent year were valued at $9 billion as rough diamonds, $14 billion after being cut and polished, $28 billion in wholesale diamond jewelry, and $57 billion in retail jewelry sales.  Parallel statistics for gold are difficult to find, although a similar six-fold mark-up from mine to earring may not be out of line. 

A fourth reality shared between gold and diamonds is that each has faced significant social and environmental challenges in the past and responded, as industries, with serious undertakings.  Diamonds have faced the “blood diamonds” threat, where rebel movements in some countries used diamond revenues to finance wars against legitimate governments.  The global diamonds community responded with the Kimberly Process – an initiative to develop a government-based certification standard and hence stem the flow of such revenues.

Gold has faced broad NGO opposition, including the “no dirty gold” campaign.  Leading companies responded with a cyanide management code, while the jewelry industry in consultation with the gold mining sector developed a business practices certification standard under the Responsible Jewelry Council.  As well, in developing countries, gold and diamond mining companies have broad social responsibility programs that include direct contribution to building schools, roads, electrical grids, hospitals, clinics, community halls, and child health and nutrition programs.  

Finally, it is interesting to note that important connections can be drawn between Canada and China in both gold and diamonds.  Canada is a world-scale supplier of both – third ranked in diamonds and eighth in gold and with the potential to remain a strong player as developments in Quebec, BC and the northern territories move toward completion.  In the global marketplace, the emergence of a large middle class in China and India will add significantly to the world demand for gold and diamonds.  The middle class population of China is presently estimated at 250 million people, with a projection that 600 million could achieve this status by 2015.  McKinsey Consulting estimates that the middle class population in India will increase 12-fold by 2025 – from around 50 million people at present to over 580 million.  These countries will be the world’s two largest drivers of demand growth for gold and diamonds over the coming decades. 

For all of the similarities, there remains an interesting marketing difference between gold and diamonds.  Gold is bought and sold openly on the world’s trading markets and real-time prices and transactions can be easily and efficiently concluded.  Conversely, because each stone has different characteristics and value, there is no public market for diamonds and sales transactions are therefore less transparent. 

With the success of new discoveries and marketing strategies in Canada, Australia and Russia, the distribution and marketing of diamonds is now largely controlled by a handful of companies.  The dominance of DeBeers has declined from around 85% of the world market in past decades to an estimated 45% at present.  However, its famous 1948 catchphrase “a diamond is forever” remains as relevant as ever – research shows that women overwhelmingly drive market demand, either buying jewelry for themselves or as the recipient of gifts from men.  Readers take note.

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