Carat tops bullion as next big thing for investors: BMO

Diamond prices are poised to rise for the next four years, outpacing gold, as increased spending on luxury goods in China, India and the Middle East outpaces supplies of the precious stone, analysts said. Average prices for rough, or uncut, diamonds will probably climb 9 percent to $145 a carat next year, 1.4 percent in 2013 and 4.8 percent in 2014, according to Edward Sterck, an analyst at BMO Capital Markets. They may gain 2.6 percent in 2015 and 3.2 percent in 2016, he said. Gold will drop for three years starting 2013, following a 19 percent gain in 2012, according to the median of seven analyst estimates compiled by Bloomberg. Demand for diamonds may grow at double the pace of supply through 2020 because of an expanding middle class in China and India, Bain & Co. said this month in a report that didn't give price forecasts. The two countries, and the Middle East, will account for 40 percent of global diamond consumption by 2015, up from about 8 percent in 2005, according to Anglo American Plc (AAL), which controls De Beers, the world's largest diamond miner. “We expect emerging nations, first and foremost India and China, to drive demand for diamonds in the upcoming years, while consumption among developed nations is likely to moderate,” said Vladimir Sergievskiy, an analyst at Moscow-based Finam Investment. “On the supply side, the commissioning of new mines should be largely offset by depletion of mature ones.” Supply Shortage Global demand for diamonds will probably outstrip supply by 7 million carats in 2016, compared with a shortage of 1 million carats this year, Sergievskiy said. Prices may climb 9.7 percent next year, 2.7 percent in 2013, 3.3 percent in 2014, 3.2 percent in 2015 and 3.1 percent in 2016, he said. Rough diamonds have advanced 24 percent this year, according to an index compiled by PolishedPrices.com, helping OAO Alrosa, the largest diamond miner by output, and Anglo American post profit gains. The price of rough diamonds may fall an average 5.1 percent in 2012 and remain little changed in 2013, said Richard Platt, managing director of U.K.-based WWW Diamond Forecasts Ltd., which provides independent valuations. The gem should gain 2.9 percent in 2014 and 2.2 percent in 2015, he said. Polished diamonds will perform better, reflecting growing Asian demand for diamond jewelry and “flattish supply,” said Platt, who expects prices to increase 4.7 percent in 2012, 9.3 percent in 2013, 6.6 percent in 2014 and 4.4 percent in 2015. Gold Prices On the gold market, spot prices have gained 12 percent this year as investors seek a haven from financial-market turmoil stemming from Europe's debt crisis. Prices fell 0.2 percent to $1,586.93 an ounce by 12:49 p.m. in London today, while February futures declined for a fifth session, losing 0.5 percent to $1,587.70 on the Comex in New York. That streak, the longest for a most-active contract since the five days through Oct. 28, 2009, compares with an 11th year of gains for spot prices. “The current gold price doesn't reflect the underlying supply and demand fundamentals,” Rob Henderson, chief economist at National Australia Bank Ltd., said by phone from Sydney. “It much more reflects an artificial demand for gold as a hedge and as a store of value against inflation. That means the market is prone to a pretty substantial correction sometime in the future.” Spending Power That contrasts with the diamond industry, where prices “have not been inflated by artificial demand to the same degree,” Henderson said. “As countries like China and India keep growing and the size of the middle-class population rises, more people will be able to afford diamonds.” Global demand for the gems is estimated to grow an average 6.4 percent a year to almost 247 million carats by 2020, while output is likely to rise an annual 2.8 percent to 175 million carats, the Bain report said. Output reached 133 million carats last year. Demand for diamond jewelry will climb to more than $100 billion by 2015 from $73.6 billion in 2010, Platt said. While consumption of polished diamonds is expected to grow in the “low single digits” in the U.S. for the next decade, it may increase by as much as 15 percent in China and India, said Laxmi Deepak, an analyst at Mape Securities Pvt. in Mumbai. China overtook Japan to become the biggest buyer behind the U.S., where demand rose 7 percent last year, compared with 25 percent in the communist nation, according to De Beers. ‘Buoyant' Demand “You can see in the Asian market, just walking around Hong Kong, demand for luxury goods is clearly very buoyant,” Rob Edwards, chief metals analyst at Renaissance Capital Ltd., said in an interview in Hong Kong. Prices of top-quality diamonds climbed 23 percent this year, the biggest advance since at least 2006, according to the Rapaport Diamond Trade Index. The index calculates the average price for the top 25 best-quality 1-carat diamonds. It rose 14 percent last year and fell 0.5 percent in 2009. The industry's positive outlook may attract buyers to BHP Billiton Ltd. (BHP)'s Ekati mine in Canada, which the world's largest mining company said may be offered for sale. The Melbourne-based company agreed to sell its 51 percent ownership in the Chidliak diamond project in Nunavut, Canada, to Peregrine Diamonds Ltd. (PGD), the companies said Dec. 20. “There are lots of companies that would love to have BHP's diamond assets,” RenCap's Edwards said. “Some mid-cap, junior would probably pick that up.” --Bloomberg News--