Why diamonds are for the long-term

You won't have to wait forever to profit from diamonds, but expect slow and steady gains rather than a quick buck. Garry White reveals the best ways to gain exposure to the rising diamond price.

I am bullish on the diamond price and I urge you to get exposure to the sector. However, you must remember that gains will be slow and steady; do not expect to see massive spikes.

The latest data issued from the International Diamond Exchange (IDEX) show that prices edged higher in June. There was some unusual short-term weakness in diamond prices in May, but diamond prices are once again on an upward track.

There was some softness in the US during the month, but this was counteracted by strength in the rest of the world. I expect this trend to continue. In the US, diamond sales are closely linked to the health of the economy. With all these concerns about subprime lending and its effect on the economy, this is to be expected. IDEX forecasts US sales growth of 3%-4% this year.

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June 2007 average global polished prices rose by 0.4% month-on-month, implying a full-year growth of 4%-5%. The year on year change June-June was 1.4%.

The IDEX Polished Diamond Price Index, calculated on the average of daily prices during the month of June, 2007, stood at 112.40, compared with 111.95 in May. The IDEX Online Polished Diamond Price Index closed at 112.63 on the final day of June, the highest level during the month.

Note that the IDEX Online Polished Diamond Price Index stood at 100 in July 2004, so polished diamond prices have risen 12% over the last three years, which is equivalent to 4% per annum.

Higher polished diamond prices reflect increased rough prices. DeBeers diamond Trading Company has implemented two price increases for rough diamonds, which IDEX believes has risen 5%.

The major cloud is obviously the US. Should economic conditions continue to deteriorate then the slow but steady uptrend in the diamond price may be broken. However, I believe this will be only temporary, as Asian demand takes up the slack.

Anyone that has ever taken a look at the luxury goods industry will understand the importance of Asia in this market. Burberry, Louis Vuitton, Gucci All these companies have a major Asian focus. Indeed, the new Asian wealthy classes appear to be even more label and fashion conscious than the Italians, if you can believe that.

Luxury goods companies are positively drooling at the blossoming Chinese market, when the middle classes are expected to number a staggering 250m by 2010. That's more than four times the current population of the UK.

In 2006, China even overtook Japan as the largest Asian market for Rolls-Royce cars. Diamonds are the utmost in luxury and I expect demand from the fledgling economies will accelerate far faster than the increase in supply in the coming years.

With supply looking likely to remain flat and the fact it takes years to develop a diamond mine, the outlook for diamond pricing is positive.

Total wealth of the rich and mass affluent in 12 Asian countries should hit $610bn by 2015 from $301.2bn at the end of 2005, according to a report by MasterCard International. Indeed, Asian consumers now account for as much as half of the global luxury industry. That's some spending power.

Diamonds are not included in this estimate but they should be. The same trends seen in other luxury goods will be repeated in diamonds Diamonds, after all, are one of the most luxurious goods of them all.

You should play the diamond price gains in a similar way to how I believe you should be playing the uranium sector. You should only ever consider putting your money into a company that is producing as well as exploring. Searching for diamonds can eat up cash very quickly and highly dilutive fundraisings are a real risk for the juniors.

Look carefully at the company and its revenues. Make sure you are happy with them before you invest. Cash is always king and producers generate cash.

By Garry White for his Garry Writes' newsletter. To find out more about his monthly newsletter, Outstanding Investments, which expands on his views and makes specific recommendations in the resource, infrastructure and biotech sectors, click here: Outstanding Investments

Investing in shares can lose you some or all of your investment. Never risk more than you can afford to lose. Small company shares can be illiquid and carry higher risk than other shares. Past performance is no guide to the future. Consult a financial advisor if unsure. Fleet Street Publications Ltd. 020 7633 3600