June/July 2010

MAC Economic Commentary

Diamonds and gold: a common past, present and future

By P. Stothart

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 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 their corresponding industries have long shared a number of similarities in terms of the surrounding market drivers, price markups and social pressures. For example, the fundamental driver of the global market in both gold and diamonds is jewellery. According to the World Gold Council, fully 68 per cent of the world’s demand for gold over the past five years was for use in jewellery. While the delineation is less exact in diamonds, it is estimated that gem-quality diamonds used in jewellery account for over 80 per cent 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 per cent of world gold demand stems from industrial uses (the remaining 18 per cent is for investment purposes). While important in the dental, electronics, medical and environmental fields (with a 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 $1,000 per ounce.

Of mined diamonds, less than 20 per cent of production value is destined for industrial markets — principally for uses such as cutting, grinding and drilling. 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, again flowing from the dominant jewellery 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 jewellery, and $57 billion in retail jewellery sales. Parallel statistics for gold are difficult to find, although a similar six-fold markup 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. Faced with the “blood diamonds” threat, 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. Faced with broad NGO opposition, including the “no dirty gold” campaign, leading companies responded with a cyanide management code, while the jewellery industry, in consultation with the gold mining sector, developed a business practices certification standard under the Responsible Jewellery 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 — ranked third in diamonds and eighth in gold, and with the potential to remain a strong player as developments in Quebec, British Columbia and the northern territories move towards 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. Although De Beers’ dominance of the world market has declined from around 85 per cent to an estimated 45 per cent, its famous 1948 catchphrase “a diamond is forever” remains as relevant as ever. Research shows that women overwhelmingly drive market demand, either buying jewellery for themselves or as the recipient of gifts. Readers take note.

www.mining.ca


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

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