In order to purchase a colored diamond, a buyer most commonly goes to a well-publicized auction. Sometimes the diamonds are cut and polished prior to auction, while other times they may be sold in their rough form as they were found in the mine. So how exactly does a colored diamonds auction work?
Colored diamond auctions work the same way as any other auction; the valuable item is showcased to a group of investors and enthusiast who bid for the item. The house typically sets a minimum price for the stone, which is the lowest price the owner has agreed to sell the diamond. As buyers bid on the item, the value increases until the highest price is submitted or time runs out. From there, the auction house typically takes a cut of the final price.
Let's observe this for an example; if you’re an investor who is trying to sell your diamond, going to an auction house will help you utilize their resources. You can set a minimum price, for an example $10,000, and let the house take care of the sale. Say the diamond is sold for $17,000; you’ll end up taking home $15,300 after 10% cut for the auction house. Please note: these are hypothetical numbers.
Another key benefit of auctioning a diamond is that you’ll be able to work with a specialist in the fancy colored diamond industry. They’ll work as hard as they can to get you the best price for your diamond. At the end of the day, they make the most money from selling your stone at the highest price!
More Complex Auction Systems
Traditional auctions are the easiest systems to determine the value of a diamond. However, there are more complex systems to help determine better value. Let’s take a look at mining company BHP Billiton. This company offers 2 unique auction systems: a Spot Market and a Term Market.
In the Spot Market, BHP builds a demand curve from the amount of bids placed on a certain good. The auction starts from the highest price until it meets the supply. IDEX Magazie explains, "... the highest bidder will be allocated goods according to his bid, the next bidder will get goods according to their bid, and so on, until all the goods of a particular type have been allocated."
Although the system is complex, this method helps BHP find true market prices of their items.
Term Market auctions are another complex auction system where bidders compete for long-term supply contracts. These contracts are typically 18 months and include an option to leave every 6 months. A Spot Market Clearing Price (SMCP) determines the price of the goods that are part of the contract. Bidders then compete for the contracts, starting at bids less than the SMCP. The price then continues to increase until supply and demand match.
Disadvantages Of Colored Diamond Auctions
Selling a fancy colored diamond takes time, effort, and money. Let’s say that you found out your stone qualifies to be showcased by an auction house, you must make sure they’re reputable and are known to do great work. Be sure to explore different auction houses and clearly define:
- Payment methods
- Any fees
- Date of auction
- The reserve price they set
On top of it all, there really is no guarantee your stone will sell; and even if it does, the process might not completely go through. Take the infamous story of the Pink Star diamond that sold originally for a world record price, only to have the buyer default on his payment.
The market for colored diamond is huge and gaining access to one of these auctions isn’t as simple as walking in the front door. These colored diamond auctions are often invitation-only events, allowing large diamond companies and high-net worth investors the opportunity to take part in the bidding. With the consistent increase in value of colored diamonds throughout the last decade, it is no wonder why investors and diamond companies are snapping up colored diamonds for jaw-dropping prices.
When investing in any form of asset, investors have to be smart, logical, and confident with their decision. If you are unsure about how to position your investments in fancy colored diamonds, Arpège Diamonds stands ready to help. With over 50 years of combined industry experience, we'll help you gather the most effective information and insights so that you can make educated decisions on your fancy colored diamond investing. You can contact us at 866-821-5508 for a personalized review.
For more reading on colored diamonds, see the links below:
- Investing in Natural Pink Diamonds: What You Need to Know
- The Arpège Tribute to the Breathtaking Pink Diamonds
- Why Colored Diamonds Are The Investment You're Looking For