Colored diamonds are one the most rare types of diamonds available. They originate just like colorless diamonds, from a mine. However, they are often worth much more than colorless diamonds. Colored diamonds are mainly sold at well-publicized auctions. Sometimes the diamonds are cut and polished prior to auction, while other times the diamonds may be sold in their rough form as they were found in the nine. In this piece we will discuss the process of a diamond traveling from its discovery in a mine to the auction block, as well as how colored diamond auctions work.
Let’s take a look at mining company BHP Billiton, a multinational mining, metals, and petroleum company. This company offers 3 different auction systems: a Spot Market, a Term Market, and a “Specials” auction that’s held for items larger diamonds.
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. What this means is that the highest bidder is distributed his goods according to his bid and continues down the list. Although it seems very complex, BHP has been using this method to help find true market prices of their items. Even today, up to 45% of product from the Ekati mine is sold this way. To put it in example, Idex Magazine provides this example. “For example, if four bidders were bidding for three parcels, the final price would be the price offered by the fourth bidder who does not win but has the pleasure of setting the price for the winners. This is known as the Clearing Price.”
In contrast, Team Market auctions are where bidders bid for long-term supply contracts. Typically, these contracts are 15 cycles (18 months) with the option to leave every 6 months. A monthly Spot Marketing Clearing Price determines the starting prices in these goods, and prices increase until the demand matches the supply.
Finally, the specials auction is an auction held in an ascending-clock format, which is the most recognizable form of auction. In this type of auction, the bidder only knows their own private value. As the price gradually increases, bidders are able to drop out at any time. In a specials auction, stones are auctioned individually or grouped together with similar stones. Specials auction begin with the rarity and value of the stone, since the diamonds worth increases with every bid.
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 only 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.
For more reading on colored diamond auctions, see the links below: