Diamond prices surge in step with China and India

Clive Cowdery, the Resolution founder who made about US$240 million ($290 million) buying and selling insurers, is betting on diamonds after prices rose five times faster than gold this year on demand from China and India.

Cowdery, 48, is among startup investors in Diamond Capital's US$20 million fund that will manage a portfolio of the polished gems valued up to US$400,000 apiece. Rajeev Misra, UBS's securities business joint head, is also backing the London-based project, Diamond Capital said.

"I'm conscious of the need to balance my investment risk," Cowdery said. "Something as non-correlated with financial-market movements as this fund was attractive."

Diamond prices jumped 26 per cent in the first six months as rough gem production failed to match surging demand from jewellery buyers in the swelling middle classes of China and India.

That compares with 5.6 per cent for gold, which reached a record US$1577.57 an ounce in May.

Investors disappointed at bullion's performance or the 4 per cent advance in the MSCI World Index of stocks in the first half may still prove hard to sell on diamond funds.

"I'm not a great supporter of them, but I can understand why high net-worths find them quite attractive," said Des Kilalea, an analyst at RBC Capital Markets.

"You rely really keenly on the guy who is doing the buying to know what he is doing."

The new fund's diamond trading will be headed by Rishi Khandelwal, who established a gem wholesaler and retailer in Dubai in 2006. He is part of a three-member board that will meet quarterly to set strategy, said Peter Langdon, investor- relations director for the fund.

Harry Winston Diamond Corp said in May it proposes a US$250 million diamond fund for institutional investors, while Fusion Alternatives plans one backed by polished stones this year.

Supplies of rough diamonds are forecast to remain flat in the next five years and will fail to match demand driven by China and India, according to RBC.

De Beers, the world's largest producer, said June 9 demand will surpass output for at least the next five years because of a lack of new mines.

Last year polished gems advanced 17 per cent, according to data compiled by polishedprices.com, while gold gained 30 per cent.

Prices advanced 2.2 per cent in the past week to the highest since at least 2002, said polishedprices.com data.

Diamond Circle Capital, the first publicly listed fund to invest in the stones, has plunged 54 per cent since selling shares in 2008.

The fund slumped as the financial crisis reduced investor appetite for its US$1 million-plus gems.

The first diamond investment trust, set up by Thomson McKinnon Securities in the 1980s, was wound up after a decline in the market, according to press reports.

Cowdery, a former life insurance salesman, made his fortune by buying closed life insurance funds through Resolution between 2003 and 2007.

He sold the firm for £5 billion ($9.5 billion) in May 2007, before the financial crisis, to Pearl Group, which was then headed by Punch Taverns founder Hugh Osmond.

Cowdery declined to say how much he's placed with Diamond Capital, which opened for minimum investments of US$75,000 on June 13. It's targeting US$20 million and will stop accepting money on July 22, said Langdon.

Misra, 48, who joined UBS in 2009 as global head of credit at its investment bank after leaving Deutsche Bank in June 2008, has said he was considering making an investment.

"We've got some strong support from some high-profile City personalities who like the concept and back the idea," Langdon said.

"Diamond prices have been increasing. There is definitely demand there for diamonds as an investment."

The Diamond Capital fund seeks to be different from predecessors by trading the stones as well as holding them in anticipation of prices rising, Langdon said.

- Bloomberg