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Part of becoming a successful diamond investor is to understand how diamonds are priced, especially when it comes to markups.
Watch as diamond investing expert Jacques Vorhees explains how diamonds are priced and how investors can sidestep hefty price markups in the diamond market.
Hi, my name is Jacques Vorhees, and I’m the CEO of Icecap.Diamonds, the company that offers diamonds to investors via non-fungible token technology, or NFTs. Today, I want to talk about the markup structure in the diamond industry and how a diamond investor can sidestep all of it. But first, I want to thank Jerry Robinson for having me on the program. It’s an honor to be able to discuss these issues with hard asset investors.
The markup structure in the diamond industry and how a diamond investor can sidestep all of it.
Ok, so one of the most common questions I’m asked is, “Why does a diamond lose so much value after it’s purchased?”
The quick answer is that you’re buying at a retail price and selling it at a below wholesale price. Now, marketing diamond jewelry is expensive in retail stores, even e-tailers have to factor in their cost as part of their margin. Every business does this. This means even a relatively low-cost online diamond retailer is marking up their diamonds, on average, at least 20%. So if you sell your diamond back to a retailer, you’d expect to lose 20% of the value, right?
No, it’s worse than that.
Most retailers obtain their diamonds from wholesalers on what’s called memo, meaning the wholesaler loans them the diamond until it sells. Only then does a retailer have to pay for it. So if you’re asking a retailer to buy the diamond from you, the consumer, you’re asking them to put out cash upfront for something they normally could obtain from a wholesaler at no cost until they actually sold it. Retailers don’t have that much cash.
The retailer will have to send the stone back to a wholesaler in some Diamond Center like New York. That wholesaler isn’t willing to make a firm bid on the diamond until he sees it. So the retailer doesn’t honestly know how much he can get from the wholesaler. If you’re asking the retailer for cash right now, out of the retailer’s own pocket, you’re asking him to guesstimate what he could sell the stone for to a wholesaler in New York. Remember, the retailer has to make a profit from this or it’s not worth his time.
Ok, so let’s do the arithmetic. Stay with me here, it’s a little complicated.
- We’ll start with a diamond that the wholesaler obtains, let’s say for $2000.
- He sells it to a retailer for $2200 (+10%). The retailer adds at least 20%.
- You, the consumer, bought that diamond then for $2640 (+20%).
- Now you need to sell it. You go to another retail store.
The retailer can buy that diamond from the wholesaler for $2200 and not have to pay for it until he found a customer. So he has to guesstimate what he could sell it for upstream to a New York wholesaler. He guesses the wholesaler would normally pay $2000, but that’s when the wholesaler needs that exact stone. The wholesaler probably doesn’t need that exact stone right now, because if he did, he’d already have bought one. So the wholesaler won’t offer more than perhaps $1600.
And he won’t offer anything without seeing the stone first. The wholesaler knows there is far more to diamond value than just the 4Cs on the certificate. So if the wholesaler might, at best, pay the retailer $1600, the retailer has to assume it could be even lower if there are issues with the stone itself, and most stones have issues. We talked about that earlier in my prior video.
So now the retailer’s thinking, hmm, maybe $1500 is what the wholesaler will offer. And remember, the retailer has to make something out of this transaction himself, or he won’t do it. So if conservatively, the wholesaler will pay the retailer for $1500, the retailer is not going to pay you more than maybe $1300.
But hold on a second.
You paid $2640 for this diamond, originally. You thought it was worth that. A diamond is forever, right? But now you can’t get more than $1300 for it? The diamond seems to have lost half its value. You’re outraged, right? Someone ripped you off.
The truth is, they didn’t.
The diamond hasn’t changed. You just bought at retail, and you’re having to sell back, not at wholesale but actually below wholesale. And, by the way, this exact scenario plays out many times a day in the diamond market. The consumer, let’s say, needs to sell back a diamond and they’re outraged to learn the diamond has lost half its value. Typically, the consumer is furious, even if he doesn’t know who to be furious at, exactly. This is frustrating for consumers.
But for diamond investors, it’s not just frustrating, it’s unacceptable! Investors can’t buy something for investment if they’re going to incur a 50% loss right out of the gate.
So how does Icecap solve this problem? It’s pretty simple, we replace that entire industry structure with one that works for the investor.
Here’s how that same scenario unfolds under the Icecap model.
- We’ve reduced the markup from 20% to 10%. First, we don’t mark up the diamond, 20%, we mark it up 10%.
- We don’t deal with diamonds that have “issues”. Second, we don’t allow any diamonds into our program that, as we say, have issues. If they have issues, we reject them. That makes it much easier to ensure liquidity in the future.
- Diamond stays in a vault, a digital token is what’s traded. Third, the diamond goes in a vault, and it’s the NFT representing its ownership that’s what’s traded. That removes all the friction of a diamond having to be sent out to a jewelry store, having to incur the high sales costs, and then on the return trip, having to be sent back to a wholesaler who will bid less than wholesale. Since the diamond went into a vault, under our model, all the costs and inefficiencies of moving the diamond around disappear.
- Investors sell their diamonds not to wholesalers, but to investors. Fourth, when the investor is ready to liquidate, we help them sell that diamond back, not to a wholesaler, but to another investor. That means investors are buying and selling the diamond at the same price level.
We do charge a 5% sales commission. So there is a 5% load on the transaction. But today, think about it: There’s a 50% or more load on the transaction as we’ve just seen. Icecap simply provides a very different structure, one that meets the needs of the hard asset investor.
The diamond doesn’t have to stay in the vault.
Finally, remember that the diamond doesn’t have to stay in the vault. At any time, the owner of the token can redeem it and receive the diamond itself. We ship it to you. For a small fee, it can then be later retokenized in the future for purposes of selling. It’s kind of the best of both worlds. For more information on Icecap and how it offers the diamond investor a more suitable structure, I hope you’ll contact our sales representative, Tom Cloud at (912) 771-9353, or visit Icecap.diamonds. And thanks very much for listening.
If you’d like to know more about Icecap and buying diamonds for investment, please call our sales representative Tom Cloud at 912-771-9353. And Jerry, thanks again for having us on the program.
Interested in adding investment-grade diamonds to your hard asset portfolio?
Contact Tom Cloud at 912-771-9353 or by email at firstname.lastname@example.org
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