This Market Was Rigged For Decades

We’re all wrong from time to time...

But the idea I am about to pass on to you surprised me so much, that I had to go to the freezing wastelands of northwestern Canada to see it for myself last month.

It’s a story about diamonds. We all know Canada is rich in natural resources... but did you know Canada is about to become the world’s most important producer of diamonds?

It turns out the big diamond explorers – including DeBeers – have switched their attention away from places like Botswana and Angola and are pouring money into Canada. To put it into perspective, the Canadian government estimates that half of all money invested in worldwide diamond prospecting in 2004 went into Canada.

I was amazed when Steve Sjuggerud told me that.  Up until then, I had thought Africa was the only place that mattered to world diamond production. I wasn’t even that interested anyway, because I thought the whole diamond market was rigged by the gigantic African mining monopoly DeBeers and its legendary stockpile of diamonds.

It is true that DeBeers used to have a huge supply of diamonds... far more than the market could ever support. To prevent diamond prices from collapsing, DeBeers bought up all the competing mines in Southern Africa and hoarded their diamonds in huge vaults. DeBeers would then release its diamonds onto the market – a little here, a little there – in such a way that prices could never fall.

According to Steve, this has all changed. DeBeers' huge stockpile has run out, he told me, and interest in diamonds is about to really heat up...

Especially when people figure out that diamond prices haven’t moved in twenty years!

This is why Steve sent me to Canada... to verify the details.

I flew to Saskatoon and met a gray-haired geologist from South Africa called Peter. Peter had spent his whole career working for DeBeers, but was now consulting for a Canadian diamond company. He met me in Saskatoon and drove me out to his mine.

It took us three hours to get to the mine and three hours to come back. It’s a very remote part of Canada, so the roads aren’t paved. We spent most of the journey skidding our way down ice-packed tracks.

As we talked in the car, Peter confirmed everything Steve had told me. DeBeers' stockpile has dwindled to almost nothing, he said, and their African deposits are drying up. Now they’re looking to Canada – home to some of the largest clusters of kimberlite ever found - for their next big score.

“They’re desperate,” he said. “They’ve spent so long telling people to buy diamonds. Now demand is here, but they don’t have any diamonds.”

And when I asked him about the quality of Canadian diamonds...

“Canadian diamonds are the best quality diamonds in the world... even better than African diamonds.”

Peter was referring to the physical characteristics of the diamond. But he also mentioned that buyers prefer Canadian diamonds for another reason: they don’t want to support civil war in Africa and will pay a premium for a clear conscience.

There you have it – Canadian diamond deposits are the best in the world. Supplies are short, demand is growing, and prices have been suppressed for twenty years.

Sounds like the recipe for a bull market to me...

Good investing

Tom