Diamonds as an Investment

Diamonds Index

Diamonds in Their Natural State

• General
  Some people believe that diamonds are a good investment. In our experience, this is because jewellery salesmen have repeatedly said so, usually when they are trying to close a sale. This type of opinion should be treated with caution.
• Inflation
  Most commodities and consumer goods increase in price roughly in line with inflation, and diamonds are no exception to this.
• Homogeneity
  Most commodities need a degree of homogeneity for an efficient market to operate. Diamonds are almost infinitely variable, by weight, colour, clarity, shape, proportion, and a few other factors. Because they are not homogeneous, diamonds are unlikely to ever become an effective investment commodity.
• Terminal Market
  Most commodities have terminal markets, and some form of broker exchange, clearing house, and central storage facilities. This does not exist for diamonds, and is unlikely to in the future.
• Efficient Market
  By "efficient market", we mean that the items can be bought and sold at low buy-sell spreads in almost any quantity. This does not apply to diamonds.
• Sales Tax
  For efficient investment, the goods must not be subject to sales taxes such as Value Added Tax (VAT). Diamonds are subject to VAT in the UK, EU, and sales tax in most developed countries, therefore reducing their effectiveness as an investment medium.
• Commodity
  We have mentioned "commodity" several times. One definition of commodity is: "An article of trade or commerce, especially an agricultural or mining product that can be processed and resold." Although diamonds qualify as a commodity under this definition, their lack of homogenousness detracts from their inclusion as an investment commodity.
• High Markups
  Most diamonds are sold through retail shops at very high profit margins. This is partly because retail competition currently favours prime site operators paying high rents. Another reason for high markups is the slow stockturn of jewellery, and the high interest cost, and security costs, of carrying large stocks.
• Individuals Demand Individual Jewellery
  Consumers paying high prices for jewellery expect a degree of exclusivity or differentness when buying jewellery. This militates against real discount jewellery operators.
• De Beers Official Policy Discourages Investment
  A phoney investment company calling itself De Beers Diamond Investments, Ltd was set up in 1977, selling investment diamonds by telephone. This company had no connection with the real De Beers. It was followed by about 200 more diamond investment sales companies. De Beers itself experimented with a foray into the market in 1978, but soon changed its mind, and later actively discouraged diamond investment parcels.
• Certificates
  Diamond grading laboratories issuing certificates for diamonds go some way to making diamonds into a tradeable commodity, but it still fails to obviate the infinite variety factor. Buying certified diamonds via the internet is probably of more benefit to canny consumers.
• Fashion
  Fashion influences demand, so can cause temporary price increases, which create investment opportunities.
• Top Quality
  There will always be more upside potential for top quality in any markets, but this can also add to the downside risk too.
• Possible Investment
  There will always be some investment potential for diamonds, but any diamond investor would need to bear the low liquidity of diamonds in mind. In fact, low liquidity could provide patient investors with opportunities. For example, if jewellers are offered large, high quality, high value, diamonds. they may be delighted to find an investor to offload to. It may then be mutually advantageous for the jeweller to try to market the stone for the investor.

Diamond Jewellery and Investment Portfolios
Added: (Fri Sep 23 2005)

With diamond prices having increased 30% over the last five years, and predicted to increase an additional 10-20% by the end of 2005, investment consultants are at last taking notice of diamonds as a lucrative and safe investment, with a better guaranteed return than gold. Another big increase, diamond dealers say, could come now that China has revalued its currency. Since diamonds are priced in dollars around the world, a stronger yuan will make the jewels more affordable for Chinese consumers and more attractive as an investment. Heightened demand in China could push up global diamond prices further, with some industry analysts predicting another 100% increase over the next 5 years.

Leading jewellery designers such as Michael B, David Morris, Daniel K and Carl Blackburn have capitalized on the desire for large investment quality diamonds by featuring what has been called the "Halo-Effect" in their ring designs. This large center diamond look is punctuated by a center stone of greater than 1 carat, surrounded by streams of micro-pavé diamonds.

Carl Blackburn has seen a huge increase in ring mounting sales this year, especially in the mountings for stones 3 carats and up, where the customer is looking for a ring that represents the best quality that money can buy. The Beverly Hills designer, who has production studios in Thailand, describes these new diamond investors this way:

"Consider a Limited Edition Platinum Patek Philippe watch, which a gentleman might buy and put in his safe to keep as a long-term investment, but also will want to take it out from time to time to wear on his wrist for very special occasions or social functions. In the same way, a woman is now buying or receiving a very expensive diamond as an investment gift to keep in her safe, but instead of just keeping this large diamond in her safe deposit box, never to be seen by anyone, she also wants to have it mounted in a very fine platinum ring, so she can take it out and wear it for special occasions and society events."

Of course, buying diamonds as an investment flies in the face of traditional wisdom, which always warned about ever buying diamond jewellery as an investment due to the many incremental markups that occur in a diamond's journey from mine to retailer. But that was before the internet leveled the playing-field dramatically, with online companies like Diamonds-USA now offering certified large carat diamonds to enhance personal investment portfolios.

The potential for gains has become so strong that Tongjai Thanachanan-Marion of Thailand's Ayudhya JF Asset Management now recommends that her affluent investors dedicate up to 20% of their portfolios in luxury goods such as gold, diamonds and the like, stating: This asset class can be a smart choice for long-term investment.

• Research
  Be prepared to research the market, so that you at least will know what you are being sold.
• Risk
  Be aware that any investment involves some degree of risk.
• Liquidity
  Avoid short term investment in diamonds. As mentioned above, a clever investor may find that he can turn illiquidity to his advantage, but this will also require patience.
• Patience
  We advise patience to wait until the right investment opportunity arises, and it will also require patience to wait until the investment can be resold and liquidated profitably.
• Fashion
  A smart investor would buy things which were out of fashion, and sell them when they are in fashion and demand is strong. Most people do this the wrong way round.
• Establish Contacts
  An investor wishing to offtake jewellers surplus stocks would be well advised to build a select network of jewellery contacts.
• Ready Money
  to take advantage of surplus stocks, an investor would need to have rapid access to his capital.
• Decisions, Decisions
  If an investor wished to work co-operatively with a jeweller, he should be prepared to make rapid decisions, as buying opportunities may be transient.

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