Do diamonds have a place in the average punter’s investment portfolio? It is important to divorce emotion from this investment decision.
Diamonds are beautiful, desirable and rich in history. But they don’t pay annual dividends, like shares, and can’t be rented out, like real estate. So you’re looking only at an increase in the capital value of the gems.
You must ask yourself for how long you want to hold this investment, and if the value will increase to the desired level in this time period. Look at the trajectory of supply and demand, remembering that the phenomenal prices paid at auction for large, rare diamonds are no indicator for the average investor in smaller diamonds.
Diamonds have a lot going for them as investments. They are portable and easy to store safely. They cannot deteriorate with age, require no maintenance and are very hard to damage. Unlike an art investment, they are not subject to a potential buyer’s likes or dislikes.
Today’s diamond market is unregulated in terms of supply. In the past, one big player, De Beers, dominated the market and controlled supply to maintain the price level. There have been fluctuations, with a drop in 2005, a high in 2007, drops in 2008 and 2009, and a high again in 2011. But any investment sees fluctuations.
Both Morgan Stanley and Bank of America Merrill Lynch expect polished diamond value to expand at a compound annual growth rate of 4 per cent between 2016 and 2022.
Factors which influence returns on investment in diamonds include pressure from anti-mining activists with environmental concerns; political changes in individual markets such as the anticorruption campaign in China; consumer taste in jewellery; and financial crises. The list goes on.
If you are taking the plunge into the diamond market, be aware that you are not dealing with a single defined item. Within the world of diamonds, there are many variations – some of which are more desirable than others at any given time.
When making your investment you should be guided through these intricacies by experts and must have the certification to substantiate your choice. You should know about the famous 4Cs – carat, colour, clarity and cut – so you are able to communicate with the experts and ask the right questions.
Carat is the measurement of weight and as a general principle you should buy the highest carat you can afford, knowing that diamond prices take an upward surge at the full and the half carat. The higher the carat, then the rarer the gem, with an exponential price increase. It means that a one-carat diamond is worth much more than two half-carat diamonds.
A colourless diamond is the most valuable. The colours of diamonds are graded on an alphabetical scale, from D, as absolutely colourless, right up to anything between K to Z, which you shouldn’t even bother with.
The clarity scale runs from flawless and internally flawless, through VVS1 and VVS2 (very, very slightly included), SI1 and SI2 (slightly included) to others that investors need not consider.
The best cut gives the maximum sparkle.The shape of the finished diamond is an issue for investors, with round brilliants representing around 75 per cent of demand, mainly because of their popularity for engagement rings. The round diamond reflects light very well.
You should buy the best you can afford by using a reputable dealer and also acquiring certification, preferably from the Gemological Institute of America or American Gem Society.
When looking at how much you should pay, there is plenty of information available. In fact, diamonds are much more thoroughly covered, in language and content accessible to the layperson, than many other forms of investment. There are a number of diamond price indices online, but most professionals use the Rapaport Diamond Trade Index. This means you can track the value of your diamonds as time passes.
Until recently, trading in physical diamonds was the only way to go; there was no derivatives market for diamonds because there was no single benchmark. Singapore has its Diamond Investment Exchange (SDiX), the world’s first commodity exchange in physically settled diamonds, which accommodates accredited investors. SDiX says: “By bringing commodity exchange technology to the diamond market, SDiX is creating a true price discovery mechanism with increased liquidity, allowing diamonds to be traded as a commodity.”
Then last month saw the creation of the Indian Commodity Exchange, trading in one-carat contracts. India is the world’s biggest diamond cutter, importing more than 150 million carats of rough diamonds annually.