Investing in diamonds - hard stuff

Posted by Josh Conibear in Personal Finance on 7 March 2014 - Josh worked as a Credit Analyst at checkmyfile until 2014

Is now the right time to invest in diamonds? For many of us, this is a totally theoretical question – the mortgage and credit cards will always have a first call on our income – but it’s nice to check out the options should the Lottery come good just for once.

Even for the experts, investing in diamonds is never straightforward, as valuing diamonds is a very tricky business. Unlike other precious commodities such as gold, the sheer variety of individual pieces rules out any simple cost-by-ounce pricing mechanism. Valuation depends on the four Cs – Carat (weight), Colour, Clarity and Cut and of course some degree of subjective assessment.

Following the loss of control of the market – DeBeers once controlled 80% of all sales – and the discovery of new diamond mines over the past twenty years – which resulted in a volatility in prices not before seen, calm has largely been restored and investors are now looking again at diamonds with a more positive outlook. Certain types of the rock, such as coloured varieties, have held their value better over the past years than other equity investments.

So if you’re in the market, what do you need to look out for?

As in most things in life, size matters. Between 1990 to 2011, the value of three-carat diamonds increased by 145%, compared to a rise of 171% for five-carat diamonds according to the Rapaport Diamond Trade Index.

Colour, colourless (or “white”) diamonds are measured on a sliding colour scale in which the rankings are D (the best blue white) and E (exceptional white). Buyers tend to avoid buying any diamond that registers lower than grade H, as this is deemed too yellow and will stand out like a sore thumb when placed with diamonds of better quality.

Clarity grades range from Flawless to Imperfect, which is pretty much measurable and is easy to understand.

Cut is the most important of the four Cs because it is the skill of the cutter that gives a diamond its brilliance. The best cutters get to work on the biggest diamonds.

Clearly expert knowledge (or bought-in expertise) is an essential part of buying diamonds but the first rule of buying is very easy to grasp. This is always to avoid getting misled by jewellers’ mark-ups. If you’re curious about diamonds and want to get a feel for prices, check out Rapnet.com.

You can invest in diamonds without having to get your hands dirty by actually having to handle them. Exchange Traded Funds (ETF) -common in the gold market - are rare in gems and – be warned - are unregulated. But funds are springing up to track the fortunes of diamond miners and associated companies. The US-based manager PureFunds, for instance, recently launched what it claims is the first “pure-play” diamond industry ETF.

In the UK, Pink Iguana offers a tax-efficient Enterprise Investment scheme (EIS) which allows you to invest directly in rare diamonds, subject to a minimum investment of £10,000 – a lot to lose if things go the wrong way.

Diamond investment is always going to be risky business, emphasised by a BBC investigation in January which uncovered a rapid growth of diamond boiler-room scams, with vulnerable targets conned into dodgy schemes often involving non-existent gems.

Yet the market fundamentals do look strong. Arguably, the three most important factors in the supply and demand equation are the melting of the De Beers stockpile, a significant decline in the rate at which kimberlites (the host rock for most diamonds) are being discovered, and the growing development of the engagement ring market in new consumer economies like China.

Of course, if you’re the kind of market bear who thinks China could become the third wave of the financial crisis because of the toxic debt in its banks, the demand for celebratory sparklers could fall off a cliff. But arguably that’s where the gems would come into their own as a portable store of value amid turbulence.

Diamonds could in fact be seen as an each way bet for investment, but equally the risk of losing money is crystal clear.

Now, where did I put last Saturday’s Lottery ticket?

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