Diamonds are a girl’s best friend – at least according to Marilyn Monroe in the 1950s classic “Gentlemen Prefer Blondes”. The brilliant gemstones may have been highly prized at the time, but the concept of diamonds as an investment is a very modern phenomenon. While in the past, diamonds were looked at as a mark of luxury and prestige, today many investors are turning to diamonds as a “hard” currency to hedge their wealth against inflation.
The purchase of genuine diamonds has long been the preferred investment method. The valuable gemstones can be securely held in a safe deposit box. High prices are primarily commanded by glamour diamonds, rather than industrial diamonds.
Diamonds can yield high profits
The gemstone heavyweights are currently in high demand in countries like China, India, Brazil and Russia, where they are worn as status symbols. Supply, on the other hand, has remained tight. Because demand currently outstrips supply, diamond prices are steadily increasing.
Some diamond experts predict value increases of 6 to 8 percent per annum. Specific diamonds of a particularly high quality – such as unusually large or pure stones of extraordinary color – generally increase in value at a faster pace, as the exorbitant prices paid at auctions bear witness to.
The Diamond Prices Index (DPI), which reflects price developments in the diamond market over recent years, provides a good reference point for would-be investors. More than anything, diamonds prices are driven by consumer behavior in relation to diamond jewelry. The Index is based on price developments reported by globally active diamond dealers.
Diamonds: A potentially risky investment
For the sake of comparison: The value of gold has risen by around 145 percent between 2006 and 2015. The value of diamonds rose by around 60 percent in the same time frame. Prices are vulnerable to major fluctuations and can increase or decrease at any time, based on supply and demand. Some experts expect the price of diamonds to rise significantly in the coming years, due to the high demand. Because diamonds are a luxury rather than a commodity, they are a relatively risky investment.
Before investing in a diamond, it is crucial that you have the stone evaluated by a professional to help you avoid buying into a white elephant. Unlike gold, which is valuated based on its weight, diamonds are valuated based on many different aspects of their character. There is no fixed measurement of a diamonds purity, as with gold or platinum.
Diamond experts valuate diamonds based on the four C’s: Carat (the diamond’s weight – one carat is 0.2 grams); clarity (the purity of the stone); color (the color of the diamond is an important factor); and cut (the skill with which a diamond is cut can make or break its value). In some cases, a fifth “C” is included in the valuation process: the “certificate” issued by the producer is meant to prove the gemstone’s quality and authenticity. If you prefer to err towards the safe side, you can pay to have the stone tested at a reputable laboratory before making the purchase.
Few alternative diamond investment options exist. Investors can indirectly invest in diamonds by purchasing shares in diamond producers, such as diamond mining firms and diamond dealers. Adding shares in stock-market-listed diamond producers to your investment portfolio can be a profitable move. Profits of leading diamond producers have increased by as much as 80 percent per year. Leading diamond producers include Alrosa (listed on the Moscow Exchange) and Anglo American, which holds a majority stake in De Beers and is listed on the Swiss stock exchange SIX, as well as the London and Johannesburg stock exchanges.
Diamond production companies have steadily invested in new, efficient machinery for the mining of rough diamonds and the diamond-cutting industry. Producers are also expanding production beyond its traditional confines. Antwerp is still the world’s largest diamond trade center and Belgium still hosts the world’s finest diamond cutters, but a large part of the production process now takes place in countries with low-cost labor. Many diamonds are now cut in India, Israel and China, which currently boast the highest numbers of diamond cutters.
What makes investing in diamond shares difficult is the fact that, aside from diamonds, many of the exchange-listed companies also process many other raw materials. So stock prices may be affected by the fluctuating values of many commodities and precious metals, not just in diamonds.
If you buy shares at a foreign stock exchange, there is also the risk of possible foreign currency fluctuations. The value of shares in these producers is also affected by the performance of the companies themselves, and can also be affected by political activity in diamond-producing countries.
If a mining corporation were to declare bankruptcy, your shares in it would be worthless. On the other hand, a genuine diamond, held in a safe or a safety deposit box, is not prone to these risks.
There are several investment funds which are based on diamond investments. However, these often come with high administrative fees. Many index-based diamond ETFs are still in their fledgling stages, although there are ETFs which participate in the diamond trade via select shares in diamond dealers and producers.
The moneyland.ch team