Unlike Diamonds, Gold has been an unobstructed leader in investment market. But recent developments suggest that situation might just change as diamond investments become promising. A number of factors qualify diamonds as a suitable candidate for investment. Diamond prices have been increasing at an average of 14% per annum for the past 50 years. From 1999 to 2011, value of a one carat diamond increased by 64.4% and that of 3 carat diamond increased by 144.9%.
From 1982, value of investment grade diamond weighing 1-3 carat increased in correlation with USA consumer price index making them an efficient hedge against inflation and deflation risks. Jignesh Mehta, co-founder of Divine Solitaires remarks “Diamond is the rarest and the purest piece of nature that can only be cut and polished but not mixed or merged with something else. Also it cannot be melted and reshaped (maintaining the same weight)”.
Future increase in value of diamonds is likely to happen and is backed by surging demand and depleting resources and supplies. Even in a depressed global economy, consumer demand for diamonds is flourishing in Asia, South America and Eastern Europe. Recent report by CNBC stated a 10-12% annual growth rate for diamond demand in India and China. While diamond ring buying practice is increasing rapidly among Chinese couples, Diamond industry has failed to discover any huge gem quality diamond reserve in the past decade.
Despite these multitudes of reasons, financiers are still wary of investing in diamonds. Investors feel that they are not knowledgeable enough to evaluate diamonds and have to depend on intermediaries. Even the gem and jewelry market is reluctant to offer diamonds as investment option owing to smaller profit margins compared to retail market. It is challenging for outsiders to buy diamonds at wholesale prices since the diamond houses trade only through memberships.
The ambiguity in diamond pricing is slowly and gradually dissipating as a number of diamond market price lists like – RapNet weekly list, IDEX Online, PolishedPrices.com etc. are now available. But unfortunately only around top 1% of polished diamonds are of investment grade. These stones are laser inscribed by reputed grading labs with a unique ID number, which provides confirmation to investors of their diamond’s quality.
Martin Rapaport advises in a blog on diamond investment: “You need to connect with an expert that can give you direct access to international dealer prices and markets. You also have to confirm the quality of your investment diamond through independent third party grading and expert confirmation. It is important that you establish a relationship with a trustworthy investment diamond expert that can advise you about timing, ensure quality control and handle your transactions.”
In 2013, an association of hedge fund traders found Investment Diamond Exchange based in Los Angeles. The diamond exchange concentrates on trade of diamonds solely for the purpose of investment. In the same year, Chicago based GemShares entered into partnership with Nasdaq OMX Group to develop “GemShares Global Investment Grade Standard Diamond Basket Index” with a purpose to create an exchange traded fund backed by diamonds. These developments portray the slowly growing acceptance of diamonds by the investor community.
With the major diamond reserves facing extinction within the next decade, prospect has never been so fitting for a diamond investment. However, till the time more transparency, fungibility, standardization and awareness are brought to diamond grading, valuation and trading, the upside potential will be restricted. Until then, since last year has been tough with diamond prices down 15-19%, Nicolas Colas – Chief Market Strategist of ConvergeX suggests to tread with caution.