Diamond Investing

Who isn’t attracted to diamonds? Even James Bond had more than a fleeting interest—Diamonds Are Forever, right? But successfully diamond investing requires more than a superficial interest in their sparkle. There’s a lot to learn about the diamond trade, not least, how to spot a fake.
Investing in diamonds is like any other pursuit of investment returns; the better educated you are, the more likely you are to make wise choices. Read on to understand more about diamond investing, the 4Cs, the different types of diamonds, blood diamonds, and how to pick the right diamond to realize a “brilliant” return.

What Is Diamond Investing?

Diamond investing is buying gems to make a future return. Diamonds have quite the history, so before you turn to the diamond trade to complement your portfolio, here’s a quick guide to their discovery, types, and value.

The History of Diamonds

The word “diamond” comes from the Greek word adamas, which means “unconquerable.” This reflects diamond’s strength because early diamonds were used to engrave metal and valued for their brilliance and light refraction.

The earliest diamonds were found in India in 4th century BC and were transported along the Silk Road, trade routes that connected India and China. India was thought to be the only source of diamonds, but other sources emerged when the Indian diamond mines were depleted.

In 1866, 15-year-old Erasmus Jacobs found a 21.25-carat diamond along the banks of the Orange River in South Africa. Then, in 1871, a colossal 83.50-carat diamond was found on a hill called Colesberg Kopje. These events brought a rush of diamond prospectors to the region and led to the first large-scale mining operation, the Kimberly Mine.

As the supply of diamonds increased, their value decreased, and the upper classes chose other colored gemstones like emeralds, rubies, and sapphires for their engagement rings. Englishman Cecil John Rhodes formed De Beers Consolidated Mines, Ltd. inn 1880 to control the diamond supply and increase the price of diamonds.

In 1947, DeBeers coined the slogan “A diamond is forever.” The premise of the marketing campaign was that diamonds should be the only choice for engagement rings. It worked. According to the diamond retailer, “Brilliance.com.” more than 78% of engagement rings now sold contain diamonds.

Today, the world’s diamond deposits are depleted. Less than 20 percent of the diamonds mined are of gem quality, and fewer than 2 percent are considered “investment diamonds,” rare high-grade stones with good color and often 10 carats and above in size.

The Different Types of Diamond

There are various types of diamond. Three examples are synthetic, polished, and Polki diamonds.

Synthetic Diamonds: These are man-made. They are produced by subjecting graphite to very high temperatures and pressures. Most synthetic diamonds are grit or small crystals used for industrial equipment such as grinding wheels and other machine tools. According to the retailer, Heart in Diamond, synthetic diamonds cost about 40 percent less than real diamonds, but they are ethical and eco-friendly.

A polished diamond is a stone cut and polished to maximize its visual beauty. Before that, it is a rough diamond and is opaque and often difficult to see through. The angles and shapes of the cut will determine the diamond’s sparkle.

Polki diamonds are experiencing renewed popularity in western jewelry markets. Polki is an Indian word describing a natural raw, uncut, and unpolished diamond. While polkis were traditional used in their natural, unfaceted form, modern jewelers cut them and polish them lightly. The three types of polkis are Syndicate, Zimbabwe, and Kilwas.

Raw diamonds do not have a resale value and they cannot be melted, repurposed, or reused elsewhere.

The Price of a Diamond

Many factors that determine the price of a diamond. The Gemalogical Institute of America (GIA) uses the 4Cs to categorize diamonds. The 4Cs are the color, the carat (the size or the weight), the cut, and the clarity. Diamond dealers also use the Rapaport price index, a weekly chart with polished diamond prices broken down by size, color, and clarity.

Carat

Large diamonds are rare. Therefore, diamonds get exponentially more expensive as they get bigger. There is also price per carat to consider. A 1 carat round ideal cut hearts and arrows diamond value might be $8,000 per carat and a total price $8,00.  But a 2 carat diamond of the same quality could also be $12,000 per carat or $24,000 total, three times the price.

Price per carat tends to jump at certain ‘key weights,’ and there’s a “prestige premium” for going over 1.00 carat.

According to Periscope.com, an online resource for diamond enthusiasts, a 1-carat round brilliant diamond for an engagement ring can cost anywhere from $2,000 to $20,000. The average price range for a 2 carat round brilliant diamond is between $9,800 to $64,500. A round brilliant 3-carat diamond costs between $20,000 and $100,000, and a 4-carat diamond could cost anywhere from $39,000 to $163,000. The formula for calculating diamond price is

Cost = Carat Weight x Diamond Price Per Carat

Color

There are three categories for colorless diamonds: D, E, and F. D is the rarest, which is perfectly colorless and commands the highest price. The next color grades are “near colorless,” but they appear colorless to anyone who is not an expert.

Clarity

A flawless diamond, an FL diamond, is the rarest in terms of clarity and will fetch a top price. The FL designation indicates no inclusions or blemishes visible to an experienced diamond grader under 10x magnification.  Below FL, there are four clarity grades indistinguishable to the naked eye (IF, VVS1, VVS2, VS1).  Each lower clarity grade means a lower diamond price.

Cut

Diamonds have traditionally been cut to retain as much weight as possible rather than maximize their light performance. This works for shady jewelers who want to sell big, subpar diamonds, but it is not so great for buyers.  However, some cutters are willing to sacrifice some weight to make the best possible diamond.

Cut should not be confused with shape, which refers to the outline –the shape you see when viewing the diamond from above, for example, round oval, heart, pear. The GIA and the American Gem Society Laboratories (AGSL) will certify diamonds, which helps buyers and sellers trade more confidently.

What Is the Attraction of Diamond Investing?

Some investors consider diamonds a safe haven and a good place to put their money when economies take a dive. Other alternative investments they could turn to are gold, art, watches, whisky, or crypto. The De Beer’s term “forever diamonds” implies retained value in fluctuating markets, but the value of a diamond is subjective, and there are no guarantees.

Natural diamonds hold their value if the buyer avoids paying retail and the stone is well chosen. This is not the case for lab-produced synthetic diamonds. There is an unlimited supply of lab-grown diamonds, but not an overwhelming demand, so the law of supply and demand dictates that lab-grown diamonds lose their resale value.

Diamonds have always been an indicator of wealth when worn as jewelry, and today’s social media trends are encouraging the wearing of luxury brands and jewelry. What’s more, diamonds are hardy. Unlike classic cars, diamonds can be worn and enjoyed with minimal risk of damage.

What Are the Pros and Cons of Investing in Diamonds vs. Gold?

Diamonds and gold are both commodities that can add diversity to a stock portfolio. However, gold is considered a safer investment because it can withstand inflation and is not subject to quality requirements like the 4Cs and certification. In some countries, gold is considered a currency.

Pros

Resale Value – Diamonds often have a better resale value than gold.

Storage – Diamonds are easier to store than gold.

Cons

Higher Risk – Gold tends to be a safer investment because it can withstand inflation and has a reliable return.

Currency – Gold is considered a form of currency in some parts of the world; diamonds are not.

Quality Requirements – The value of diamonds depends on its quality in terms of the 4Cs and its certification.

How Can Novice Investors Start Diamond Investing?

It is not difficult to buy diamonds. They are available online anywhere, even eBay. But the secret to buying value is knowing what you are buying. Newcomers to the diamond market should at least learn the basics of the 4Cs.

It’s also sensible to compare prices before you buy. This might not be possible for rare, colored diamonds, but it is for more mainstream diamonds. Try to balance rarity with market preference. You don’t want a diamond that is difficult to sell later. However, if you buy a 1 carat VS1 diamond, you will be competing with many other sellers when you want to unload it. A colored diamond would fetch a higher price if it is cushion cut or round. Research the market and use your judgment when considering the demand for your diamonds.

Only buy certified diamonds, preferably with GIA certificates. Also, try to buy from manufacturers because there will be less markup on the price compared to retail. Many manufacturers now sell online. Unfortunately, there are no ETFs for diamonds. However, you can buy stocks in the companies behind the diamonds.

The best advice you can get when starting to invest in diamonds is to seek out diamond experts. Also, participate on diamond forums to broaden your knowledge and learn all the pitfalls.

What Are the Risks with Diamond Investing?

No investment is risk-free, so here are the risks when it comes to diamonds.

Theft

Flashing a diamond on your hand can invite trouble. And diamonds can also be stolen from your home. Stocks and Crypto trading are less at risk of theft because they are not tangible.

High Expectations

Diamonds are not a get-rich-quick scheme. Keep your expectations realistic by researching the market and planning for the long term. Keep your portfolio diversified, and don’t put all your money into diamonds.

Buying the Wrong Diamond

You might fail to do your due diligence in your exuberance,, particularly if you think you’ve spotted a deal. Take your time so that you don’t fall victim to fraud, and ensure your diamond is certified.

Blood Diamonds

The rise in environmental, social, and corporate governance (ESG) investing in companies that incorporate sustainable practices in their corporate strategies has cast a dark shadow on blood diamonds.

Blood diamonds are illegally traded and mined to fund conflict in war-torn areas, particularly in central and western Africa. According to the World Diamond Council, blood diamonds fund opposing governments or militia efforts to depose internationally recognized existing governments.

The World Diamond Council, set up in July 2000, is composed of experts, scientists, designers, and leaders from the diamond industry who help manage the legitimate diamond trade. In 2003, the Clean Diamond Trade Act (CDTA) came into effect, and The System of Warranties and the Kimberley Process were introduced to track diamonds.

However, smugglers still manage to hide conflict diamonds within shipments of “conflict-free” Kimberley Process diamonds, and corruption and smuggling are still rife in the diamond trade. The only sure-fire to avoid conflict diamonds is to buy synthetic ones.

What Is the Criticism with Diamond Investing?

Much of the criticism directed at diamond investing is to do with illiquidity. For example, let’s say you find a large and expensive diamond at a good price. That’s great, but will you be able to find a buyer when you need to sell it? There isn’t a huge market for big expensive diamonds.

The mark up on the retail price of a diamond is often 100 to 200 percent, and most stores won’t buy back diamonds from consumers because they buy through wholesalers. The stores don’t risk any capital because they don’t pay the wholesaler until a diamond is sold.

So, why risk buying a diamond from a consumer that they may never resell? Also, retailers don’t want to give the impression that a diamond is a bad investment, so they won’t give a consumer a low offer. It’s bad for business.

Another criticism is that diamonds’ traditional use in engagement rings could fall out of favor. There are other stones that are rarer and that could be the next fashion trend pulling the bottom out of the speculative diamond market.

5 Tips for Profiting from Diamond Investing

1. Educate Yourself

You can’t pick a good diamond as an investment if you don’t know much about diamonds. Educate yourself on the 4Cs and follow the market and price charts to understand what diamonds are popular. Learn diamond terminology.

2. Buy Certified Diamonds

Make sure your investment is certified either by GIA or the American Gemological Labs (AGL). This will ensure your diamond is authentic, that you are paying fair value, and that you will have an easier time selling your investment to a future buyer.

3. Look for Quality Over Rarity

The quality of a diamond trumps rarity from a buyer’s perspective (not a collector’s). Rarity is important, but a D grade diamond (rarity) can be indistinguishable from a G (quality), so quality offers the best value. Bottom line, don’t overspend on grades that they eye can’t discern.

4. Don’t Buy Retail

Buy a diamond at the price you can easily resell it, which translates to don’t buy retail. If you can, connect with an expert who can get you access to international markets and dealers.

5. Find an Expert

Build relationships with experts in the diamond industry. Find a diamond expert who can advise you on timing, quality, and transactions. A GIA grading report does not necessarily mean it is a good diamond. Have your expert ensure the diamond meets the Rapaport Specification 2+ quality standard.

Diamond Investing: General Terminology

Carat Weight: The unit of measurement for the physical weight of diamonds. One carat equals 0.200 grams or 1/5 gram.

Clarity FL: indicates a flawless diamond with no inclusions or blemishes.

Clarity IF:  indicates internally flawless; a diamond with no inclusions visible under 10x magnification.

VVS1, VVS2 clarity: Diamonds with inclusions that are so slight they are difficult for a skilled grader to see under 10x magnification.

VS1, VS2 clarity: These diamonds have minor inclusions observed under 10x magnification, but they are minor.

SI1, SI2, I1, I2, I3 clarity: Diamonds with noticeable inclusions under 10x magnification that may affect transparency and brilliance.

Color: Diamond colors range alphabetically from D to Z. D, E, and F are colorless, and the categories are near colorless, faint, very light and light. Beyond Z, diamonds enter the fancy color range beginning with Fancy Light Yellows.

Cut: The cut of a diamond determines the way it reflects light according to three attributes: brilliance, fire, and scintillation.

Conclusion

Diamond investing is a great way to complement a diversified portfolio. However, if you are looking for significant returns, it will be difficult to achieve with diamonds. The most prized diamonds for investors are rare, of great quality, and expensive.

Also, the value of diamonds is highly subjective and vulnerable to market whims and current fashions. That said, investors can buy diamonds that will withstand inflation by focusing on quality and cut that the market supports. Diamond investors should follow basic luxury goods investing guidelines: don’t buy retail, focus on quality, and buy at a price that you can sell. Alternatively, keep your diamond forever.

FAQs

Are diamonds a good investment?

In some ways, diamonds are a good investment because they have intrinsic value and last forever. They are also portable and tangible. They will increase in value over time, but the value of a diamond is subjective. How much of a return you make will depend on your choice of diamond and the market when you sell it. Diamonds can diversity a portfolio, but they should not be the bulk of it.

Which diamond is best for investment?

So-called “Investment diamonds” are the best because they are high-quality and rare. However, they are also expensive and often over 10 carats. If you don’t have that much to invest, focus on quality and cut so that it will be easier to sell, and always buy a certified diamond.

Are there any brands to be wary of?

Just don’t buy retail. For example, avoid high street retailers like Zales, Kay, and Jared. These outfits sell low-quality diamonds at high mark-up prices. Also avoid online retailers like Amazon, eBay, an Overstock. You have no idea where the gems come from, and they won’t be certified diamonds. Better options are James Allen, Ritani, Brilliant Earth, Blue Nile, and 1215 Diamonds.

Can diamonds be a good investment against inflation?

Yes. Many are of the opinion that diamonds are a better inflation hedge than gold because the diamond industry works independently and does not correlate with the financial markets. This is why the inflation hedge is better for high-quality diamonds

How can you tell if a diamond is real?

There are various ways to test if a diamond is real.

The Water Test

Fill a drinking glass three-quarters of the way with water. Drop the diamond into the glass. If it sinks, it’s real, if it floats either on the surface or underneath, the diamond is fake.

The Fog Test

Hold the diamond or ring between two fingers and breath on it. A light fog will form on the diamond because of the moisture and heat in your breath. If the fog goes right away, the diamond is real. If it takes several seconds for the fog to go away, it is fake.

Check Setting & Mount

A real one diamond will only be set in a high-quality mount. For example, a real diamond will be set in white gold, platinum, yellow gold, pave or side-stone setting and halo setting rings.

Also check the ring’s center for markings. 10K, 14K, and 18K indicate the type of gold. PT and Plat are platinum. 585, 770, 900, and 950 also indicate platinum or gold. A “C.Z.” stamp or engraving indicates a cubic zirconia gemstone and not a real diamond.

The Dot Test

Place a white piece of paper on a flat surface and draw a small dot with a pen. Lay the diamond onto the dot with the flat side down. Look down onto the paper through the pointed end of the diamond. If you see a circular reflection inside the gemstone, the stone is fake. If you cannot see the dot or a reflection in the stone, then the diamond is real.

The Sparkle Test

Hold the diamond under a lamp. Watch how light reflects off the diamond. Do you see bright shimmers of white light bouncing off the diamond? Do you see colorful light reflections also? A real diamond reflects white light well, providing exceptional sparkle. Diamonds also reflect colored light.