'Cannot Lose': While There Are Risks, Top-of-the-range Diamonds Can be Highly Profitable for Investors

Diamonds make you feel good. They’re up there with chocolates and Champagne. Investing in diamonds has a powerful psychological edge over your tech start-up company shares or natural gas futures beause they are so desirable on such a personal level.

Is this a good basis for an investment decision?

There are diamonds, and there are diamonds. Collectable diamonds – of exceptional size, quality and sometimes colour, perhaps associated with a celebrity or historical figure – are fetching astronomical prices.

There are obvious advantages to diamonds. They are portable, durable, comparatively rare and not subject to significant public opinion shifts as so many commodities are affected today by “green” considerations. Unlike fields of grain or herds of cattle, diamonds cannot be increased by human agency unless you are talking about lab-grown ones. Diamonds are easily stored by individuals, and require no special conditions, unlike investment wines.

The supply of diamonds is a different story. Supply can be, and has been, manipulated for years. De Beers controlled the modern diamond market with 80 per cent of supply, drip-feeding to maintain high prices. The end of this monopoly 15 years ago reduced prices. Supply has also been changed as new sources have been discovered, in Canada and other parts of Africa.

Whether to add this to your portfolio is an individual choice, thinks Chin Yeow Quek, Sotheby’s deputy chairman of Asia and chairman of international jewellery in Asia. “It really depends on the investor’s personal choices, where some people veer towards liquid assets, [such as] stocks and shares; others prefer to invest in more tangible commodities such as real estate. The same goes for jewellery, where you can buy shares in diamonds, but also invest in actual, physical diamonds. Today, top diamonds tend to be seen as a class investment asset.

“Generally speaking, diamonds do not fluctuate but, as with most items of value, there will have been some ups and downs. Top diamonds over time will always have an investment return.”

The world auction record for a white diamond was set by Sotheby’s Hong Kong in October 2013, when an unmounted oval brilliant-cut diamond weighing 118.28ct sold for US$30.6 million. This diamond was D (colourless) colour, with flawless clarity and excellent polish and symmetry, and which was determined as a Type IIa diamond. “This was a perfect example of a top-quality stone in a significantly large size, achieving top record prices,” Quek says.

Arnaud Bastien, president and chief executive, Graff Diamonds Asia, says: “Quality diamonds are a commodity. They fluctuate far less than other commodities which are often widely available and subject to many economic/political uncertainties. Diamonds are rare and they offer many advantages [portability, no maintenance, resistance] and over the past decades, their value has always been growing at a fair pace.”

Diamonds are unlikely to lose their value. Over the years, we have heard that they could be threatened by many things such as new mines, synthetic diamonds and so on, but prices have always gone up.

Market forces are at work now as the China market for diamonds has responded to the government’s anticorruption campaign. Togo Yu, diamond specialist at Pour La Vie bespoke jewellery, says: “A D colour is much cheaper than it was three years ago because of a drop in demand. I can give you an example: as reported on March 5, 2010, a one carat round diamond, in D colour, IF (internally flawless) clarity, was US$23,800; in August 2016, the same diamond is US$21,600.

“So there is a decrease, but not for the top quality, that has increased. Change the specifications for a one carat round diamond to F VS1 [very slightly included] and value increases from US$9,500 in 2010 to US$9,800 in 2016.”

Diamonds are no more speculative than most stocks or shares. Investing is always a gamble, and the old rule holds: don’t gamble with what you can’t afford to lose. In other words, diamonds could be a small part of an investment portfolio.

A good investment diamond requires careful choice. “It is always a question of demand and supply; rarity is a key issue,” Yu says. “Bigger size, higher in colour [other than a white colour], top quality in clarity, excellent cutting – these are some of the factors affecting the value of a diamond. For example, 10 carats, in D colour, IF clarity, triple excellent is not easily found, so the price is more than HK$10 million.”

Bastien says: “I always recommend my clients to buy the best: you never go wrong when you buy the best. This is valid for every class of asset, from property to wine, from art to diamonds. Diamonds are unlikely to lose their value. Over the years, we have heard that they could be threatened by many things such as new mines, synthetic diamonds and so on but prices have always gone up. It’s a bit like a Picasso painting: today you can find ways to reproduce a Picasso painting to be identical, but somehow, a real Picasso will always remain a Picasso.”

“In the long term,” Yu agrees, “diamonds cannot lose value, especially the good quality ones, as there is limited supply but high demand.” It is up to the investor to look at value over time in relation to inflation, though you run up against the perennial problem with diamonds – standardisation, or lack of it.

Part of the attraction, and the challenge of diamonds, is that they are not simple to define unlike, say, gold, with the published price per ounce. The well known 4Cs of carat, colour, clarity and cut are not easily assessed by the layperson. There are con men out there. So rule one, dealing with a known and reputable diamond trader, or even manufacturer, provides confidence in the quality of your investment, as well as help reduce mark-ups in the supply chain leading to the retail counter.

And know that there are various trade indices, the best known of which is the Rapaport Diamond Trade Index.

Yu remarks: “We, not end-users, follow the value of diamonds through Rapaport listing of market prices. As far as I know, everyone [especially traders] is following the price list provided by Rapaport. It means most investors can check prices.” As Bastien advises, buy the very best you can afford, knowing that the higher the carat, the higher the proportional increase in value.

An investment is not an investment if nobody else wants to buy it. Or if the buyer can go elsewhere and buy a diamond of the same specifications from another source at the same or lower price. It is true that certain cuts, notably the round brilliant, are more in demand, mainly because of their use in engagement rings. But it is not hard for anyone to buy a round brilliant.

Bear in mind that a buyer who is an end-user might not want to pay a premium for a flawless diamond when one with slight inclusions looks exactly the same to the naked eye of the beholder.

Keeping in mind that rarity is a significant factor, look at fancy (coloured) diamonds. If buying more than one, several colours would be a sensible idea.

Fancies have held their value remarkably well even in volatile times. Only one in 10,000 diamonds is a natural coloured diamond, and the colour makes each one unique. At this moment of rising recognition, the outlook is good for fancies which, incidentally, are not covered by the Rapaport index.

Most importantly, do not buy without certification. The most respected certification in today’s market is that offered by the Gemological Institute of America.

There are not many avenues through which you can sell diamonds. The elite auctioneers deal in large stones, but there are other auctions which sell smaller finished pieces of jewellery and loose stones. There are costs associated with this method of selling. Your diamonds may also be subject to sales tax.

In most forms of investment there are investment funds, formal exchanges for trading, and a derivatives/futures market. A diamond industry investment fund set up in 2012 had closed by 2014.

Rapaport has been working on a diamond-backed futures market and on RAPX, a diamond exchange. The Rapaport Group also has Rapnet, which has been running since 1992 and is the world’s largest diamond trading network. The Singapore Diamond Investment Exchange, the first electronic exchange for physically settled diamonds, opened in May. Its executive chairman and founder, Alain Vandenborre, says the exchange provides the first transparent price discovery mechanism for diamonds, allowing investors to trade diamonds as an asset class.