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Diamonds - An Investor's Best Friend?

Siemond Chan
Siemond Chan

Anyone wanting to invest in diamonds has a few options through which to do so stocks, funds or the stones themselves.

With equities, miner Rio Tinto (RIO), jewelry seller Tiffany (TIF) and online diamond merchant Blue Nile (NILE) are well-known names in the diamond arena. Funds such as JP Morgan Global Natural Resources and First State Global Resources have some exposure to diamonds, while an exchange-traded fund, the Gem Shares Physical Diamond Trust, may be arriving soon. More exotic prospects include the U.K.'s Pink Iguana Enterprise Investment Scheme.

But setting aside these alternatives, the most direct way to try and profit is to buy the diamonds directly. However, such a decision clearly can be intimidating for novice diamond purchasers. Along with questions about the pricing, a prospective buyer also would want to know about the origin of a given diamond, the expertise of a jeweler who's selling it, and how it measures up in terms of the "C's" clarity, cut, carat weight and color. For the inexperienced, it would be completely natural to approach the entire process with trepidation.

To learn more about the diamond industry and find out what buyers need to know, we contacted Diamond Concierge Service. Based in Manhattan's Diamond District, and with suppliers in New York, India, Israel and Belgium, the company's main service is finding diamonds for individual buyers, essentially operating as a match-maker.

The diamond market has a wide range of participants, some better than others, and a full spectrum of precious stones again, some better than others. With both the seller and the diamond itself, you want the highest quality you can get. Here are Ron Khordi, CEO's thoughts on how to make confident buying decisions.

Yahoo Finance: What are some of the fundamentals about diamonds that you would suggest a buyer study before getting into the market?

Diamond Concierge Service: Rapaport.com and idexonline.com are two industry trade publications that report on trends and pricing. Rapaport also publishes a diamond price list for the industry to which diamonds' prices are benchmarked.

The diamond market is not monolithic. It would be advisable for potential investors to start by looking at historical data and future forecasts of the diamond market as a whole, then research the niche markets, because price trends and liquidity differ dramatically between niches.

Let's use pink diamonds as an example. Pink diamonds from the Argyle mine in Australia have increased in price over the last few years due to a waning in available supply from that particular diamond mine. Therefore, investing in pink diamonds now may be too late. For white diamonds, the Asian and Indian market has grown dramatically over the past decade and forecasts continued growth. These markets demand diamonds of higher clarity, so buying a diamond that is flawless to VVS [very, very slight inclusions] clarity can be considered a safer bet.

The Gemological Institute of America (GIA) is the largest, most well known, and most internationally accepted certificate company. The four C's grading system was developed by the GIA.

Click to see explanatory videos from the GIA:

YF: What is the usual markup on diamonds?

DCS: Before the Internet, jewelry store markups were traditionally "keystone," meaning double the cost to the store, or upward to "triple keystone," or triple the cost. The success of online diamond retailer Blue Nile has made diamond prices more transparent, but only for GIA (and some AGS) certified diamonds, since they do not sell any other certificate. As a result, many stores and online retailers were forced to follow suit, and the average markup for GIA diamonds is 10% to 20%.

Fancy color diamonds are an entirely different animal and can be compared to priceless art. The price is simply what a buyer is willing to pay. Fancy color diamonds are extraordinarily rare.Prices are not bench marked to the Rapaport Price List like white diamonds, and therefore, there is no fixed markup trend.

YF: Could you describe some recent trends in demand and pricing?

DCS: The Rapaport Price List does fluctuate occasionally. Last month, nearly all the SI1 and SI2 [SI for "slightly included"] diamonds across the list increased in price by 2% to 5%. An increase in the Rapaport price usually affects the retail market overnight, since most retail outlets stores and websites do not stock inventory. They will have to buy at a higher price before selling to their customer. Those that stock inventory can choose to raise or lower their prices.

The large increase of the middle class and wealthy in China and India has dramatically affected the diamond trade. One specific example is the demand for high clarity diamonds (VVS2 up to flawless), since traditionally Asian cultures prefer higher-clarity diamonds. Therefore, from an investor’s point of view, demand should remain high for the foreseeable future.

Ron also emphasized the importance of having an exit strategy for anyone planning to invest directly in diamonds.

DCS: Unlike commodities, stocks or bonds assets with [ample] liquidity at publicly known market prices a diamond is a physical asset that has unique logistical hurdles when the time to sell arrives. Do not invest in diamonds if you need quick liquidity. The selling process can be compared to real estate the right buyer is out there somewhere, if you are patient enough.  

One way to maximize the number of potential buyers is to choose a diamond that has ideal characteristics beyond the basic carat, color and clarity that determines the Rapaport price. A non-ideal diamond will have a smaller [number] of buyers within the wholesale market.