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Diamonds as investment?

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FT published this news report today:

De Beers has launched a global campaign to convince investors that diamonds are an alternative to gold as a safe-haven investment.

The move is a sign of the pressure on the world’s biggest diamond miner to find new markets following the collapse of traditional sales.

With diamonds as  luxury goods, De Beers has clearly taken a major hit in the form of falling demand caused by the worst global recession since World War 2.  On a related note, there’s also the question of whether diamonds could ever be a reliable investment or a store of value the same way safe investments like gold and bonds are.  Wikipedia explains the problem:

There is no natural shortage of diamonds. Diamonds can be synthesized at much lower cost than the equivalent natural diamond price, and the chemical and structural purity of a synthetic diamond can exceed a natural one. However, the chemical composition is not the only factor that determines their value – the quality of the cut is of as much, if not greater, importance.

Diamonds are a problematic investment. While it is easy to buy a diamond, it is not easy to sell one unless one is already an established diamond merchant. Another problem for investors is that purchasers other than established jewelers will be paying retail for a stone but can get only wholesale at most if they sell it back to a jeweler. If buying from non-industry sources, fraud is a major risk and even retail jewelers are skittish about it following Jewelers Vigilance Committee warnings in the 1990s about numerous fraud schemes by customers selling jewelry to jewelers or bringing it in for repair.

So it appears that the major problems with investing in diamonds would be the lack of a exchange where the gem commodities are priced and that subjective factors like cut and structural purity of the gem factors heavily into the picture.  A similar line of reasoning is found here:

Gemologists say that buyers frequently pay for grades, without knowing where the stone falls in the spectrum of the mark. From an investment standpoint, that’s like coming up with a fair-market value without ever being able to look at precise financials. A little swing either way can dramatically change the potential profit or loss.

Next, there is liquidity risk. While stones retain their value, you won’t have a lot of bargaining power if you must sell to raise cash.

Dealers who buy jewelry don’t pay retail, and the nation’s pawn shops are full of expensive gems that were turned in for a lot less cash than they were purchased for.

See this for a counter-point.

Back to the article:

But Mr Salier added that diamonds represent a much riskier investment than gold. Unlike the yellow metal the stones, traded through auctions and private tenders, have no public market price and there is no instrument investors can use to hedge against fluctuations.

So it turns out the major problems with diamonds would be a lack of commonly agreed attributes with which to price them and that their quality could be “upgraded” with some work in gem cutting and polishing.  Plus the fact that De Beers controls about 40-50% of the world’s supply of diamonds.  Still, I wouldn’t close the door on them.

Written by defennder

May 17, 2009 at 12:43 AM

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