Are diamonds a good investment?

Investing in diamonds is an extremely complex topic. Like works of art, gemstones can combine practical use with an investment aspect. Not every painting or sculpture is purchased for subsequent resale. Often, a purchase is primarily intended to evoke emotions, for instance joy, sentiment or nostalgia. Not every work of art will increase in value over time, but works by esteemed or fashionable artists are most likely to rise in price. The same is the case with diamonds. If the stone is unique and the buyer understands how the gemstone market works, it is a good investment. This is where the questions arise: How to invest in diamonds? Are diamonds a good choice as an investment of capital?

A long road of the diamond to the investor

Before the diamond reaches the final recipient, it passes through many hands. The stone's journey begins when it is extracted in the mine. Mining companies sort and parcel rough diamonds that are sold on sightings - closed shows organized several times a year, available to a small group of buyers. It is the mines that decide how many new diamonds will be placed on the market. By controlling supply, mining companies can influence the price of rough stones. As a result, they largely determine the profitability of investing in them. This works similarly to the OPEC cartel, which affects the oil price by increasing or decreasing the production of ‘black gold’. On the other hand, mines do not have this power to control the price of cut diamonds.

Mining companies monitor the inventories of grinding shops, wholesalers and retailers. Accordingly, they adjust the number of stones delivered to the market to maintain a stable price increase. It might seem that the best solution for the mining companies would be to constantly raise the price while increasing production. However, they will not be able to do this if the other market participants have large stocks which they want to liquidate in the first place and do not make further purchases. The mining companies plan to raise the prices of rough stones in the future because access to reserves in their mines is becoming more and more expensive and requires increased capital expenditure. Consequently, investing in diamonds will become increasingly difficult for investors. By 2030, the consulting firm Bain & Co estimates a decline in diamond supply by 1-2% per year under a conservative scenario. 

rough diamond supply graph

Source: https://www.bain.com/globalassets/noindex/2021/bain_report_diamond_report-2020-21.pdf 

Diamond cutting and polishing

The next stop on the road of rough diamonds are diamond cutting factories. About 90% of all cut and polished diamonds are sold in India and then sold to wholesalers. At this stage, diamonds may lose as much as 50-60% of their weight, but the increase in the price of a cut stone compared to the uncut makes up for this loss. This is why diamonds as an investment of capital are a good decision. Before the cutting and polishing process, the future quality of a cut diamond cannot be clearly defined. It can only be estimated on the basis of parameters determined by the mine. It is the cutter that runs the risk of losing a large proportion of the weight or reducing the quality of the diamond, which it will have to sell at a lower price. For this reason, diamond cutting mills try to maximize profits by trying to gain as much weight as possible and sell high-quality stones at the highest possible price.

The cutters influence the price of a cut diamond, but charge very low margins. On the one hand, the price of rough diamonds is imposed by the mines, and on the other hand, a very strong negotiating position of wholesalers does not allow the cutters to achieve high profits.

Wholesalers buy diamonds from cutting factories and deliver them to the retail market. Most of them go to jewellers. In addition to jewellery itself, jewellery companies are increasingly offering loose diamonds, that is, stones that are sold separately. In this way investors can diversify their portfolio with tangible resources. It is of vital importance that the stone is purchased as high as possible in the supply chain. The potential returns from such an investment will be higher, so the profitability of investing in diamonds increases. At every step in the supply chain, someone takes a margin. For this reason, it is worth looking for brokers who have access to diamonds from a cutting factory or an Antwerp diamond trading exchange. By avoiding retailers, you can get better prices. 

Graph 1. Diamond Supply Chain

diamond journey icons

Why are diamonds bought?

Diamonds can be purchased from a variety of sources as single stones (loose diamonds) or mounted in jewellery. The purpose of purchase and the place of transaction will be of great importance for the profitability of investing in diamonds. Gemstones can be acquired with the intention of a long-term capital investment or as part of a short-term investment plan. They are also used for practical purposes as jewellery that can be worn or offered to someone.

Diamond jewellery as security and capital investment

Buying diamond jewellery solely for the purpose of investing is not a very good idea. The price of a diamond in jewellery will be higher than that of the same stone purchased separately. The price of an item of jewellery includes many fees which increase the price of the finished product, i.e. production cost, marketing and the retail store's margin. In this configuration, the price of the diamond itself would have to increase very much for the investor to sell the diamond at the purchase price, let alone make a profit. Diamond jewellery should be treated as an investment of capital, capital security and an option to pass on wealth to future generations.

Short-term investing in diamonds set in jewellery, at a retailer, will not provide you with a profit. Such a stone will be much more expensive than an identical loose diamond. If you want to resell this jewellery, you should take into account an offer that is even half the price of the purchase. Jewellery is bought for utility purposes, so it's no wonder that its investment potential is low. You can earn money by selling this jewellery, but the profit will be small, and the time from purchase to sale is very long.

History shows that many families with physical assets, including gold and diamond jewellery that could be easily transported, have survived some of the economic crises and wars. Thus, from an investment point of view, it will be more profitable to buy a loose diamond. The purchase cost will be lower and the increase in the value of the investment itself will be faster, which significantly increases the profitability of investing in diamonds.

Diamonds as investment assets

In order to achieve the highest potential profit, the investor should buy stones as directly as possible from the producers of cut diamonds and choose those that are sold separately. Diamonds framed in rings, earrings or necklaces will be more expensive than single stones. If an investor prefers to invest in jewellery, they can produce and sell it themselves instead of buying loose stones, thus keeping the margin.

A simplified scheme is as follows: the investor buys the stone, sets it up in jewellery and puts it up for sale. The mechanism is simple, but there are several obstacles along the way, such as choosing a stone, type of jewellery or selling the finished product. Already at the design stage, significant obstacles may appear, so it is worth getting properly acquainted with the ways of how to invest in diamonds in order to make it profitable.

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Investor is not the target customer

The investor will have to attract the greatest possible audience with their jewellery. The finished product must fit into the current trends and appeal to potential buyers, not the investor themselves. By creating jewellery "for oneself", the investor may significantly limit the reach among recipients and have a problem with selling. Going through the whole process yourself, you can fall into the simplest trap and design jewellery that will delight you, but not your potential customers, which will significantly reduce the profitability of investing in diamonds. The sale will be difficult and may result in price reduction.

The last stage of the process, however, can be the most difficult as reaching potential buyers is not easy at all. The investor is not a jewellery seller and therefore has no network of contacts. What’s more, they may not get a satisfactory offer on online auction portals. Fortunately, there are companies around the world that enable this method of investing in diamonds. The role of the investor then comes down to providing capital and controlling the investment. The entire operational part, including the sale of jewellery, is not their concern.

Best diamonds for jewellery

Unique stones of a certain quality – gem quality - are used for the production of jewellery. However, it is not necessary to invest in perfectly colourless and purest stones. In the case of colourless diamonds, diamonds of the SI1 and SI2 clarity can be used for the production of jewellery. In such stones, inclusions are invisible to the naked eye. However, care should be taken that they are on the sides of the diamond or under the facets. As a result, the diamond will retain its visual effects and will shine beautifully and present itself effectively in jewellery.

Two diamonds with similar parameters, but different clarity, can significantly differ in price. A single-carat, colourless diamond with a D colour and IF clarity will cost an average of 14.4 thousand USD. For the same stone, but with the lower clarity SI1 and colour H, you will have to pay an average of 5,000 USD or 9.4 thousand USD less. The difference in their appearance will be barely noticeable to most people. Therefore, for the production of jewellery, you can use SI1 and SI2 clarity stones without fear. Clarity and colour are only part of the diamond's evaluation, so pay attention to the other characteristics of the stone before buying.

Graph 2. The GIA Clarity Scale

the GIA clarity scale

Source: https://www.gia.edu/

Fluorescence can act to the disadvantage of colourless diamonds. It is the phenomenon in which diamonds most often emit a blue glow under the influence of UV light. It may happen that a diamond has a milky appearance due to its fluorescence and is not perfectly transparent. The prices of diamonds that are negatively affected by fluorescence are up to 30-40% cheaper than those without this effect. This shows that the diamond rating is not only 4C. On the other hand, fluorescence may increase the price of colourless diamonds with weaker J-M colours, as it may have a beneficial effect on colour evaluation.

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 Table 1. Approximate percent changes from nonfluorescent

fluorecence price changes table

Source: https://www.diamonds.net/Prices/DetailedInfo.aspx

You buy diamonds with your eyes. The way it looks will affect its price. It is not necessary to use the most expensive stones for the production of jewellery, because most people will not notice the difference between the colour D and H or the clarity of VS1 and SI1. There are some proven tricks you can apply when making jewellery. The colourless diamond with the best colours D, E and F is completely colourless. In jewellery made of platinum, white gold or silver, you do not need to use stones of such perfect colours, but you can use H diamonds. Such stones will be 50-60% cheaper, and most people will not notice the difference while they are mounted in an item of jewellery. For the production of yellow gold jewellery, you can safely use diamonds of colour M and below. This type of metal will not contrast with the diamond, making colour decline less visible. Jewellery must be produced wisely, not as expensively as possible to achieve the highest margin and profit.

Diamonds with investment characteristics

The investment in loose diamonds will look different. Here, the most important thing will be choosing unique, rare stones. These undoubtedly include diamonds with a purity FL (1 in 5,000) and IF (3 out of 100). There are no specific parameters of colourless diamonds suitable for investment, because each stone is different and should be assessed with your own eye. In addition to clarity, you should pay attention to the colour. It is worth choosing the purest from the D-F range and the highest possible weight. Diamonds with fancy colours are unique in themselves and most of them will be a good investment. Currently, the share of coloured diamonds in mining is about 0.1-0.01%. The rarity of occurrence and the limited offer significantly increase their prices. The most expensive diamonds are red, blue and pink.

Diamonds can be a good investment. History has shown that the prices of stones are rising steadily, and after the crises they quickly return to their previous levels. Every year, fewer and fewer diamonds are mined, and the demand for them is growing. Forecasts indicate that in 2030 the demand and supply gap of rough diamonds will amount to 159 million carats, and in 2050 to 278 million carats. Yet in 2014, the supply still met the demand. This shortage is expected to drive up prices in the coming years.

Diamonds can be a good investment

First, when buying a diamond, you must first identify your motivation. A diamond purchased for investment purposes must be unique and rare, because only such a stone has the best chance of increasing its value in the future. Perfect for this are larger colourless stones of FL or IF purity and D-F colour. Coloured diamonds will have the best chance of price growth. Mainly red, blue and pink. The second parameter worth paying attention to is the colour intensity of the coloured stone. Vivid intensity diamonds enjoy the highest recognition. They are very rare and desirable, so you should include them in your collection. As with any other asset, diversify your diamond portfolio and complement your collection with gemstones in a variety of fancy colours, shapes, clarity, and weights.

Secondly, it is not profitable to buy diamond jewellery for investment purposes, which price is above manufacturer's costs. There are many cost elements included in the price of a ring, earrings and other jewellery products that significantly increase the price. The same stone can be even half the price of a diamond framed in a ring, earrings or bracelet. It will take many years for the value of a diamond in jewellery to rise above its purchase price. 

Finally, diamond jewellery can be a good investment, however, the process needs to be reversed. In this situation, the investor is not the buyer of the jewellery, but its producer. Thanks to this, they can profit from the sale of the finished product. Like any investment, also the one in diamonds must be carefully thought through.

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Fancy Colour Diamonds