How to invest in diamonds?

Diamonds, like any other tangible asset, can be invested into. Including gemstones in an investment portfolio can be a good idea, thanks to which an investor will secure his or her assets. A proper selection of diamonds will also steadily gain in value and can be passed on to the future generations. In order for an investment in diamonds to be successful, you need to prepare for it properly and follow a few simple rules.

Diamonds are unique

Under 10x magnification, or in some cases, by observing the diamond with the naked eye, you will see a defect inside the stone, the so-called inclusions. The arrangement of the inclusions has an impact on the visual effects of the stone and its overall perception. Ideally, the inclusions should be located under the facets, in the side parts of the stone. If they are underneath the surface, they can lower the diamond's rating and consequently the price. There are many types of inclusions and their locations in the stone, therefore each stone is unique and subject to individual valuation.

Fluorescence of colourless diamonds 

When choosing colourless diamonds, pay attention to fluorescence. It is manifested when a diamond starts to shine, usually blue, under the influence of the UV light. Weak fluorescence will be noticeable under the light of the UV lamp, but when exposed to sunlight, it will be strong. Inside the diamond you will see a bluish glow (other colours such as red, orange or green are very rare). In some markets (e.g. Russia or Singapore) diamonds with fluorescence are desired. Unfortunately, the effect of fluorescence on the best colourless diamonds can be detrimental.

The fluorescence in colourless diamonds may or may not affect the quality of the stone. It is estimated that this phenomenon affects 25-35% of all stones. Fluorescence most often negatively affects colourless diamonds in the D-F colours. Strongly fluorescent, colourless stones may appear dull, hazy and lifeless. Therefore, compared to stones without fluorescence, their price can be lower by up to 35%. Opposite is the case with colourless stones in the worse category of J-M colours. Fluorescence can have a positive effect and improve the colour of a diamond and therefore increase its price.

Table 1. Approximate percent changes from nonfluorescent

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

Fluorescence of coloured diamonds

Fluorescence as phenomenon in diamonds of fancy colours must be considered separately. The fluorescence in the colour of a diamond can positively influence the perception of its colour, which will make it seem more intense. Yellow and orange fluorescence in diamonds of yellow and orange colour, respectively, will have a positive effect as these stones will appear more vivid and intense. The same is true for green diamonds with green fluorescence. Certain fluorescent colours, such as red, are so rare that they are considered collectors' items.

To sum up, each diamond is unique and should therefore be assessed individually. Valuation of stones with the same 4C parameters may significantly differ in price due to, for example, distribution of inclusions or presence of fluorescence.

Picture 1. Fluorescence of coloured diamonds

4C as the first step to the assessment of each diamond

When estimating the value of a stone, most people follow the 4C rating system, i.e. Cut, Clarity, Colour and Carat (mass). In colourless diamonds, the cut seems to be the most important parameter, and it is certainly the most complex.

The cut should be understood as the interaction of the diamond with the light that falls on it. In a diamond that is cut perfectly, the light is reflected perfectly inside the stone and the diamond shines and sparkles. A full assessment of the cut of a diamond requires taking into account, in addition to the cut itself, also the quality of polishing and symmetry of the stone. Somehow these 3 parameters influence the diamond's visual effects, i.e. brilliance, dispersion and scintillation. They are responsible for the shining, sparkling and glittering of the diamond. The better the parameters, the higher the visual effects of the stone will be, and thus the price will also increase.

The remaining 3 4C classification parameters of colourless diamonds can be assumed to be equal from the point of view of significance (and impact on the price).

Inside a diamond, there are more or less imperfections called inclusions that can affect the brilliance of the stone. How easy it is to see them or not to notice them (under 10x magnification or with the naked eye) is their clarity. The most expensive stones are devoid of internal (FL - flawless and IF - internally flawless) and external (FL) defects. These are extremely rare diamonds that account for approximately 3% of all certified gemstones. You should not select stones for your portfolio only in terms of grinding and cleanliness. You have to take into account the other parameters of the 4C classification, which will also have an impact on the price.

Diamonds with a greater mass are more expensive. The relationship between weight and price is not linear. One stone weighing 1 carat will be worth much more than 2 smaller stones with a total weight of 1 carat. 

The importance of colour in the evaluation of diamonds 

The colour of a diamond is an important feature when it comes to evaluating colourless diamonds and undeniably the most important parameter when evaluating diamonds in fancy colours. An international colour scale has been defined for colourless diamonds. It starts with the letter D, which denotes colourlessness. As the presence of colour increases, they are labelled sequentially up to the letter Z, denoting diamonds with an admixture of yellow or brown. Disregarding the other parameters, D-colour diamonds are the most expensive, and the price of the stones decreases with the colour decrease towards Z. When investing in loose diamonds, it is best to choose the D-F colours. However, for the production of jewellery, diamonds do not have to have such a perfect colour.

Fancy-coloured diamonds are also assessed according to the 4C classification, but in their case the most important parameter is the colour of the diamond and the intensity of the colour. The most expensive stones are red, blue and pink. “Vivid” is the most desirable intensity.

The 4C classification is just a first step

4C classification is good starting point, but it definitely needs to be expanded by other features of a diamond. Each stone can be assessed on the basis of 4C, still, a closer look is needed to determine the value of a diamond. First, the aforementioned fluorescence. It is not part of the 4C classification, but can have a significant effect on the price of a diamond. The stones are also unique due to their imperfections, i.e. inclusions. Their distribution, size and quantity will affect the visual effects of the stone. Inclusions "hidden" in the side parts of the diamond under the facets may not affect the value of the stone. A diamond is bought with the eyes, so it is important to examine it carefully. Stones that look beautiful, gleam and sparkle are simply worth more.

Table 2. Selected prices for colourless diamonds

Source: Rapaport

It’s worth checking the price with different sellers

Today, diamonds can be purchased very easily over the Internet. Shops that offer such services deliver stones to customers all over the world. What's more, if the diamond does not meet the buyer's expectations, the buyer can send it back within the time specified by the store and receive a refund. Many stores even allow you to buy diamonds at interest-free instalments. Facilitations in concluding and cancelling transactions via the Internet favour buyers, which is why sales through this distribution channel are growing. The lack of many costs to be borne by stationary stores, i.e. employment costs, rent and other running fees, makes most often the online offer more advantageous.

The prices at which stores display their stones will vary. Their bargaining power towards wholesalers and polishing and cutting stores is different, as well as credit terms and the scale of their operations. A trader that trades thousands of colourless diamonds a month is likely to have a lower price than a trader that sells a few. It is worth checking the competition's offer before buying. It is very important to compare the stone you are interested in with very similar stones or as closely similar as possible. All parameters must be almost identical. Only then can you judge which store has the best prices. A difference in the cut quality or the fluorescence scale can strongly influence the price difference.

Diversification of your diamond collection

A good solution, taken directly from the capital market, is diversification. Investing in diamonds involves risk, so by purchasing different stones, you will be able to reduce them. It is worth building a collection based on diamonds that differ in colour, clarity or weight. It is most favourable when diamonds in fancy colours, one of the rarest gemstones, also appear in a diamond portfolio.

Coloured stones are desirable because they are unique. The largest diamond miner in the world estimates that these diamonds account for only 0.01% of the annual total extraction. Adding them to your collection can reduce your investment risk. Fancy-coloured diamonds, like other unique assets, stand a chance of the greatest increases in value in the future. It is worth purchasing stones of different colours, with or without an additional colour. This increases diversification. There is also a growing chance that with the emergence of greater demand for a particular colour, it will already be in the investor's portfolio. 

Purchasing only certified diamonds

It is without question that diamonds which will go to the investor's portfolio must be certified. Only documents issued by the reputable institutes, such as GIA, IGI and HRD, count. The investor is then sure that the stone he or she has, in reality complies with the parameters presented in the certificate. It may be the case that when trying to sell diamonds certified by other institutions, the prospective buyer may request that the stone be assessed by a reputable gemmological institute. Unfortunately, it may then turn out that the diamond parameters will differ in minus from the information in the current certificate. It will be a double pity because the original purchase price appeared to be too high (the certificate showed better parameters of the diamond than it actually was) and the new selling price will have to be revised downwards.

Picture 2. GIA Diamond Grading Report

Source: gia.edu

Liquidity of the diamond market

The diamond market is not liquid. It is rare to buy loose stones and sell them quickly. The liquidation of single diamonds can be possible in a few years. On average, transactions in the loose diamond market take around 5-7 years. You should remember about this limitation before buying them. Most often, stones are purchased for the purpose of investing capital and protecting value and transferring capital for a future generation.

The fastest way to liquidate a diamond is to frame it into a piece of jewellery it and put it up for sale. These types of transactions last about 12 months and are characterized by the highest expected rate of return for the investor. Unfortunately, for the average diamond market participant, this option is difficult to access, because they do not have the necessary tools to carry out such an operation, e.g. a network of potential customers for diamond jewellery. Fortunately, there are entities on the market specializing in such projects, which, in return for a share in profits, will help to liquidate diamonds in the form of jewellery.

Diamond jewellery is not an investment

Buying diamond jewellery for investment purposes is not a good idea. A diamond in a piece of jewellery will be much more expensive than the same but a loose stone. It will take many years before the price of a diamond rises so much that it exceeds the cost of the purchased diamond jewellery. The price of rings, earrings and other jewellery items includes many additional fees, which significantly increase their price. Finished diamond jewellery should be purchased for utility purposes.

A better investment solution would be to buy a loose diamond and set it in jewellery, as we wrote in the section on market liquidity.

Shape of a diamond

It is best to choose a diamond as an investment in the most popular shapes, because it will be the easiest to liquidate then. Diamond-shaped colourless stones will be much easier to sell than heart-shaped diamonds. For fancy-coloured stones, the shape is not so important as these diamonds are very rare. Cutters tend to get rid of up to 50% of the stone's weight when cutting and polishing raw colourless diamonds to obtain the best diamond shape. In the case of coloured stones, the shape is selected in such a way that the loss of the stone’s mass is as small as possible.

Rules for investing in diamonds

The principles of investing in diamonds presented by us can help you make the right investment decision. By learning and applying them, you can avoid unfavourable transactions and in advance reduce the risk of losing capital.

The most important rules for investing in diamonds:

  • Diamonds are unique. Each stone is different and requires individual evaluation.
  • Basic knowledge of diamonds is essential. 4C is just the first step.
  • Diamond diversification. The collection should include diamonds with different parameters.
  • Compare the prices offered by different retailers before purchasing. It will be beneficial to buy stones over the Internet, as the prices will usually be lower.
  • Purchase rare and desired diamonds for your collection.
  • Coloured diamonds are the rarest. The shape of the diamond will be important for subsequent sale.
  • It will be easier to liquidate a colourless diamond in the shape of a diamond than a heart.
  • Only purchase certified diamonds.
  • A diamond bought for investment purposes should not be set in jewellery as it will then be easier to sell. A diamond set in a piece of jewellery will be more expensive than the same stone purchased separately.
  • Diamonds are a medium and long-term investment (5-7 years).

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Fancy Colour Diamonds

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