Is it possible that diamonds are going to be the next gold?
Traditionally diamonds are not an investment due to the high premium placed on the sale of diamonds and the ready availability. In fact diamonds are not as rare as one might think. De Beers, a major diamond producer, has a very large diamond production business and has been known to stock pile surplus diamonds in order to maintain the price of its sales. As De Beers now have a whole chain from mining to retail shops across the world they are able to recoup virtually all the profit normally retained by wholesalers and retailers.
Diamonds generally have a mark-up of anywhere from thirty to one hundred percent. The wholesaler and the retailer each want to make their cut and this adds to the retail price naturally. So when it comes to buying diamonds the closer one can get to the source the better.
Another factor that affects the price of diamonds is that the majority of diamonds produced are industrial quality and only a small percentage are suitable for the jewelery business. Twenty percent of all diamonds mined are used in jewelery and the remaining eighty percent in industry such as for lasers and other cutting equipment.
In view of the fact that cultured diamonds can now be produced through chemical vapour despoliation for example, the diamond industry is no longer totally reliant on mined diamonds. All of this tends to reduce the potential of diamonds as an investment vehicle.
However there are some exceptions.
The price of diamonds varies with the quality and weight of the diamonds so there is no universal weight benchmark for diamonds as there is for precious metals such as gold and silver. A diamond is valued according to its own characteristics such as its color, clarity, the cut and weight of the diamond. This is as individual as the diamond itself.
The Gemological Institute of America, the American Gemological Society and the International Gemological Institute are three major institutions which are used to ratify the value and quality of individual diamonds.
When it comes to diamond investment there are basically two ways to invest in diamonds.
The first is to buy and keep diamonds for a very long time and the other is to buy with the intention of selling at a higher price.
The first option is the one that is open to most people and the question then becomes, where do I get diamonds and what type do I get that I can keep, at the best price? Firstly one would be looking for loose stones, not diamonds that have been set into any kind of jewelery. Buying wholesale or as close to it as possible would be the order of the day.
Getting certificates to establish the quality and value of the stones, a certificate (Kimberley Certificate) to establish that they were not conflict diamonds would be required, and an insurance assessment to establish the value for insurance purposes. Then one would store or keep them in a safe place, such as a deposit box or bank vault for an extended period of time. Funds for this would be those that are not going to be used for a long time.
In the long term the value of the diamonds stored would depend on two factors. The availability of diamonds worldwide and the economic climate. There is no real shortage of diamonds in the world. DeBeers and Argyle Diamonds hoarding activities ensure that the supply of diamonds are regulated to maintain a specific price level. In practice diamonds price value tends to increase at around five percent per annum. Currently not a bad interest rate in today’s climate.
In the short term this is not a particularly attractive investment but in the long term, provided one has acquired diamonds at a good wholesale price, then the steady increase in value will, at least, counter inflation if not improve the value of one’s asset.
So to either buy and keep or buy and sell diamonds, you should be looking to buy wholesale or even better, direct from source, if possible.
Of course one should not put all ones eggs in one basket and some diversification, such as money in property, precious metals, the bank as well as diamonds would be prudent in this day and age.
When it comes to diamond investment, it is possible to at least retain your investment if not make some money, but you will certainly need to do some work and research first.
It was recently found that many wealthy investors own equal amounts of gold and diamonds. The difficult with using diamonds as a security is the pricing factor. Where as gold is simply … gold… you have the weight the size and fineness, but with diamonds you have such a diverse range of factors, the 4 Cs for example and the variable in price per carat as the size increases, makes it difficult to use a standard price. Everyone knows what the price of a bag of coffee or a bushel of corn is as they are easily accessible in the market. Diamonds, on the other hand, are all unique, making a standard pricing very difficult. In fact, you can often take the same stone to two different dealers and receive two different price quotes because it is so difficult to nail down a standard way to value these minerals.
However a company called GemShares, a Chicago-based firm is expected to secure a patent to create an index for diamond pricing which can then be applied to futures contracts and ETFs and so on.
What Took So Long?
But that could all change with the new index, “in which diamonds are arranged in 10 layers of comparable quality and value from cheapest at the bottom to most expensive at the top” writes Jason Zweig. GemShares even has a plan to displace conspiracy theories that often plague GLD and SLV (along with other precious metals ETFs); they are contemplating picturing each diamond on their home website for all of the world to see.
GemShares hopes to create as many trade-able units as the market can handle.
So who would invest In diamonds? Well the existing investors no doubt and possibly some who were not sure how to invest, with an index such as this, would possibly feel more comfortable investing in diamonds.
The return may not be a lot of course but, hey, with bonds returning a negative investment you can hardly go wrong.
As Wealth Wire says, at first it may seem like a rather far-fetched scenario, but the use for a diamond security has the potential to be very high. First, there are all of the producers and miners who could utilize the diamond-based products to hedge against unforeseen issues in production. But more importantly, the average investor would be able to invest in these ultra-expensive minerals with (presumably) a much lower cost, allowing even the average Joe to add diamond exposure to their portfolio.
The introduction of the first futures or ETFs investing in diamonds is expected to be around mid-2013 but that might change with regulation issues, set ups etc.