Diamonds as Investments

Investors Increasingly Comfortable With Diamonds As Investment

Diamonds, which have symbolized love and marriage for decades, have in recent years started to attract wealthy investors as an investment with potentially high returns. And in the past year, as prices of polished diamonds have remained largely static, that has given many investors a good buying opportunity.

Volatility in stock markets and low yields on fixed-income investments are fueling the search for a relatively stable investment that can deliver higher returns. The wealthy have been turning to hard assets they can enjoy, including jewelry, art and even collectible cars. Investing in

precious stones is a natural alternative.

Until recent years, diamonds were not on the agenda for investors for several reasons, including lack of price transparency and a liquid trading market, as well as difficulty in establishing uniform standards of quality among stones.

But with increasing global demand for the gem, companies are emerging with plans to replicate the success of gold and silver by developing diamond-backed exchange-traded funds or mutual funds.

The buzz around investing in diamonds has been fueled by spectacular auction sales results over the last few years and rising prices for rough goods, if not for polished goods.

In April, Sotheby's sold a 74.79-carat white diamond for $14.2 million in bidding that took the price far above its presale estimate of $9 million to $12 million. In May, Christie's sold a pear-shaped, 101.73-carat stone for $26.7 million.

With increasing global appetite for diamonds and a limited number of mining operations, supply and demand are working in the investor's favor and driving up prices.

A report from Bain & Co. notes that global sales of diamonds increased by 18 percent from 2010 to 2011, with most of the growth coming from India and China. In 2011, supply contracted by 3 percent. As a result, the price for rough diamonds increased by 31 percent, while the price of polished stones rose 24 percent.

Another research firm, Wealth-X, reports that prices of rough diamonds have risen by nearly a third since 2005 and are likely to go up another 20 percent by 2017.

The overall view is that prices will go up because of buying in markets such as India and China, where new wealth is emerging, although demand in those countries has been waning with the softening economies, he adds.

From a financial viewpoint, diamond mines, especially the largest ones, are running out of stones. Not just that, but new mines take at least 10 years to come on stream, and existing new sources produce relatively small quantities of diamonds. And add to all that the demand from major emerging markets which is pushing up the price of diamonds on a continuous basis.

For investors worried by unstable stocks and bonds, as well as governments struggling to determine the future of their economies, and possible economic problems down the road, diamonds can represent a strong investment vehicle. As with precious metals, such as gold, diamonds too have great intrinsic value, are easily moved around, and can be sold almost everywhere. Investing in diamonds is increasingly being seen as following in the footsteps of gold as providing a worthy investment opportunity and a safe investment haven.

Consequently, business groups are being set up to provide investors, worried about financial markets, with both an alternative investment option as well as benefitting from rising demand and prices for the stones.

Investing in diamonds has often been held back by the fact that the product was just too heterogeneous. There are thousands of classifications, and prices for similar stones can be different both between markets, such as New York, Belgium, Israel and India, and within the markets themselves as well.

Investing in diamonds and gold as a solid asset, provided a means of diversifying investments, and that has grabbed the interest of investors used to seeing traditional investment vehicles collapse unexpectedly.

With China having taken over as the second-largest market for polished diamonds, and strong demand from India, and even the U.S. diamond market rebounding, rising consumer demand and investor interest is seen further boosting diamond prices.

Gold and diamond prices have traditionally moved together, and that has largely been the case in the past year as well, although the decline in the price of gold, silver and platinum has been much more severe than that for diamonds. Although diamond prices have largely stood still, the price of gold declined in 2013 by around 30 percent and silver was down by about 20 percent.

“Rough diamond production peaked in 2006,” said Edward Sterck, a London-based analyst for Bank of Montreal. “Despite some returning production and a handful of new mines forecast to enter production … rough diamond supply is highly unlikely to ever return to its 2006 high water mark." In the long term, the outlook is extremely positive for rising polished diamond prices, he added.