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Diamonds Are An Investor's Best Friend as Art Fades

A string of spectacular diamond sales last week showed the world's richest people are still willing to spend, offsetting a disappointing art auction that some had seen as an omen of economic gloom.

Fears that the super-rich might not be immune to the credit crisis rose when a Vincent van Gogh landscape went unsold at a Sotheby's auction instead of fetching its expected $28-$35 million price.

Yet on Thursday, Christie's sold a rare red diamond for a record $2.6 million, while Guess Jeans founder Georges Marciano bought a huge white diamond for $16 million a day earlier, the second most expensive stone ever sold at an auction.

"With the shadow of economic recession looming over the USA these mixed auction results could look like a correction and set the tone for the future market," auction database rtprice.com said on its website.

But the results of the diamond auctions may be the more significant, given that art is a more speculative investment than precious stones, where mined supply and measurable qualities determine prices.

"Diamonds are closer to being a homogeneous product. There are average qualities, there is even a kind of general measure, whereas art, paintings, are clearly totally unique," said Gilles Moec, an economist at Bank of America.

The disappointment at Sotheby's might be a sign of the next fashion fad, or a simple price correction, as impressionist-era paintings show signs of being less in demand, experts said.

"Unlike companies where people invest in stocks or bonds in art there is no shareholder-driven cost management, no cash flow, no forecasts," said UBS art banking expert Karl Schweizer.

"Any future price development can only be assessed in a speculative way," he said.

Shortly after the dismal art auction -- which knocked a third off its market value -- Sotheby's had its most successful auction of post-war art, selling a Jeff Koons sculpture for a record breaking $23.56 million and a Francis Bacon canvas for $46 million.

Diamonds are Forever

Economists monitor prices for items like yachts, paintings and jewels to assess the outlook for sales growth in luxury goods.

The world's richest hold some $670 billion in collectable assets, according to the Cap Gemini/Merrill Lynch world wealth report. That is just 1.8 percent of their wealth, but possibly a telling gauge of sentiment.

"Weakness in financial markets or on stock exchanges can definitely have an impact on the art market ... You'll see fewer buyers coming to the market simply because they have other priorities," said UBS's Schweizer.

But it's too early to definitely say if that is the case.

Diamond dealers say the underlying reasons driving jewellery prices -- such as the huge rise in the number of middle eastern and Russian millionaires on the back of the high oil price -- remained in place.

"There are more and more people who are very, very wealthy.

A lot more wealthy people can afford expensive luxury investments ... demand is outweighing supply," said Fiona Spence at Graff Jewellers of London.

Another factor supporting diamond prices is that there is only a limited secondary market because jewellery is normally inherited, not sold.

And precious stones have a more universal appeal than fine art, where tastes may differ over time and place.

Last week in Antwerp, Graff bought one of the largest rough diamonds ever found for $10.4 million which is expected to be transformed into a polished stone of more than 100 carats.

"I think in Antwerp there were 11 people who were bidding for this diamond. It shows that people need to find these valuable diamonds," said Spence.