Diamond Investing Not for Faint of Heart

Diamonds could bring true love to investors willing to brave a tough market, but experts say heartbreak lurks for the unwary.

Jeffrey Coolidge | The Image Bank | Getty Images

Dazzling numbers make the multifaceted market seem to glitter.

According to Martin Rapaport’s “Diamond Price Statistics Annual Report — 2011,” every $1,000 spent on a 5-carat diamond 10 years ago would have returned $1,645 in 2011.

A decade-long diamond investment outpaced returns in theyen, euro, and Nasdaq or Dow Jonesindices, according to the report.

Rapaport, however, is cautious about investing in the market. He says normal investors have “no access to the market,” and that the bid/ask spread for items is “crazy.”

“Let’s say you have a diamond that you inherited from your grandmother,” Rapaport says. “Your ability to get a good price for that diamond would be a lot less than mine because I have more access to buyers and sellers and traders.”

Indeed, there are few vehicles for investing in diamonds. There are no futures or ETFsfor diamonds, unlike precious metals. While the spot price ofgoldcan be found for free online, or on TV, the most respected sources for diamond prices (like Rapaport’s price guides) are subscription-based.

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So What's the Price?

Experts, including Virginia Zart, director of operations of ETF Trends, say the complexity of diamond pricing is one of the toughest obstacles to commoditizing the diamond market. And each of a diamond’s four C’s — cut, clarity, color and carats — make standardized pricing very difficult.

De Beers, the world’s largest diamond supplier, has had requests to participate in an investment instrument, Zart says. “There are no diamonds futures,” Zart says. “So a diamond ETF would have to be physically backed.”

Founded in 1888 as a consortium of diamond producers and distributors, De Beers actually predates the Organization of Petroleum Exporting Countries, or OPEC, which includes some of the world's largest oil producing and exporting countries. At the beginning of the 20th century, it controlled about 90 percent of the diamond supply, according to De Beers.

Plus there's the emotional value associated with diamonds. Stephen Lussier, CEO of Forevermark, a De Beers company, repeats a sentiment used in Forevermark’s marketing — “every diamond is a unique miracle of nature.”

“The emotional content of (diamond jewelry) is most critical,” Lussier says. “We prefer consumers buy diamond jewelry to keep, not to trade.”

The market first waxed sentimental about diamonds in 1939. De Beers had contracted with N.W. Ayer, a leading U.S. ad agency, which suggested linking diamonds to love.

This corporate union, described in a 1982 article in The Atlantic, “Have You Ever Tried to Sell a Diamond?” reinforced the notion of better diamonds as bigger expressions of love. It also increased U.S. diamonds sales 55 percent by 1941. By 1951, Ayer penned the slogan “A diamond is forever.”

Seeking Diamond ETFs

While De Beers talks romance, others seek revenues. Among them is Saul Singer, a partner in Fusion Alternatives, which advises diamond investors. Singer says his company is working on a diamond investment fund, and trying to persuade other firms to launch diamond-backed ETFs. There's now no efficient way for average investors to access the diamond market, Singer says.

“Furthermore, a 'normal' investor will generally not be able to purchase a large enough pool of diamond assets with diverse characteristics in order to create a diversified portfolio effect,” Singer says. “On the sell-side, the 'normal' investor will be limited in his or her ability to liquidate the diamond assets at fair market value.”

For now, while a dive into diamond investing is dangerous, it could also be rewarding — especially if they become commoditized. Rapaport says those who had gold would’ve gotten a price boost when the gold ETF began. He also touted their portability, saying, if times get tough, “you don’t even have to smuggle them” — because there’s “no law against wearing a beautiful engagement ring through an airport.”

What to Look For

Rapaport also gave these tips for would-be diamond traders:

  1. Only invest in diamonds examined and certified by the Gemological Institute of America or International Gemological Institute.
  2. Get an appraiser’s opinion on a diamond, making sure it's appraised by current market price, and that the appraiser is a member of the National Association of Appraisers.
  3. Don’t get caught up paying a lot of money on insurance. Lock it up in a safe.
  4. Invest in polished diamonds, rather than uncut.
  5. Don’t buy diamonds with a greenish hue — they could be blood diamonds. Sometimes also called conflict diamonds, these kinds of diamondshave been mined in war zones and fund insurgencies or warlords.
  6. And, most importantly: Before you buy something, see if you can sell it.

Finally, Rapaport says diamonds can be more than a pure investment play.

“There’s an artistic, or there’s a luxury aspect, to investing in a diamond,” he says. “A lot of people have this relationship with diamonds or art. So having beautiful jewelry is definitely going to make your wife very happy. It’s a status symbol.”