Gold, silver, gold, but what about diamonds? Under what conditions are diamonds a good investment? Sometimes it can be easy to lose sight of the world of investment opportunities in front of us. Plenty of the tangible and non-tangible options exist with potentials to make or break the bank.
You can go from commons stocks, ETFs and mutual funds, to derivatives like futures contracts, options, and swaps. On the other hand, you can invest in commodities such as precious metals, or alternative investments such as numismatics or art.
Within the commodities sector, diamonds hold an innate attraction over certain investors. Is it because of their industrial value? Or does it have to do with emotional attraction? If like many people, you have an affinity for shiny valuable things, you might be led to ask are diamonds a good investment? We're not investment advisors and we're not here to give you some fancy rendition of the efficient markets hypothesis. We are, however, investors who hold a variety of assets. In fact our team often argues about whose portfolio makes the most sense.
So in the spirit of the Rhianna song, will your diamond investment "shine bright like a diamond"?
To begin with, let’s consider some of the facts about diamonds themselves:
- Diamonds are made of carbon, a chemical element that just happens to be at the molecular core of nearly all life. Traditionally the most valuable pure and elemental diamonds are colourless. However, impurities in the composition or structure of a diamond can create vivid colours that add to or detract from value.
- Naturally, diamonds take roughly 1 to 3 billion years to form in nature. As it happens, though, there are now companies creating "artificial diamonds," a concept that has been around for over a century. These diamonds have become fantastically difficult to distinguish from the real thing.
- Industrially, diamonds are some the hardest known materials on earth on both the Vickers scale and Mohs scale. According to Science Alert, only recently have scientists found a material harder than a diamond: another kind of diamond.
Historically, diamonds have been a popular purchase for their aesthetic value. Yet, how far back does "historically" go? In reality, it all traces back to an advertising campaign in the 1930s and 40s that climaxed with Mary Frances Gerety's "A Diamond is Forever" for what was then De Beers Consolidated Mines, Ltd. Since then, a stone that was generally rare became a symbol of promise and affection. Not long after, a tight monopoly on the market allowed the Company to squeeze huge profits out of an otherwise plentiful commodity.
That leads to one central investment thesis for diamonds; that like gold bars, they keep up with inflation. Ancillary factors are that diamonds are generally small, tougher than nails, and in theory you can use them while you have them.
But are diamonds a good investment in all cases? The immediate challenge for most people is that diamonds are very expensive and it can be very difficult to get into the market. Moreover, how do you accurately price a diamond? Much like commemorative coins, there is a huge disparity between the retail price and the wholesale value of your purchase.
Next, there can be a major problem of liquidity, whereby selling diamonds can be incredibly difficult and you often pay a huge discount on sale. This is in-part due to the difficulty of authenticating a diamond.
A solution to these problems comes in the form of Diamond ETFs or exposure to diamond mining companies or distributors. These open-market alternatives give you many of the benefits traditionally only institutional investors have. So what? Well, the argument goes you can now focus on diamond fundamentals and as trends industrial use.
Some research indicates that investing in diamonds has similar benefits as gold. Benjamon Aur and Frank Schumacher conducted significant market research into the matter. According to that research, you can answer "are diamonds a good investment" in a couple ways.
First, the looking at the value of diamond stock, it appears that diamonds can outperform stock market investments over the long term. Second, diamonds appear to represent a superlative hedge in turbulent economic times.
The obvious challenge is whether this historic evidence will repeat in the future? According to recent market updates, the price of diamonds is steadily improving. The RapNetDiamond Index reports that 1-carat diamonds have been inching up, for example, 0.3% in December.
On the other hand, this may partially reflect new tax laws coming into effect and strong holiday spending.
It is very important to note that public equity diamond investments have only been around for a few years. The PureFunds ISE Diamond/Gemstone ETF was launched in 2012 by PureFunds. Not surprisingly, it has since been the subject of quite some turmoil. Obviously, this is not the kind of image you want to be sending the investment community about the validity and stability of a diamond ETFs. A chief issue with diamond investing, even institutionally, is that there is a lack of global standard.
While several formulas have been developed to try and illustrate how a larger diamond market would become more valuable, there is a clean lack of how to get there. For example, Jean-Baptiste Tavernier put together a formula where Price = W^2 x C. In other words, Price equals the square of the carat weight multiplied by the price of one carat.
As you can see, there exist some major issues with investing in diamonds, at least in the way they currently are bought and sold. At a basic level these begin with being sure you are getting a fair price for the diamonds you buy and sell. This is a truly problematic issue because large funds have a likewise hard time pricing diamonds values. More broadly, the rise of artificial diamonds and other trends may be creating issues. With that in mind, some new solutions like VULT may be changing that.