The following article is “copied” from another up-coming website that I am creating which will be focused on selling wholesale diamonds and diamond jewelry. The “new” website should hopefully be done in next couple of months and I will definitely share it here to all my loyal blog readers. I wrote this article because several clients and readers have continuously asked me my opinion on what I thought regarding diamond as an investment. I do hope you find the following information interesting and do feel free to provide your comments or views.
Diamond as an Investment
A very common question we get asked from our client’s is, “Are Diamonds a good investment?” As I do have some financial background, graduating with a finance degree & working in an investment bank before re-entering back to my family business, I do have a slight advantage in knowing what a good investment means.
By definition an investment (in my words) is an asset which appreciates over time and therefore allows the buyer to make some money. It should beat inflation or normal deposit interest rates – which are virtually zero today because of non-stop crisis propping up in the Western World for the last 5 years. It is also important that the asset is in demand, liquid and market price is transparent for it to be a successful investment.
So, how do diamonds fare as an asset class when we compare to above definition?
First, in terms of demand, today, there is more interest in buying a diamond ring then ever before. It has now been a tradition to buy a diamond engagement ring in the western world for the last 50 years and this trend is picking up in Asia for the last 10 to 15 years. For today’s under 35’s, which are most of our clients, there is more interest in buying diamond jewelry than any other color gemstone jewelry. There reasoning is, diamond jewelry is more elegant, has a pleasant white color and does not look cheap or showy as compared to traditional yellow gold or gemstone color jewelry. This again is their opinion and NOT mine. So, there is no question that there is a lot demand and upcoming demand for this asset class.
In terms of liquidity or market price transparency, diamond asset class has traditionally been illiquid, controlled by few hands and had a very opaque market price because it was quite difficult to understand all the different factors. This traditionally has not been good for this asset class because it does not allow the investor to understand this asset class or to know how much their diamond is worth. BIG PROBLEM! However, the last few years this trend again is changing because the more standardize certification process (from GIA, HRD, etc.,) as well as more information provided online (including us), which allows investors and end users to understand better what different diamond quality grade means and how much they should approximately cost. This has definitely helped the diamond asset class because now when you do have GIA certificate which states, so or so quality based on the 4Cs, you can understand more what your diamond is worth and you have willing buyers who also understand what it is worth. This helps in liquidity, market price transparency and understand-ability.
Macro trends (or the big picture trends) also effects how an asset class performs. This trend again has helped diamonds as an asset class and other commodities because of low interest rate and money printing agenda’s by the western governments since the Great Recession started on September 2008, so they can restart their own economies. This has made investors more keen to store there money in “other” assets as they still want to make money – as they are not rewarded in keeping cash near zero interest rates – as well as preserve value because they believe all this money printing will eventually make all “hard” assets increase in value. This principle is simple – more printed money chasing after same hard assets means higher prices for the hard assets. I actually don’t agree with this point as I do believe the printed money is only replacing deleveraging process of the Western World and therefore, net effect is the same. However, there is huge group of big money investors who disagree with me, so you cannot “fight” against the crowd!
Please understand that opinion which I stated above is just my opinion, however, I usually do check if “my thought process” is true by looking at how the asset class has performed in the last few years. Diamond prices we have noticed have increased by almost 30% to 50% in last few years (in terms of wholesale prices). Also, according to industry bible Rapaport’s annual report (the diamond price list provider) for 2011, every $1,000 spent on a five carat diamond in 2001 would have returned $1,645 in 2011, a 64.5% increase. Not bad!
Of course, this can only be realized if you do buy the diamonds at the “correct” wholesale price. This is where normal investors like yourself can be cheated if you do buy a diamond from normal retail store or wholesaler who knows you lack the knowledge and therefore won’t give you the correct price (this won’t be an issue if you deal with someone closer to the source like us!). Retailer in general charge almost 30% to 100% markups and therefore just because your diamond value might have increased 64.5% in 10 years, it still did not cover these “extra markups” yet because you did not buy the diamond at the right price! Therefore, if you do want to invest in diamonds it is very important that you paid for it in the correct wholesale price, so you can realize the higher returns in upcoming years.
So, in the end it is your choice if you believe diamond is a good investment or not. What I believe is a diamond is just another asset class that has many positive things going for it, and therefore, in the long term should gain value. _________________
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