Should You Invest in Diamonds?

The global diamond industry can be a hard sell for investors.

The sector is notoriously for its lack of transparency, making it tough for investors to judge risk factors and analyze profit opportunities. Getting accurate, up to date pricing isn’t always easy, which further complicates investment decisions.

That said, there’s also an abundance of opportunity for diamond investors, especially as prices lag in 2015 (they’re down anywhere from 11%-to-15%, depending on which analyst you believe.)

A look at the Zimnisky Global Rough Diamond Price Index shows that, by and large, global diamond pricing has been positive over the long-term. 10-year growth stands at 40%, and the industry was stable through the first half of 2015, although the industry has experienced a slow down in the previous six months.

With those thoughts in mind, are diamonds an investor’s best friend in 2016? Here are a few issues to consider:

Know what you’re doing

The idea of investing in diamonds is not for the novice investor nor is it for someone with limited assets.

The sector is primarily for investors who have resources and would like to diversify away from the stock market and other traditional investments. A rule of thumb among diamond traders is this – “the greater the investment in diamonds, the greater the return.” That’s why so many rich folks invest in diamonds.

Historically, the real and most significant reason was portable wealth.  Those in power were always afraid of a coup or the overthrow of their governments. Leaders and the elite in the Middle East, Africa and Russia all have realized the same thing. That’s a big reason why diamonds are the best and easiest form of wealth transfer in history – a tradition that continues today all over the world.

Tough on liquidity

While gemstones (a term that generally includes diamonds, sapphires, and emeralds) are in many ways a good investment, given their high relative value and the fact that precious stones are usually in high demand, be careful before you invest.

As the number of diamond stocks, like DeBeers or Rio Tinto, are fairly limited, you may be tempted to buy physical diamonds on your own, as many hard asset investors do. The downside in doing so is that diamonds aren’t a good liquidity option, i.e., if you need cash quickly, they’re not easy to sell.

Unlike gold, you can’t just walk into a diamond retailer or buyer and get the spot price you saw today on diamond prices. What buyers are looking for is a gemstone’s quality and the cash a buyer is willing to pay, and those two subjective factors that can hinder you from getting your best sales price.

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If you’re in the market for a diamond investment, know what factors into a precious stone’s price:

  1. Carat – The weight or size of the diamond.
  2. Color – The purity or lack of any other hints of color.
  3. Clarity – The absence of internal imperfections.
  4. Cut – The proportions and relative angles of the facets
  5. Shape – The shape such as round, cushion, princess, emerald, etc.
  6. Market supply and demand
  7. Grading – Reports from labs such as GIA, AGS, IGI, HRD

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Watch out for con artists

There’s no shortage of fraudsters out there who’ll take advantage of new gemstone buyers (for example, if you hear the term “investment grade” from a seller, head for the exits – there’s no such thing in the diamond market).

To mitigate any fraud issues, retain a trusted gemstone professional who can analyze and verify the true value of a diamond you’re considering for purchase. Just Google “diamond appraisers and your area code” and you’ll likely come with a handy list of professional appraisers.

Look to China

The Financial Times reports that China is a lynchpin for the diamond sector these days. The Times reports that the Chinese diamond market is “soft” right now, but a longer-term view reveals an upward path for hard assets a year from now.

Stephen Lussier, head of De Beers’ Forevermark brand, and Alan Davies, head of Rio Tinto’s diamonds & minerals unit, states the China market should rebound by 2017. That bodes well for the entire diamond industry, as China has been the fastest growing diamond market in the past few years. Bloomberg notes China comprises roughly 13% of the $85-billion-a-year global market.

Know your tax liability

Diamonds are subject to taxes like most investments, and capital gains taxes do apply. Make sure you discuss any tax-related issues related to a diamond purchase with a trusted accountant.

Like most investment classes, the most successful investors are the one who are prepared; who work with trusted professionals; and can afford the accelerated risk levels that come with the territory.

Keep those tenets in mind, and you too, can shine on like a crazy diamond – just in time for 2016.

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Brian O’Connell is a former Wall Street bond trader turned freelance writer with 15 years experience covering financial news and trends. He is the lead consumer finance writer at TheStreet.com as well as a contributor to Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, Yahoo Finance, CBS Marketwatch and others.