Diamonds are a hot commodity – with investors

With prices of the precious stone soaring, outpacing even gold, the symbol of romance is also proving to be a sound investment - and not just for the rich. Jane Williams reports

Exotic diamonds such as the Yellow Tiffany, the Hope and the Centenary fire the imagination and create more than a sparkle of desire.

Admired as much for their beauty as their history, diamonds suggest romance and wealth and are exquisite examples of the wonder of nature.

Now, with diamond prices soaring, outpacing even gold, the precious gem is also proving to be a sound investment - and not just for the very rich.

Although diamonds have been used as ornaments and for trade for thousands of years, it wasn't until after the Second World War that De Beers created the famous "Diamonds Are Forever" campaign, bombarding young men with the idea that diamonds equate to romance and no courtship was complete without one, making them an object of desire for the masses.

Since the 1940s, the worth of diamonds has increased by about 15 per cent a year.

After a brief decline during the recent economic downturn, demand is now outstripping supply at a rapid rate and prices have soared.

Rough diamonds have gained almost 30 per cent in value since January, pushing up the polished (or cut) diamond prices by between 9.6 per cent and 15 per cent.

With such a large lag in the price of polished diamonds, there is speculation that bigger increases are still to come.

"Rough diamond prices have just gone ballistic," Charles Wyndham, the founder of WWW International Diamond Consultants, told Bloomberg News recently.

"Polished is grossly undervalued. If people are pushing rough skywards because of an anticipated shortage, at the very least the same should apply to polished."

The reason for the sharp rise is threefold.

When the recession started, the world's top five or six diamond suppliers, which control 85 per cent of the world's diamond mines, cut back development activities, closed mines and generally reduced supply, while retailers let their inventories sell down.

When the economy picked up, demand was much stronger than anticipated, driven by markets in India and China, firing prices and attracting the attention of speculators, which pushed them even higher.

While the bubble can't expand forever, diamond experts expect further increases over the next six months before the market reaches a plateau. "One characteristic of the diamond prices is that it doesn't fall, it's much less volatile than gold," says Karim Merchant, the Dubai-based chief executive of Pure Gold Jewellers.

"I feel diamond prices can easily increase another 10 to 15 per cent from here before the end of the year, as typically it's during summer that American retailers start buying for the Thanksgiving and Christmas seasons."

Saul Singer, a partner and investment diamond specialist at the US-based Fusion Alternatives investment house, also expects investment in diamond fundamentals to remain robust.

"We've maintained our overall positive outlook for investment diamonds, both in the short and medium terms, and expect prices to continue to trend upwards in 2011," Mr Singer said in a recent commodity report.

But whether diamonds should be seen as a commodity such as gold or silver is debatable.

Many market watchers say the variables in diamond pricing make this impossible, but, while the diamond industry is not much enthused about introducing futures trading, Rapaport, the leading US-based diamond price and information provider, is keen on creating a diamond futures market.

Peter Meeus, the chairman of the Dubai Diamond Exchange, says the improving economy and strong demand from emerging markets has helped to boost the investment value of fortified diamonds.

"Traditionally marketed as an ornament, the industry must do more to create awareness of the investment value of diamonds," Mr Meeus says.

"Consumers need to know their hard-earned money is safe when invested in a commodity that has always been in constant demand and will become even more so in the future."

Although investing in diamonds is easier for punters with deep pockets, anyone with a few thousand dirhams can purchase a certified solitaire that, if kept in its seal, could increase considerably in value in the future.

Mr Merchant advises people looking for investment diamonds to ensure they know what they are buying and not to take the first price.

And, most importantly, to make sure the diamond has been graded by an independent, internationally recognised institute such as the Gemological Institute of America, the EGL USA Institute or the IGI Institute of Gemology, which opened its largest diamond grading laboratory in Dubai's Jumeirah Lakes Towers in February.

The value of diamonds is based on the four Cs: cut, clarity, colour and carat.

Carat is the weight of the stone, while cut refers to the way the diamond has been shaped: its faceting pattern and polish or surface finish. Clarity, or purity, refers to the diamond's ability to reflect light without flaws. And, while most diamonds are white or colourless, the coloured, or fancy diamonds, are the most rare and the priciest.

A diamond's value is not directly linked to stock markets, which means it can hold its value during a recession while gaining in value during times of inflation. And being small, it is easily portable.

If buying for investment only, minor investors should buy just the stones - once stones are made into jewellery, the price of gold and labour pushes up the cost - and be prepared to wait.

Diamond investment does have its drawbacks because they are specifically priced. There is no universal world price per gram and they are not easily sold, so, like a good car, unless an investor is able to buy at market price, the value of the diamond will drop the minute a buyer leaves the store.

"If someone has bought at a good price and can hold onto the diamonds, their value will increase," Mr Merchant says.

The most successful investments are in the niche market of special and unique diamonds.

Pastor-Genève, a worldwide wholesaler of high-end diamonds, says the key to making a good investment is to buy the most rare and largest diamond you can find.

Experts agree that prices for coloured diamonds, pink in particular, are on the rise, with stones previously selling for US$500,000 (Dh1.8 million) to $600,000 a carat now attracting about $1m a carat.

Investors can also gain exposure to the diamond market through funds. These funds capitalise on the long-term value and appreciation of high-quality, fancy stones, but, again, they are aimed at the very rich.

The KPR Diamond Fund requires a minimum investment of $250,000, while the minimum investment required to participate in the Diamond Circle Capital Plc Fund is $1m.

Rupert Connor, a senior financial consultant with Acuma Wealth Management in Dubai, says an easier way for everyday investors to invest in rough stones is through special purpose vehicles (SPVs).

Investors can also gain exposure by purchasing shares in diamond companies, although most of the largest producers of diamonds, such as De Beers and Russia's Alrosa, are private enterprises and others, such as Rio Tinto and Anglo American, are not pure diamond plays.

Cynics may dismiss diamond investment as one of the biggest hoaxes of the 20th century and insist the diamond market and its prices are artificially created.

This may have been true in the past, but today the gems are mined, cut and sold through many different channels, while the market is closely scrutinised and its price established by a multifaceted, globalised market economy.

pf@thenational.ae