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Wednesday 16 April 2014

Can diamonds be an investor’s best friend?

The allure of the diamond is a hard thing to resist. Ask James Bond, or Marilyn Monroe and two answers you may get are ‘Diamonds are forever’, and ‘Diamonds are a girl’s best friend’. What about as investments though? While many investors think that diamonds are a bit of a ‘sure thing’, like precious metals, fact of the matter is that investing in diamonds is more a tricky business, that needs skilled planning and due diligence, lest an investor see his investment go belly up!

Why are diamonds so tricky as an investment?

The very fact that every diamond is as unique as the possessor of the stone, proves to be a rather difficult problem. Says trade analyst, Randall Clarke, “When it comes to diamond, each diamond is as different from the other as chalk is fromcheese. This makes setting a common trading price for diamonds highlyimprobable, if not impossible.” The lack of a common trading price or standard price, like in gold or silver, makes tracking prices of diamonds, extremely difficult.  

The purity of a diamond is also determined by the 4Cs. Now each diamond has its own unique, cut, color, carat weight and clarity, this makes it virtually impossible to find the perfect stone to compare all other stones to, let alone invest in.

Change in trends:

With the world economy in a slowdown mode, what were considered traditional powerhouses in terms of return on investment, like high yield bonds and long term fixed deposits and mutual funds, have taken a beating of sorts. High net worth individuals are now looking at non-traditional means of investments, which can also be enjoyed at the same time. Be it wine, art, gold or real estate, the returns in these, non traditional sources, is all of a sudden more attractive and by all means more enjoyable than the ‘waiting game’ that traditional investment sources of investment entailed.

When such a paradigm shift is slowly occurring, diamonds are the most logical next hottest investment destination. The roadblocks in such an investment option however, mean that diamonds aren’t yet the new currency of trade in the world. Clarke chips in, “Until the Securities and Exchanges Board, can determine a way, where diamonds can be traded in paper securely, over a Stock Market, something like a Diamond Exchange Traded Fund (ETF), the returns on investment will be more difficult to standardise and predict, making trading in diamonds a much riskier proposition.”

Mark up prices:

The reality of the matter is that unlike gold, oil, or property, diamonds are still traded in bourses across the world, by people who are old hands in the trade. The diamond trade is possibly the only one in the world that still relies on the ‘honor’ system, which dictates that a man’s word is his bond, and that reputation is something one must go by. Industry insiders say that every time a diamond changes hands, it’s price increases. From a polisher to a trader, the price can go up anywhere between 5% and 25%. This means that a stone bought from a trader, could have been obtained from a polisher for a fraction of the cost. Says Clarke, “People keen on buying diamonds would be well served to have an ‘in’ with a polisher. But since this luxury is not afforded to everyone, the reality of the matter is that diamond prices are what they are and they aren’t changing anytime soon. Hence the need for a market backed ETF which standardises both the prices of and the returns on diamonds.”   


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