Investing in diamonds, a complete guide

How to invest in diamonds? In the world of investments, diamonds represent a fascinating and often underestimated niche. Investing in diamonds not only helps diversify your portfolio but can also act as a hedge against inflation and financial market volatility.

However, accessing the investment diamond market requires specific knowledge, especially for beginners. First of all, it is necessary to know the key factors that influence the prices of investment diamonds, such as the 4Cs (Carat, Color, Cut, and Clarity, from the English Cut, Color, Clarity & Carat Weight) and how these characteristics determine the value of a diamond. But how to buy investment diamonds and how to avoid the most common traps in this sector?

Why invest in diamonds

Here are 6 reasons why investors opt for diamonds when diversifying their portfolios.

1. Diamonds do not take up space

Diamonds have always been used as an excellent means of transferring value. The fact that such a small item can be worth so much money is amazing. It is possible to have a million-dollar diamond in your pocket.

2. A diamond is a durable good

It does not break or deteriorate, it is the hardest substance on earth. You don’t have to worry about it breaking, just about not losing it (and it can be insured anyway).

3. Inflation Proof

Real estate, gold, silver, and diamonds usually appreciate alongside inflation. Unlike other commodities, diamonds are more resistant and transportable, which is why, even if you don’t want to buy diamonds for investment purposes, you can buy them simply by considering them an alternative way to put money aside.

4. You can enjoy them

Since diamonds do not deteriorate, you can mount and wear them even if you bought them for investment purposes.

5. The sense of security

Diamonds are a physical asset. You can hold them, look at them, and even wear them. They provide a sense of security more than stocks and other financial assets, which may just look like lines going up and down on a computer screen.

6. Market Stability

Diamonds have proven to be a stable investment over time. Despite economic fluctuations and financial crises, the diamond market has maintained remarkable resilience. This stability comes from the constant demand for diamonds, both for industrial purposes and as luxury jewelry. Investors can therefore consider diamonds as a safe and stable component of their investment portfolio.

The 4Cs of diamond investing: Carat, Color, Cut, and Clarity

The 4Cs represent the fundamental criteria for evaluating the quality of a diamond, directly influencing its value on the market. These criteria include Carat, Color, Cut, and Clarity. Each aspect has a significant impact on the beauty and price of these precious gems.

Carats

The carat is the unit of measurement that indicates the weight of a diamond. One carat equals 0.2 grams. Contrary to what you might think, a diamond of greater weight is not necessarily of greater value, as color, clarity, and cut also play crucial roles in determining its price. However, larger diamonds are rare and, as a result, often have a higher value.

Color

Diamonds are graded from D (colorless) to Z (strong coloration), with the higher grades being those with less color. Colorless diamonds (grades D-F) are the rarest and most precious, as they allow greater dispersion of light, resulting in exceptional brilliance. Diamonds with more intense colors, such as blue, pink, or yellow, are valued separately and can fetch high prices due to their uniqueness.

Cut

Cut does not refer to the shape of the diamond but to its ability to reflect light. A well-executed cut allows the diamond to reflect and refract light optimally, maximizing the brilliance and fire of the stone. Cut is considered by many to be the most important factor, as even a diamond with excellent color and clarity characteristics can appear dull if poorly cut.

Purity

The clarity of a diamond refers to the presence of inclusions and imperfections. These are classified into different categories, from FL (Flawless, without imperfections) to I (Included, with obvious inclusions). A diamond with a high clarity is rarer and, consequently, more expensive. However, many of the imperfections are invisible to the naked eye, allowing lower-clarity diamonds to appear similar to purer ones at a significantly lower price. These four criteria are essential for understanding the value of a diamond and making informed choices when purchasing investment diamonds.

How to invest in diamonds

Investing in diamonds falls into the category of alternative investments, as it must only represent a small portion of your portfolio. The reason to invest in diamonds appears clear. As already mentioned, the convenience of investing in diamonds is based on their being physical raw materials. As such, you can easily purchase them anywhere, even online. The tips below are basic guidelines, tips, and tricks on how to invest in diamonds if you are planning to do so. But, even more importantly, we explain the risks of this choice.

1. Learn (at least) the basics

Start from the beginning. Learn the basics, the language of diamonds. Start with the four Cs: Cut, Clarity, Color, and Carat weight - that’s Cut, Clarity, Color, and Weight in carats.

Scheme of diamond classification by color

2. Set a budget

Remember that investing in diamonds should only make up a portion of your portfolio. It’s true, unlike shares, the initial investment required is higher but it’s not a good reason to go over budget or beyond the portfolio share you had previously planned.

3. Diversify your diamonds

Don’t put all your eggs in one basket. Although according to the famous billionaire investor Warren Buffett "diversification is a protection against ignorance, it makes no sense to those who know what they are doing", we are not all investment geniuses. When investing in diamonds, as in other investments, it is advisable to diversify your portfolio. With a diamond investment budget of $20,000, you should consider purchasing two $10,000 diamonds, or even three.

Also, don’t buy two or three diamonds of the same type. If you want to purchase a pink diamond, consider buying a second gemstone in blue, green, or even yellow. We cannot know which will increase in value the most and which will be easier to liquidate in times of need.

4. Compare prices

The price of diamonds is set based on thousands of online buyers and sellers on the platforms. However, thanks to a large number of online retailers it is easy to compare diamond prices by asking the cost for similar stones - a more difficult task in the case of colored diamonds, all different from each other.

5. Buy rare pieces, use logic

In the diamond industry, it doesn’t make much sense to buy something that everyone has. Whoever buys a 1-carat D VS round diamond to invest, when it is time to liquidate the investment, will be selling something that can easily be purchased elsewhere, thus suffering competition from many other sellers (and producers).

However, if you own a special natural diamond, for example, a blue diamond or a pink diamond, you will be able to take advantage of its rarity. And it is important to think about the desirability of the good. For example, it will be easier to sell a cushion cut or round diamond (even if pink) than a marquise. It will be easier to sell a VS blue diamond than one with I2 clarity.

6. The importance of certification

Buy only certified diamonds. Don’t trust what the seller says (or writes, if the purchase is online). Keep in mind that every small change to a diamond’s attributes results in a huge change in its value.

We recommend purchasing diamonds with GIA certificates, issued by the most well-known and controlled gemological institute in the world.

When the time comes to sell your diamonds, the buyer will also most likely want to see the GIA classification. When it comes to colorless diamonds you can also refer to the IGI, but when it comes to colored diamonds the GIA is the only institution you can trust.

7. Evaluate the setting

When you want to sell your diamond the person who buys it will likely do so with an investment perspective - for this reason, the value of any setting is equal to zero, and the transaction value is based solely on the value of the diamond.

This does not necessarily mean that it is not worth putting a setting on your diamond. Not everyone can imagine what a diamond looks like when mounted. A quality setting can be a useful tool for selling the diamond as it can highlight its color and characteristics. The majority of extremely rare diamonds sold at Christie’s and Sotheby’s auctions are mounted. And let’s not forget that when they are mounted they can also be worn.

A small note: it is practically impossible to grade diamonds when they are mounted. If you followed our instructions, you bought a diamond with a GIA certificate indicating its characteristics - but an experienced buyer might rightly ask to remove it from its setting to evaluate it in all its aspects.

8. Save

Buying from a retailer means purchasing your diamond at the end of a supply chain where various brokers have charged their commission. Saving does not mean buying poor quality diamonds, but buying at the highest possible step in the distribution chain, trying to skip as many intermediaries as possible. Try buying directly from the manufacturers, many of these have online shops and have all the advantages of selling directly to end customers.

Buying investment diamonds

When deciding to buy investment diamonds, it is essential to consider some crucial aspects to guarantee the safety and optimization of the investment.

Gemological certificates

The first step in purchasing an investment diamond is to ensure that it is accompanied by a certification issued by a recognized gemological institute. The most reliable certificates, such as those issued by HRD, IGI, and GIA, attest to the authenticity of the diamond and describe its fundamental characteristics such as clarity, color, cut, and carat.

These documents are essential because they act as an "identity card" for the stone, providing a guarantee of its quality and characteristics. It is important to check that the certificate is recent and reflects current assessment standards.

Reliability of the seller

The reliability of the seller is another crucial aspect when choosing an investment diamond. It is essential to buy from sellers who can demonstrate their credibility and reliability in the industry. This includes checking customer reviews, confirming that the seller is affiliated with recognized gemological organizations and that they offer guarantees on the quality and authenticity of the stones.

Furthermore, it is advisable that the seller provides a detailed and accurate description of the jewel, including a photograph, and that the jewel is accompanied by a detailed gemological analysis issued by a qualified gemologist. Buying investment diamonds requires attention and prudence. Ensuring the presence of valid certificates and verifying the reliability of the seller are essential steps to protect your investment and ensure that the quality of the diamond purchased corresponds to the buyer’s expectations and needs.

leggi anche

How to buy Bitcoin ETFs

Tips for Investing in Diamonds

Investing in diamonds requires in-depth knowledge and a careful strategy to avoid common mistakes and maximize return potential. Here are some essential tips for those wishing to invest in this sector.

• Know the evaluation criteria: Before making any purchase, it is essential to understand the 4Cs of diamonds: Carat, Color, Cut, and Clarity. These parameters determine the value of a diamond and help evaluate its quality and authenticity.
• Check the gemological certificate: Ensure that the diamond is accompanied by a certificate issued by a recognized gemological institute. This document is proof of the diamond’s authenticity and describes its essential characteristics.
• Check the reliability of the seller: Buy diamonds only from reliable and recognized sellers in the industry. It is important to read reviews and check the seller’s credentials before purchasing.
• Consult a professional gemologist: An expert can provide an accurate evaluation of the diamond and advise on the best time to purchase or sell. Monitor the market
• Know the market value: The price of diamonds is influenced by various factors, including global supply and demand. It is useful to consult the Rapaport price list, one of the main sources for diamond prices, to get a clear idea of the current value.
• Watch market trends: Keeping an eye on global trends, such as economic growth in key countries like China and India, can offer clues to future movements in diamond prices.
• Evaluate liquidity: Consider the liquidity of the diamond, i.e. the ease with which it can be sold. Certified diamonds in popular cuts tend to be more liquid.
• Diversify investments: Don’t rely exclusively on diamonds as the only form of investment. It is prudent to include diamonds in a diversified portfolio to reduce risk and balance potential fluctuations in value.

The risks of investing in diamonds

There are three major risks and disadvantages in the field of investing in diamonds:

1. The non-transparency of prices

While other raw materials such as gold and silver have a price that can be followed and controlled on the market - diamonds cannot. There is the Rapaport price list that most diamond dealers rely on, but it is not sufficient on its own. The list is used as a benchmark, but while it is possible to have a copy, it is not fully useful for several reasons. It only takes into consideration the basic factors of carat, clarity, and color.

Ultimately, the price is determined by the market, i.e. by the dynamics of supply and demand. You can buy certain diamonds above and below the reference price list, and a difference of 10% can be very significant indeed. Furthermore, it only refers to colorless diamonds; there is no benchmark for colored diamonds.

The way to overcome this disadvantage is to do a lot of research. Buy from a reputable retailer, known to be fair, and be sure to compare prices online.

2. Difficulty in liquidation

Buying a diamond is relatively easy. Selling it is a whole different story. Some companies buy diamonds just like many buy gold, but they don’t pay well. You can try to sell them to other dealers, but they are difficult negotiators and you will have to beat their supplier on both the price and rarity of your jewelry. The final option, reserved for high-end pieces, is to try to sell your diamond through auction houses.

Diamond auctions organized by Christie’s and Sotheby’s attract many diamond investors and collectors.

3. Patience is a virtue

Diamonds are not stocks. There is little chance that the value of the diamond you bought will spike 30% in the year after your purchase. Consider purchasing diamonds as a long-term investment.

Investing in diamonds with stocks

You are fascinated by the diamond industry but do not have enough funds or the right knowledge to make a good investment on your own. In this case, there is an alternative solution. Throughout this guide we have compared investing in diamonds with investing in stocks - and highlighted the differences between the two. However, it is possible to invest in diamonds (alternatively) by purchasing the securities of companies belonging to the diamond industry. Additionally, there is an ETF (Exchange Traded Fund) that tracks the major diamond and gemstone companies.

GEMS by FactorShares invests in a selection of companies that produce and sell diamonds. Experts expect an increase in this type of ETF over the next few years. Another solution is to create a portfolio independently. For example, around 70% of the diamond mining industry is in the hands of four large companies: De Beers (majority owned by British Anglo-American), Alrosa (whose majority is owned by the Russian government), Rio Tinto and BHP Billiton.

Original article published on Money.it Italy 2024-07-15 18:55:45. Original title: Investire in diamanti, la guida completa