Diamonds as investment? 8% per year?

[moneyman]

Like every guy that looks at diamonds, I think we go through phases.

First phase is, "Wow, I can''t believe these little stones are so expensive, what a ripoff!"
Second phase is, "This is a sham, but DeBeers has brainwashed my gf and there''s nothing I can do about it"
Third phase is, "Huh...diamonds have been valuable for a long time now...maybe I can view this as an investment"

Well, I''m at the third phase right now. I understand that the main reason I''m about to buy a diamond is to make my gf happy and to present my gf a valuable physical reminder of my undying love for her, but there''s no reason not to think about the investment characteristics of diamonds. I haven''t seen much trustworthy looking historical price data. I did stumble across some forum post. If you guys don''t feel like clicking the below entry, I''ll just summarize. The author thinks diamonds have and will return about 8% nominal compounded annual growth rate (CAGR). He/she also touches on a second level of collusion among dealers that maintains high prices...not sure I understand his rationale since my understanding was always that DeBeers set the price.

http://www.berkshirehathawayforum.com/viewtopic.php?f=2&t=55&sid=b92bbc0038cdd6105e367bf5b0b07700


Is 8% a reasonable estimate over the next 20 years? Next 100 years?

 

[Lorelei]

Diamonds aren''t a good financial investment and on the resale market it is regrettably usual to only recoup around 30 - 50% of what you paid....As to actual facts and figures someone else might be able to give you some info, but I just wanted to point this out.

 

[strmrdr]

diamonds are going down right now in some categories.
You cant buy or sell close enough to wholesale to make a profit on it.
Do a search of this forum for investment.
Also DeBeers no longer controls the market and is making moves towards becoming a high end jewelery chain rather than a ruler of the diamond world.

 

[ubiquitous]

May be buy it as commodity with future contracts (like oil or gold) if there is such thing. However, since each diamond is unique and you can''t simply recycle diamonds like gold by melting a ton of them and resell as raw material so I don''t think it''s a wise investment. The retail price may be going up, but it already includes a 40-50% premium from wholesalers so I don''t see how you can compete with them when you need to sell your inventories in the future.

 

[denverappraiser]

The problem with ‘investing’ in diamonds is in the selling, not in the buying. Define your terms. As an investor, the way to evaluate an investment involves your cost and expected sales price, the carrying time and any expenses incurred along the way like insurance and security as well as any transaction costs you may incur like taxes and dealer commissions.

I mention this because this is NOT how the people pushing diamonds generally calculate the appreciation. That’s done by comparing the retail cost (another fuzzy term by the way) to buy one in a particular market on a particular day with the retail cost to buy one in that same market on another date. That’s perhaps a valid point for why to buy one today rather than in a year but it’s NOT evidence of an investment opportunity.

If you think diamonds are on their way up and you want to bet some money on that, you need look no further the stock market. Many of the big retailers, like Blue Nile and Tiffany are public companies as are several of the big miners, like BHP Billiton, Rio Tinto and Anglo American (the #1 partner in DeBeers). In cutting, you can become partners with Suashish Diamonds or Classic Diamonds, two of the big players in India. In all of these cases you’re carrying costs are nominal, your transaction costs are near zero and your liquidity when it comes time to sell are extremely high. Who knows how these will pan out but THAT’S an investment. You can, of course, also bet that diamonds are on their way down by betting against these folks. 2008 was a bad year for the lot of them and short sellers did pretty well. Who knows how 2009 will play out.

Meanwhile back at home, buy diamonds if you love them and if your honey will love them. If she can look at them and be reminded every day that she's loved than you got your money's worth. That too is an investment but of a different sort. Talk to your accountant and financial adviser about your financial strategies, not your jeweler.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

 

[Lady_Disdain]

Buying diamonds as an investment is very different from buying a retail diamond for an engagement ring.

Anything bought retail is very rarely a good investment. There are too many middlemen and mark ups along the process. WHen you sell, however, your price will usually be below trade prices.

If, on the other hand, you buy direct from a mine, send the rough to be cut directly and at discounted volume prices and have a direct route to market, then, yes, diamonds might be a good investment.

 

[3cd4her]

A little off subject, but based off of Lady_Disdain''s comment how nice would it be (if you knew what you were doing) to get a raw stone and have it cut by someone. Probably not very possible and I''m sure you''d need to know a little more about diamonds than at your standard retail level. Talk about wholesale cost!

 

[denverappraiser]

Date: 1/30/2009 7:56:56 AM
Author: Lady_Disdain
Buying diamonds as an investment is very different from buying a retail diamond for an engagement ring.


Anything bought retail is very rarely a good investment. There are too many middlemen and mark ups along the process. WHen you sell, however, your price will usually be below trade prices.


If, on the other hand, you buy direct from a mine, send the rough to be cut directly and at discounted volume prices and have a direct route to market, then, yes, diamonds might be a good investment.

Even this is very rarely the case. Although it’s true that there’s an industry of people doing exactly this and there are some profits to be had here for those who want to get into it, you are completely discounting the skills of the traders. Some can make money at this but, of late, even the pros are taking a shellacking (as evidenced by their stocks and the number of bankruptcies in this industry).

There’s an industry here and there’s money on the table but a consumer buying a piece of rough and having it cut is almost a guaranteed loss financially. I literally get offers on a weekly basis from someone in Africa or South America who is offering to sell me rough diamonds directly from the mines in order to cut out all of those middlemen. I see consumers routinely who have traveled to diamond producing countries who have picked up a ‘bargain’ from some slick talker in the bazaar. It never works out. NEVER. Importing diamonds from South Africa or Venezuela makes for a great souvenir of a visit to a beautiful and interesting place and I would encourage people to do it for this reason but it is NOT a business opportunity. For those who do this, by the way, pay attention to the paperwork. The rules regarding traffic in stolen or 'conflict' diamonds can trip you up when you pass through customs on the way home.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

 

[Lady_Disdain]

Date: 1/30/2009 8:50:21 AM
Author: denverappraiser

Date: 1/30/2009 7:56:56 AM
Author: Lady_Disdain
Buying diamonds as an investment is very different from buying a retail diamond for an engagement ring.


Anything bought retail is very rarely a good investment. There are too many middlemen and mark ups along the process. WHen you sell, however, your price will usually be below trade prices.


If, on the other hand, you buy direct from a mine, send the rough to be cut directly and at discounted volume prices and have a direct route to market, then, yes, diamonds might be a good investment.

Even this is very rarely the case. Although it’s true that there’s an industry of people doing exactly this and there are some profits to be had here for those who want to get into it, you are completely discounting the skills of the traders. Some can make money at this but, of late, even the pros are taking a shellacking (as evidenced by their stocks and the number of bankruptcies in this industry).

There’s an industry here and there’s money on the table but a consumer buying a piece of rough and having it cut is almost a guaranteed loss financially. I literally get offers on a weekly basis from someone in Africa or South America who is offering to sell me rough diamonds directly from the mines in order to cut out all of those middlemen. I see consumers routinely who have traveled to diamond producing countries who have picked up a ‘bargain’ from some slick talker in the bazaar. It never works out. NEVER. Importing diamonds from South Africa or Venezuela makes for a great souvenir of a visit to a beautiful and interesting place and I would encourage people to do it for this reason but it is NOT a business opportunity. For those who do this, by the way, pay attention to the paperwork. The rules regarding traffic in stolen or ''conflict'' diamonds can trip you up when you pass through customs on the way home.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

Might is the keyword... If there was a guaranteed way to earn (licit!) money..

 

[strmrdr]

importing diamond rough without the right paperwork will earn you a trip to club fed so fast your head wont have time to spin.
Even importing polished can be an issue if it is not mounted and not for personal use.

 

[Todd Gray]

It always amuses me when consumers who admittedly know little about polished diamonds begin to discuss the profits to be made by going directly to diamond producing countries with the intention of buying and later selling diamond rough for a profit. Here''s a tip, "we have people for that" and even they get ripped.

According to news articles that have appeared in various trade magazines, over the past year the diamond industry has been plagued by fake diamond rough. In one incident, con artists attempted to defraud diamond dealers by offering them colorless topaz as diamond rough. Suspicions arose because in addition to being priced below market, the stones were always ice cold when tested and had unusual fractures. The rough crystals tested positive on the diamond tester, but shattered on the cutting wheel. Another scam attempted earlier this year involved a diamond rough imitation believed to be phenakite, a mineral beryllium silicate. While to date, there have been no reports of faux diamond rough being sold at the retail level, I suppose that all that is needed is one eager beaver looking to make a quick buck in the diamond market...

Consider this for a moment, if it was really all that profitable and as easy (and safe) as the concept seems, don''t ya think we''d be doing it? We''re in the trade and all

Not even the cutters travel direct to diamond producing countries to buy diamond rough! They buy it at sight sales or at rough tenders under safe, controlled conditions which provide them with a consistent diamond buying environment - the selection of diamond rough is a specialty within the realm of gemology that is best left to people like our good friend Lieve over at Infinity! Now there''s a lady who knows what to do with a rock!

 

[diagem]

Date: 1/30/2009 10:32:03 AM
Author: Todd Gray

According to news articles that have appeared in various trade magazines, over the past year the diamond industry has been plagued by fake diamond rough.

A bit exaggerating..., but crooks exist everywhere... (but a measly handful number of attempts don''t measure to a "plague".)

But since you guys are on the investment issue..., here is an interesting read: http://www.idexonline.com/portal_FullEditorial.asp



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POWERED BY TACY NEWS - SERVICE


Watch the Emerging Diamond Funds
There are a number of diamond/commodity linked structured products (derivatives) on the market, which ostensibly, or potentially, provide investors with considerable upside gain when cashing in on the rising value of the underlying diamond commodity. In some of the diamond funds that are operating, or that are still in the making, the investor buys shares in a fund that invests in diamonds; in other instances, the investor actually purchases diamonds – or titles to specific


diamonds.

Diamond Circle Capital, the approximately $70 million fund that is listed on the London Stock Exchange, began purchasing large diamonds just before the September 2008 collapse of large diamonds – though, luckily for the investors, the fund is still sitting on considerable cash.

In early December, 47 percent (by value) of diamonds in the fund’s portfolio consisted goods in the 10-30 carat range, 23 percent greater than 30 carat, 15 percent in the 5-10 carat range and the remaining 15 percent in goods below 5 carats. When looking at the color of the goods, some 12 percent is invested in pink diamonds, 5 percent in green, 14 percent in blue, 6 percent in yellow and 3 percent in red diamonds. The remaining approximately 60 percent is invested in colorless.

The fund’s net asset values have declined some 10 percent since inception, but its share price is trading somewhere 50 percent below its issue price, as, clearly, there is presently little liquidity in share trading. Such a low share price doesn’t look good, though it is in “good company.” The trade in the large diamonds, wrote the fund managers, remains quite paralyzed. However, they also note that “still, aggressive or forced, sellers are still conspicuously absent, which is a major difference with other markets and points to a considerably lesser relative vulnerability overall and in the distance.” The fact that investors liquidating their investment do not trigger a corresponding sale of diamond assets remains one of the fund’s more interesting features. Moreover, the diamond portfolio contains quite interesting goods.

There are more funds either in the market or in the making. Some of these funds are sponsored by non-diamond banks such as UBS or Credit Swiss, while others are backed by more of the familiar names in the diamond industry. Noteworthy is the Antwerp Diamond Bank Private Equity Ltd., based in the Channel Islands, which launched a Diamond Value Chain Fund that invests in the entire diamond pipeline –i.e. in rough, polished, mining assets, factories, etc. The underlying assets are potentially any promising value proposition found in the diamond value chain. Through a beautiful two-volume publication, this fund provides investors with a wealth of information. I have no hard data yet on the performance of the fund – except knowing that it was launched in 2008 – but will endeavor to meet with the fund’s management shortly.

The idea of trying to capture non-banking money to bring into the diamond business remains a valid and important effort that deserves to be supported. The successful securitization of diamond stocks or of accounts receivables involving some large Indian companies provides hope that more of such instruments will be developed in the diamond industry.

Fancy Colored Diamond Fund

The immediate reason for writing these lines, from a hotel room in Geneva, is that I briefly saw a draft of a prospectus being circulated within Credit Swiss Bank on a fancy colored diamond fund. This fund is to be created by two (or actually three) experienced Israeli diamond dealers. Though the strength and reputation of the sponsors provide a source of considerable comfort, also to investors, I was quite taken aback by some of the very optimistic descriptions in the issue document.

The document notes that the fund’s objective will be a 20 percent return on capital invested. It tells investors that the value of blue diamonds doubles every 5 years, the price of pinks doubles every 4-6 years as does the price of yellow goods – since 1970, the date from which it was possible to monitor price movements. As investors know that past performance provides no guarantee for the future, one can live with these descriptions.

Eyebrows are being raised, however, about the proposed fund’s structure. As the prospectus has not yet been issued, it would not be appropriate to give the names of the sponsoring entities. Let’s just call the main sponsor S. Company for the purpose of this article. S. Company tells investors something to the effect of: “Give us minimum $1 million with which we’ll buy fancy colored diamonds for you. We’ll then send these goods on memo to reputable high-class jewelers to see if they can sell the stones.” The investor locks in his money for at least three years. If during the first year he needs his money back, he is charged a 10 percent penalty; this goes down 5 percent the second year. After three years, the investor can have S. Company sell the diamonds in the market and he will get the money or, alternatively, S. Company will simply give him the diamonds and the outside investor can try to sell the goods himself.

A dedicated website would allow the investor to monitor the status of his investments 24 hours a day. The idea is that the sponsoring company actually does everything – it first sells the diamonds to the investor, then it will hold these diamonds in trust and try to sell them to third parties. Eventually, when not successful, it will, after three years, allow the investor to sell the goods himself – which is an unrealistic proposition. This makes the investor almost totally dependent on S. Company.

We didn’t see any language (yet) about the investor’s ability to check the prices of the initial investment. We also didn’t see any language yet about third-party verification or checking. It still may come and we don’t want to jump to conclusions. The concept is quite intriguing. It certainly is quite significant that Credit Swiss Bank is willing to support such a venture.

Investors Need a “Fair Chance” to Make Money

Anyone who understands the depth of the current credit crunch, and watches the size of the credit facilities shrink in tandem with either the decrease in trading activity or in the values of inventories, must and will applaud all efforts to bring outside capital into the business. I would hope, for example, that a country like Botswana might contemplate the creation of a rough diamond fund, under its control, to buy up the Angola production. This has been suggested by a Botswana parliamentarian.

This would constitute a kind of Price Stabilization Fund, which would also protect the prices of Botswana’s present and future mining output. Given its economic strength in the diamond business, such a fund could potentially do miracles for Botswana. One of the holders of a buying license in Angola, Lazare Kaplan International, also has access to a quarter of a billion dollar U.S. government guarantee on investments in Botswana. It is mind boggling what a combination of all these factors could produce.

Why bring up Angola? There is presently a vacuum there. Some of the major buyers of rough have withdrawn from the market. Prices in Angola have fallen, in some instances, to merely 30 percent as compared to pre-crisis values. The government – or, more precisely, high government officials – seeing the price of oil fall to only tens of dollars a barrel, has “rediscovered” diamonds.

In January these government officials put a temporary freeze on exports and are now considering a scheme setting a “minimum price” for rough diamonds sold by mining companies. One of the options being considered is to sell rough at no less than 25 percent below the respective category’s August 2008 values. It is too early to conjecture how such a scheme may evolve – if at all.

Another fund of potential concern is Russia’s Gokhran. The fact that almost the entire Alrosa output is transferred to Russia’s government stockpiles provides “comfort” only in the short term. Only God (and Vladimir Putin) knows what Russia may do with these goods in the medium to long term. The Alrosa mining company, though virtually government-controlled, will shortly (i.e. in the next two weeks) be in the market to place some $50-$100 million zero-coupon notes (maturing in six months) in the European Market, which may provide a 14 percent yield (annualized).

That’s a very high price for a mining company that is owned (50.9 percent) by the Russian federal government. Alrosa will have to pay off some $1.9 billion in debt in 2009, which will be done through refinancing. This is not the place to discuss Alrosa’s financial plight, apart from simply noting that while the Russian government is buying the company’s output, the mere fact that Alrosa is willing to pay so much to borrow funds is certainly not something the industry ought to ignore.

What all these efforts have in common is the search for “outside cash.” This is something that deserves to be watched carefully. One Belgian diamantaire observed recently that even diamond financing banks have a temptation to create large investor pools in which they then can invest in diamonds of industry players caught with “dead” (non-moving) stocks. This would reduce the industry’s banking indebtedness; it would move it into the hands of outside investors and inject liquidity.

There is nothing against this – to the contrary – provided the investors know what they are investing in. There is a great difference between a fund that invests in diamonds selectively sought in the market and that gives the promise of the best possible return, and an investment in what basically may be viewed as semi-troubled assets, i.e. non-moving stocks.

Every dollar invested in the diamond industry by outsiders is welcome. Having said this, it is important not to forget that this diamond commodity market is only partly regulated – and that authorities will find it difficult to monitor performance, to find benchmarks and to judge the quality of statements. It is in the vital interest of the diamond industry itself to be alert and to watch the emerging structures. The current worldwide credit crunch, deflation and fall in commodity prices underscore the value proposition of diamonds, which (price-wise) is showing considerable resiliency.

If an irresponsible (or unprofessional) fund makes unrealistic, unfair or even false promises, this will backfire on all of us. One Swiss banker, partly in jest (I hope), remarked that “if only one single diamond fund will be perceived as selling toxic-assets to outside investors, all the millions allocated to diamond-represent-value promotions will be a waste of money. The damage would be tremendous.”

That won’t happen – but never say never. The industry cannot and should not depend on outside regulators. While embracing any new fund – we must at the same time be vigilant and critical. There is too much at stake...."

 

[strmrdr]

Some of those plans sound way to much like mortgage backed securities and we know what happened with them.
Creating long term paper assets backed by a volatile base is a recipe for disaster.

 

[moneyman]

Date: 1/30/2009 3:57:40 AM
Author:moneyman
Like every guy that looks at diamonds, I think we go through phases.

First phase is, ''Wow, I can''t believe these little stones are so expensive, what a ripoff!''
Second phase is, ''This is a sham, but DeBeers has brainwashed my gf and there''s nothing I can do about it''
Third phase is, ''Huh...diamonds have been valuable for a long time now...maybe I can view this as an investment''

Well, I''m at the third phase right now. I understand that the main reason I''m about to buy a diamond is to make my gf happy and to present my gf a valuable physical reminder of my undying love for her, but there''s no reason not to think about the investment characteristics of diamonds. I haven''t seen much trustworthy looking historical price data. I did stumble across some forum post. If you guys don''t feel like clicking the below entry, I''ll just summarize. The author thinks diamonds have and will return about 8% nominal compounded annual growth rate (CAGR). He/she also touches on a second level of collusion among dealers that maintains high prices...not sure I understand his rationale since my understanding was always that DeBeers set the price.

http://www.berkshirehathawayforum.com/viewtopic.php?f=2&t=55&sid=b92bbc0038cdd6105e367bf5b0b07700


Is 8% a reasonable estimate over the next 20 years? Next 100 years?

Who are these colluding dealers that the poster in the above link mentions? How can I buy from them or contact them?

 

[NeverEndingUpgrade]

moneyman, aren''t you just making this diamond buying process harder on yourself? Did you decide against all the great suggestions you got in your other post? Sounds like what you are looking into will wind up being a more expensive mess than just buying a nice Ideal cut round diamond from one of the trusted Pricescope dealers.

 

[bgray]

moneyman: i am sorry but you are overthinking this and trying to outsmart the diamond market. The only way to get a really good deal on a great stone (ie a good buy with appreciation potential) is to buy second hand from a distressed seller or possibly an auction. you dont know enough about diamonds to do this. truly great stones are never a great buy b/c most diamonds are over priced relative to their worth just like most stocks. your best approach is to buy the best stone you can find at a competitive price because you are likely to lose less on it if you ever want to sell or trade it.As you know the true definition of an investment is something that throws off cash. diamonds are not investments. (except possibly one of a kind rare stones ie colored and extremely large stones)

 

[Dancing Fire]

moneyman

don''t even think about it. i guarantee you will lose your A$$.

 

[honey22]

Crap! Diamonds are not an investment. You might have a valuation report to say how much they are worth, but in the real word it''s baloney. You buy a diamond cos it''s sparkly and pretty, not to make money, ever.

If you went out and bought a top cut stone for $5k, you would be doing well to recover 50% of that if you sold it. The only way you would retain it''s value if you used a vendor with a good upgrade policy, and then you would be trading the stone for another one. You will never get the same amount of cash back.

DeBeer''s didn''t brainwash her buddy, the magical sparkle of diamonds have an effort unknown to many men. Just go with the flow, it will make things a lot easier

 

[diamondseeker2006]

Invest in some land or stock index funds once they reach bottom.

Buy a diamond because it will give pleasure to one you love. It is never an investment other than a symbol of your investment in a future together!

 

[suchende]

Date: 1/30/2009 11:42:24 PM
Author: bgray
moneyman: i am sorry but you are overthinking this and trying to outsmart the diamond market. The only way to get a really good deal on a great stone (ie a good buy with appreciation potential) is to buy second hand from a distressed seller or possibly an auction. you dont know enough about diamonds to do this. truly great stones are never a great buy b/c most diamonds are over priced relative to their worth just like most stocks. your best approach is to buy the best stone you can find at a competitive price because you are likely to lose less on it if you ever want to sell or trade it.As you know the true definition of an investment is something that throws off cash. diamonds are not investments. (except possibly one of a kind rare stones ie colored and extremely large stones)

This is very good advice. If you''re looking for an "angle" this is it. Also lots of people are trying to unload jewelry right now due to economic strain so it''s a good time to be looking.

 

[Dancing Fire]

Date: 1/31/2009 9:49:26 AM
Author: diamondseeker2006
Invest in some land or stock index funds once they reach bottom.

Buy a diamond because it will give pleasure to one you love. It is never an investment other than a symbol of your investment in a future together!

very funny DS...let me know when.

 

[strmrdr]

An ering diamond is an investment in a life time of sex counteracted by 20 years of PMS.
Sometimes one outweighs the other

Sometimes its a good investment, sometimes its a bad one.

Storm hides from the pitchforks and torches!!!!

 

[strmrdr]

Date: 1/31/2009 3:19:44 PM
Author: Dancing Fire

Date: 1/31/2009 9:49:26 AM

Author: diamondseeker2006

Invest in some land or stock index funds once they reach bottom.


Buy a diamond because it will give pleasure to one you love. It is never an investment other than a symbol of your investment in a future together!

very funny DS...let me know when.

yesterday at 2pm cst, day late and a dollar short.

 

[NeverEndingUpgrade]

Date: 1/31/2009 3:29:12 PM
Author: strmrdr
An ering diamond is an investment in a life time of sex counteracted by 20 years of PMS.
Sometimes one outweighs the other

Sometimes its a good investment, sometimes its a bad one.

Storm hides from the pitchforks and torches!!!!

This should be worth at least 3 cts. More if you include being a full-time chambermaid for someone who thinks that the whole house makes a good dirty clothes hamper.

 

[Imdanny]

Well, it''s time to find a 4th phase. I don''t know what that would be but good luck.

 

[denverappraiser]

Date: 1/31/2009 3:29:12 PM
Author: strmrdr
An ering diamond is an investment in a life time of sex counteracted by 20 years of PMS.

Sometimes one outweighs the other

Sometimes its a good investment, sometimes its a bad one.

Storm hides from the pitchforks and torches!!!!

The ROI comes at menopause.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver