(Investment) Return on Gems (and Diamonds)

[tradergirl]

http://www.cxoadvisory.com/individual-investing/return-on-gems/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+cxo+%28CXO+Advisory+Blog+-+Investing+Notes%29

 

[Lula]

From the last paragraph in the article:

"Reported returns are gross, not net, and transaction costs for gem auctions (principally, the auction house commissions) are very large (on the order of 10% of price each way) compared to trading frictions for stocks, bonds and gold. While a long holding period would mitigate, these transaction costs would make net returns to investors materially lower."

Yes, it is the "transaction costs" incurred at selling (whether it be auction house commissions for "important" gems or the difference between what you paid and what the pawn shop is willing to pay for the typical engagement-wedding ring diamond or gem) is what makes gems a not-so-attractive investment. Add in the insurance costs (unless you don't plan on wearing the gems and instead plan on keeping them in a bank vault) and the returns are even lower.

Diamonds and gems are indeed seeing an increase in price, but they are an inherently illiquid investment.

 

[denverappraiser]

'Transaction costs on auction are substantially more than 10% each way. Christies, for example, charges a 15% commission to the seller, a 25% ' buyer premium' to the buyer, and an assortment of fees that start at about $600 per item and go up from there. That's on both the buy and the sell. Christies is actually quite picky about what they're willing to accept into their auctions and they have more sellers wishing to sell through them than they accept because they competitive folks who are good at what they do. Sothebys is similar in terms of their pricing structure. This is whose results the authors are supposedly analyzing to come to their conclusions. They're talking about hoping for an annualized return of 6.4% but are ignoring a 40% sales load. 'Materially lower' indeed.

http://www.christies.com/features/guides/buying/buyers-premium.aspx

 

[denverappraiser]

Diamonds and gems are indeed seeing an increase in price, but they are an inherently illiquid investment.

Liquidity is yet another problem. Even at auction, where the whole point it to have a date where you're reasonably certain that a deal is going to happen, the lag time can be months or even years before you get the item into the correct auction, get the catalog printed etc. An interested seller now (June) would be hard pressed to get merchandise into a major auction for November. More mainstream items, say gemstones under $50,000 retail, the resale avenue is even worse. For the most part, the auction houses aren't interested and the 'investor' is left to buy at retail and sell at well below wholesale. The implied sales load can be expected to be quite a bit higher here and the liquidity considerably worse.

Diamonds and other gems are extraordinarily cool little things and by all means buy them if you love them. They make terrific symbols for the milestones of life and if they make you feel loved or just happy to look at them then they're a wonderful thing to buy. They do have their place in the world but they are NOT reasonable investments in the financial sense for anyone other than dealers buying inventory (and maybe not for them).

 

[WinkHPD]

I find the title of this subject to be very interesting, but looking at the article I have many questions about the data provided. What do they mean, “white diamonds”? Which lab or labs were used? What weights? What range of clarities? Where were the sales located?

Further, I wonder how can the relative values be compared or tracked since 1999 when cut grading was not even introduced until 2005-2006? Cut quality assessment still varies significantly between labs and cut grading alone can impact pricing significantly! Add in all of the other unspecified details and I question whether or not the data given is at all pertinent.

Further complicating things is that we are only talking about 2033 transactions over a twelve year period. So we have, on average, 169 transactions per year, with many details unknown or missing. If these transactions cover a large variety of sizes, colors, clarities and cut grades, then the data could be horribly skewed and who knows in which direction the skewing goes? There simply is not enough data in the provided material for us to make a valid assumption.

One of the reasons the headline caught my interest is because I actually know of a successful diamond investment program for diamond professionals that is in-progress (and on pace to return more than 40% this first year). So, it is possible, even in this current and projected situation of global supply and demand.

In agreement with what Neil said, that program is probably only practical for professionals with sales outlets, not for private individuals, unless they are teamed up with such a professional.

I have said since the late 70’s, and will continue to say, that for the average person with money to invest, diamonds are NOT the place to put your money.

 

[denverappraiser]

One of the reasons the headline caught my interest is because I actually know of a successful diamond investment program for diamond professionals that is in-progress (and on pace to return more than 40% this first year). So, it is possible, even in this current and projected situation of global supply and demand.

Wink,

I'm sure we agree but just to be clear, investing in a company or a program that's supplying jewelers with diamonds is VERY different from investing in diamonds, as is investing in jewelers themselves. For people who want to 'get a piece of the action', there are plenty of opportunities in the form of mining company stocks, jewelers, manufacturers et.al. Blue Nile is a public company after all, and those would like to become YOUR competitor can become partners with the biggest gorilla in the business with a click of a mouse for a MUCH lower sales fee and with nearly 100% liquidity. Tiffanys, Zales, Rio Tinto and several others are pure jewelry plays for those who want to get on board without getting their hands dirty. Even the big auction houses are public if you think the numbers given above seem like they're getting money for nothing. Buying diamonds, and even worse colored stones, in the hopes of reselling them at a profit later (which is what is being implied by the article) is NOT a reasonable strategy.

 

[kenny]

Yes diamonds are usually horrible investments.

But . . .

I think of mine as a sensible small part of a diversified long-term investment portfolio.
If stocks crash the holders of gold/platinum/silver/real estate etc. will have a hard asset which WILL be worth something.
Maybe not even what you paid for it, but something.

I throw diamonds, especially the more expensive white ones and red green and blue ones, into that pile.

 

[WinkHPD]

One of the reasons the headline caught my interest is because I actually know of a successful diamond investment program for diamond professionals that is in-progress (and on pace to return more than 40% this first year). So, it is possible, even in this current and projected situation of global supply and demand.

Wink,

I'm sure we agree but just to be clear, investing in a company or a program that's supplying jewelers with diamonds is VERY different from investing in diamonds, as is investing in jewelers themselves. For people who want to 'get a piece of the action', there are plenty of opportunities in the form of mining company stocks, jewelers, manufacturers et.al. Blue Nile is a public company after all, and those would like to become YOUR competitor can become partners with the biggest gorilla in the business with a click of a mouse for a MUCH lower sales fee and with nearly 100% liquidity. Tiffanys, Zales, Rio Tinto and several others are pure jewelry plays for those who want to get on board without getting their hands dirty. Even the big auction houses are public if you think the numbers given above seem like they're getting money for nothing. Buying diamonds, and even worse colored stones, in the hopes of reselling them at a profit later (which is what is being implied by the article) is NOT a reasonable strategy.

Neil,

Your points are well taken. There are opportunities to buy shares of publicly listed diamond companies and this would be a low cost way for investors to indirectly invest in the currently raising diamond prices. While this is an interesting direction, it is not what I am talking about.

Lets look at some of your examples. For Rio Tinto, diamonds are a minor part of their business. Investing in Tiffany’s or Zales implies that you are actually investing in their infrastructure more than you are in diamonds. Blue Nile is even more like that as they own virtually no actual diamond inventory, so buying their shares is buying into their system, which may or may not benefit from diamonds increasing in value.

On the other hand, Harry Winston last week announced an investment deal with a Swiss company in which the investment is directly in the purchase of diamonds. Edahn Golan of IDEX published an article last week that says that this is a model which resolves the current shortcomings of most other diamond investment programs. It happens to be that the program I am talking about covers the same guarantees, but in such a way that the benefit to the investor is a lot higher.

Wink