Investment

[Richard Sherwood]

-----------
So, a sexy women wearing a sexy 3 ct stone will *really* stand out.
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Ohhh, my heart stops just thinking about it...

 

[Richard Sherwood]

As a private individual, the key to realizing the greatest return on a gemstone investment is to sell to the same market the dealers do, the public.

Then you go from that "high bar" of return to the diminishing returns of selling to or through auctions and dealers. If you're going to do it through this avenue, you have to be sharp, knowledgeable, and buy right.

Once I sold a six carat emerald in an antique piece for $40,000 to a private individual. I had the emerald on consignment from another private individual who was making a profit after purchasing it in an auction. I was making a profit selling the piece. Then, six months later I found out the private resold the piece through Christie's in New York for $60,000.

Because of his knowledge, he recognized the piece as being Russian, with a fine Russian emerald (rare).

There's plenty of savvy private individuals out there making money on Art, Antiques, Collectibles & Gemstones. The key is they're not dummies, and study the market they're investing in. The same should hold true whatever market a person is going to invest in, whether it be stocks or gemstones.

In retrospect, looking at the performance of the stock market for the last several years, would you have rather put $70,000 in the market five years ago or in a 7 carat gem quality fancy intense screaming yellow diamond?

I can tell you which I'd rather have put my money in...

 

[diamondsman]

talking about the stock market,It all depends when you get out!! I know a few people that got out at the right time and made hudreds of thousands $ on their $70,000 investment.
But.. I agree if you really want to invest in diamonds then fancy colored are the way to go!!

good luck
diamondsman

 

[abbott]

Thanks guys for all your info. Diamonds are a passion of mine and my next purchase is going to be a 3.5+ ct radiant cut. I appreciate the education you have provided me and will be sure to ask your advise on a stone before I purchase. Thanks!!!!

 

[DiamondOptics]

Hi abbott,


My best advise would be, to buy one diamond for your own personal pleasure.


Kirk Konst

 

[lacina]

Hi Richard,

I like the story with the Russian Emerald,...
Just so you know we all make mistakes I admit I once sold a Kashmir sapphire for $2000 / carat 2+carat stone. I have received it with a parcel of Ceylon Sapphires packaged as Kashmir with a big question mark,...
Knowing the people the parcel comes from I just loughed and ignored it,...
A good customer of mine walked into my office wanting to see the new arrivals and purchased this stone right away,... I would swear this was a ceylon color and could not fond any inclusion that would tell me to watch out! Noone with the exception of a good lab would be able to tell the origin. But I haven't learned my lesson yet,... This can happen anytime anywhere to anybody. Maybe with the exception of possibly two people in the trade I know,...
One think was sure I have a very happy customer after the stone made it back from AGL ,... The stone was worth many times more than what he paid for it! A smart investor!...
George

 

[lacina]

Hi Diamondsman,
You forget who you are talking to,.. This stone was 5.10ct GIA Fancy VIVID yellow,... If you have many VIVID yellows in stock I want to know about you!...
No kidding,...
Oh, I don't the difference between Fancy yellow and Fancy Vivid yellow,...
I just started selling diamonds recently I think it was in 1986 LOL,...


Best,
George

 

[diamondsman]

HI lacina
How many do you want??Are you interested in buying them??
I have quite a few that I can offer you,But I will not be able to be do much on the price,If you want to buy them below market price I am not the source.


diamondsman

 

[diamondsman]

HI lacina
How many do you want??Are you interested in buying them??
I have quite a few that I can offer you,But I will not be able to be do much on the price,If you want to buy them below market price I am not the source.


diamondsman

 

[lacina]

Hi Diamondsman,
I have checked your vebsite and didn't find any Vivid yellow listed.
The next time I have a hard time finding one, I will check with you to see if you can help. You may have a source larger than I do, so there is a chance we can help each other in the future.
I usually have to go long way to buy them,... Never mind the market price
Best
George

 

[diamondsman]

It will be a pleasure to help you, in your time of need, I don't list fancy yellows on my site as these are usually special orders!! and prices vary , and it has to be explaind to the consumers

I have been in the business for over 30 years!!

have a great day
diamondsman

 

[HelluvaEngineer]

I hope you don't think I'm trolling here - I know there are alot of people here who make their living in the diamond business.

Before you consider diamonds as investments, read this article:

http://www.theatlantic.com/issues/82feb/8202diamond1.htm

Then check out the per carat weight of diamonds in the 70's compared to today's prices.

If someone can enlighten me and explain how an individual (who doesn't own a retail store) can make big money investing in diamonds, please do so. It will make me feel better about my upcoming purchase!

 

[Richard Sherwood]

Helluva, the article you're referring to is probably one of the most biased pieces of journalism to ever come out regarding the diamond industry. Sheer sensationalism, coupled with a very poor understanding of the diamond market and it's history.

The 70's period you're referring to is known as the "spike" of late 1979-early 1980. During that period the price of a 1 carat D Flawless, for example, went from 15,000 per carat to 60,000 per carat, and then slammed back down to it's starting point.

What people forget is that this same scenario happened to gold, silver, gas and oil. It was the Carter years, with double digit inflation, the Hunt brothers, gas lines, and massive instability. Many people attempted to make money off the roller coaster rise of diamond prices (fueled by rabid speculation) without taking the trouble to learn anything about diamonds. Debeers did their best to warn people, but nobody listened. It was sheer herd mentality.

Taken in context, you have a wild and crazy spike spanning less than a year against a backdrop of steady appreciation over a thousand years. The only other luxury tangible asset commodities which come close to that kind of performance (other than fine precious colored stones) is art & antiques, which come in a distant second in durability, liquidity and portability.

 

[optimized]

I had written this a couple of days ago when the thread was at its peak but decided not to post it so as not to get into a big debate about it, but the last post by Richard has prompted me to post it in defense of Helluva and the story he linked to. This ended up being the sort of post that helped give birth to my signature line, and I'll be modifying it slightly to reflect the more current comments in the thread. It's a long one. Sorry in advance.

This is also my 100th post, so perhaps it's appropriate in some respect that it should be a "Tim-esque" long and contrarian one.

I don't mean to raise anybody's ire with this post, and I hope some will be willing to try to correct me if I'm wrong about anything. I fully admit to not having decades of experience in the industry but I've learned a lot so far, and my common sense is screaming at me that something about the idea of investing in diamonds is just not all that safe. With all respect to the experienced professionals who are involved with this thread, I think maybe some perspective from someone not intimately involved in the industry would be of use here.

It's a little spooky to me to be hearing some of this casually confident talk of investing in diamonds. I hope everybody is keeping in mind some sage words of caution that are sprinkled in here along with the euphoria. I agree with Diamondsman's early (and repeated) suggestion to buy diamonds for enjoyment and beauty, but be wary of thinking of them as investments. It's true that there have been many people that have successfully invested in diamonds, but a great many have been burned too. I would venture to bet that the great majority of the successful diamond investors are people who have the money, resources and contacts required to purchase extremely rare stones at a steep discount from retail through privileged channels, but their past successes are no guarantee of future potential (that sounds like a Safe Harbor notice, eh?). Barry's notes about the difficulty encountered by those without such advantages should probably be carefully considered by anyone thinking about "investing" in diamonds.

I think it makes sense to emphasize that speculation in an industry such as diamond trading should be attempted only by people who are willing and can afford to apply the necessary resources and are able to absorb the possible pain of losing a large portion of their invested capital. As a few people here have mentioned, white diamond prices that peaked during the high inflationary period of 1979-1980 are still in the tank compared to those days. The information I have indicates that white diamond prices today are roughly one quarter to one third what they were in that period, more than twenty years ago. Even gold, much more liquid and commoditized, has seen prices rise and crash with wild abandon over the years. Speculating in something like diamond value would seem a very risky endeavor.

Richard commented that the article Helluva linked to is a wildly biased and sensationalist piece that displayed a "very poor understanding of the diamond market and its history." I'm hoping for some elaboration as to what exactly is so inaccurate about it. I fully realize that there is a certain perspective that is being assumed by the writer (and that the perspective is somewhat skewed by the publication date of 1982), but just about any story that's ever printed will tend to have some particular point of view being expressed. Which parts of this one were inaccurate? I truly would like to have a better understanding.

The article's depiction of De Beers and their control of the rough diamond industry jibes pretty well with my previous understanding of the diamond markets, and the depiction of the marketing machine De Beers created to conjure demand for diamonds seems spot-on. These factors are among the things that have always made me uneasy about thinking of diamonds as being of "permanent" value. It's hard to deny that the "value" of diamonds is directly tied to controls on production/distribution of rough through an "OPEC-style" cartel price structure that controls how much rough enters the markets, and arguably keeps the prices in the secondary polished diamond market artificially high. If the market prices aren't artificially maintained in the future (or worse, demand itself just plummets), shouldn't everyone expect all these wonderful returns to evaporate overnight? The episodes of the 1979-1980 period, while perhaps not typical thus far, illustrate that the stability of the market is by no means assured. Richard characterizes this collapse as "a wild and crazy spike spanning less than a year against a backdrop of steady appreciation over a thousand years," but what isn't considered in that statement is that diamonds truly were "rare" for nine-hundred of those thousand years. The current rate of production of diamonds (along with the existing numbers of diamonds already in circulation) makes that assertion hard to support now. The value of things like diamonds is said to be inextricably linked to rarity, so with millions of carats being extracted from the earth annually, how long will they remain the "rare" item that was valued for millenia?

A key aspect of my point here is illustrated in one of Richard's posts, which IMO is one of the very common slips folks make when thinking of many types of investments (not just diamonds): "The appreciation for fancies has been nothing short of phenomenal. In my opinion, they have been racing to catch up with their intrinsic value with regards to their rarity and beauty." The thing is though, diamonds have very little "intrinsic" value at all. As Richard notes, their value is derived from a demand in the market for a particular type of rare and beautiful item. Our society is currently fond of diamonds, but that's about where the value ends. Always remember, we're talking about chunks of carbon here, with little value beyond just being rare, "looking pretty" and being a great abrasive for sanding and cutting things. There is nothing so unique or useful about diamonds (colored or otherwise) that make them a required item in life (except to cut or polish other diamonds), so there is nothing to prevent value from declining in the future if demand declines (or supply outstrips it). I'm reminded of Alan Greenspan's "irrational exuberance" comments describing the steep run up on the stock markets prior to their eventual collapse.

While it is true that fancy colored diamonds have been a more stable and profitable investment than white diamonds to date, what makes anyone think that will definitely be sustained? Lacina has written that "Colored diamonds are allways subject to sellers market," but where is that law written? Perhaps we may be witnessing a growing interest in the rarer coloreds because they are becoming more available to the common person, but the entire value of the market as an investment vehicle relies on demand increasing at a higher rate than supply. While it may seem "obvious" that they will always be so rare and thus remain in high demand, remember that it was only in 1979 that the Argyle mine was discovered (to be fully exploited in the mid-80s), which now accounts for the vast majority of fancy pinks and champagnes. Should other large deposits be found, or should demand drop, all those gains could disappear. It's a big question mark. A good example of the uncertainty of the demand is the fact that the "brownish" diamonds that were to be avoided for so long are what are happily being snapped up as "champagne" and "cognac" diamonds now. That is an example of a previously "poor" diamond color becoming valued, but the possibility of the opposite trend in diamond interest occurring is also quite possible.

Another aspect of the article that I've never heard refuted is the tendency for the diamond market to almost always be a "dealer's market," leaving the common person in a very difficult position when trying to sell diamonds. Unless an investor is able to truly buy at wholesale prices and subsequently sell at a reasonably similar level of security, the potential profits could easily be eaten up by the discounted prices being offered by the buyer. I wouldn't even care to guess at how many times I've read questions from folks about how best to sell their diamond, only to be greeted with warnings from others not to expect to get anywhere near retail value for the stones they are trying to sell.

An interesting aspect the article introduced to me is the idea of the permanence of diamonds, and how the world is already awash in them. I can think of no argument to refute the idea that any widespread effort by private individuals to divest themselves of existing diamonds would result in a rapid decline in values. This is all related to the reliance on strictly controlled distribution of diamonds that help maintain their market value. If a large segment of the population decides to sell, there is a fundamental shift in the "supply versus demand" equation, with disastrous effects on prices. Only if demand stays high will diamonds remain valuable.

In the end, I think this comes down to that very basic premise, and closely parallels the stock market (heck, even Beanie Babies) in many respects. The fact is, diamonds, like stocks and Beanie Babies, are only as valuable as the demand for them warrants. They are just stones, just as stocks are essentially just little slips of paper that say "you own a piece of this company" and Beanie Babies are just horrid little dolls. If everybody decides that they don't want to own these stones (or the little pieces of companies, or the horrid little dolls), the value of them drops through the floor. There's just no getting around it. In all honesty, this applies to a multitude of things in the world (precious metals, luxury commodities), and all of these things are subject to the fickleness of human nature. The difference is that diamonds have been thought of a "legitimate" investment for a far shorter period than stocks or gold, and as such would seem to be on shakier ground in regards to safety. It might be easy to think that diamonds will always be a central part of our society of luxury, but there are no guarantees to that effect.

I'm not pretending to know what the market for diamonds will do in the coming years and I'm not trying to lecture anybody here (although the length of this post has gotten to the point where that impression is probably going to be inevitable for a lot of folks), but I do worry about the enthusiastic way some folks promote diamonds as an investment vehicle for everyday people. In my past experiences in the forums (and repeated here a couple of times), the emphasis has always seemed to be on choosing a diamond because of its beauty and personal significance, letting any appreciation in value be icing on the cake. I think this is the more prudent attitude to take when talking about little chunks of carbon that, having been crystallized just slightly differently, would be the graphite in that cheap pencil you gnawed on as a school kid....

It's all just my $0.02, (with significant future appreciation, I hope

), and I welcome any comments anyone may have...

-Tim

]

 

[barry]

Tim;

From my vantage point inside the industry, it's
refreshing and encouraging to read your consumers
point of view. You make several salient points.
Buy a diamond for its scintillating beauty and symbol
of your love, yes. For investment, no; not unless
you are uniquely positioned, directly or indirectly
to gain, as I mentioned earlier in this thread.
In today's uncertain and weak economy, with traditional vehicles of successful investment returns not performing as well as in the past, trade advocacy and enthusiasm
for Gem investment to a less than fully informed public
must be tempered with extreme caution and caveats.

To the overall comments and tone of your post,
I say, Ditto.

Barry
www.superbcert.com

 

[Richard Sherwood]

-----------
but I do worry about the enthusiastic way some folks promote
diamonds as an investment vehicle for everyday people.
-----------

Well written post Tim, and I agree with the majority of what you've written.

If you'll re-read my posts, you'll see that I have not once referred to diamonds as being an investment vehicle for "everyday people". An "everyday person" is one who doesn't take the trouble to learn anything about the diamond market, goes out and buys a diamond at retail for the psychological purposes of romance and pleasure, and goes on with his life.

The people I have been referring to are "savvy, knowledgeable people" who take the time and trouble to become familiar with diamonds, the markets and pricing, and then purchase a diamond as close to wholesale (or possibly less through distress sales, estate sales, etc.) as possible. They then wear and enjoy the diamond for a decade or two, and if desired, can re-sell it back into the private market making a profit, often a considerable one.

That is an excellent performance for a luxury item. That's what a diamond is, a luxury item. But in the same breath, it is a luxury item which is a tangible asset. In twenty years your car, boat, entertainment system or whatever is going to be worth a fraction of what you paid for it, while the wholesale value of your diamond is going to be worth more. Since 1948, the average annual increase in the wholesale value of diamonds (as a whole) has been 6.25%.

That's what I'm talking about. The word "luxury item" is the key. Just like art, antiques or collectibles. These do not fall in the same category as land, real estate, stocks, bonds, or mutual funds. They are in an entirely different category, which most people will not profit on because they never take the time and trouble to become astute in the market.

Therefore your advice would be correct for most people. As Barry and Kirk have stated, buy a diamond for enjoyment, not for investment.

However, there is still that segment of the market who will make money in precious stones just like others make money investing in art. It is a definite, viable market which has a thousand plus year history.

Even the "everyday people" will benefit from this, because it gives the value of their diamond "staying power". If they ever need to sell it to help put a grandkid through college, they'll get something for it.

I'll try to address some of your other points later. With the length of your post I figure it will take me about a month or two. Heh heh heh...

 

[diamondsman]

Tim,

All I can say is

,
very well said (a bit too long) but

 

[pricescope]

Tim, I love it when you talk like that

 

[HelluvaEngineer]

Wow...not much I can add to that, Tim. Good job.

My only other thoughts would be that there would seem to be alot of variability in this market. Over time, you might see huge changes in diamond prices. Frankly, I cannot think of any events that would dramatically increase diamond prices (new markets, diappearing supply). However, it's fairly easy to think of several that might cause the market to plummet:

- The DeBeers cartel somehow faces outside competition, similar to the manner in which Russian supplies recently drove down monopolistic gas (OPEC) prices.

- Lab created stones, not just as expensive as the real thing, become much cheaper to produce, due to volume or a production method breakthrough. People in the industry will scoff at the "fakes", but the public may not care.

- The "diamond invention" may crumble. What if people opt for another option?

Let me be honest here. From a consumer's perspective, diamonds are artifically overpriced. I'm about to buy one for my long-time girlfriend. However, it's not because I really want to. If I want to get her a ring to show my love, perhaps I want to buy a different stone, or no stone at all, or even something besides jewelry. However, DeBeers marketing has convinced every woman that they should expect a diamond (>1 carat), and a guy is a loser if they don't buy one. How wonderful for them: they have driven up demand (EVERY man must buy one, at least once), while controlling supply.

Meanwhile, a consumer barely in the know (like me) feels like a bit of a sucker for shelling out THOUSANDS of dollars for a rock with no inherent value. I know this doesn't make me sound like much of a romantic, but look at my handle - I'm a logical guy. Several of my friends have gone through this process now, and feel like they got the shaft. "Hand over your wallet, kid. You just gotta pay up."

ok...back to investments. You say that 6.25% returns are normal, which I am suspicious of because this is much higher than inflation (which commodities such as this would seem to be linked to). But let's assume that this is correct, and let's say that I have $100,000 burning a hole in my pocket that I want to invest. Would I be smarter to invest in the diamond market, at 6.25% return, or an S&P index fund, which has historically returned 11% with minimal volatility (we'll ignore the fact that the market appears to be undervalued at the moment)? See http://www.fool.com/school/indices/introduction.htm for more.

Now, let's look at this from YOUR perspective. You guys can look at a stone and quickly get a pretty good idea of it's worth. You get opportunities to buy cheap, and if something is underpriced, you will recognize it and can jump at the opportunity. The key point, however, is that you have some method of SELLING the diamond at or near retail prices to someone willing to pay these prices. We do not have this option. As mentioned above, I know that people are told to not expect near wholesale prices when they resell. Exactly how much of our 6.25% gets eaten there? Not your fault, admittedly, you have to make a living. I'm just saying that it's not a good adea for an amateur to play this game.

In a similar manner, I know alot about cars. I used to be a mechanic. I might find a super-rare Yenko Camaro in a barn and buy it for $2000 (I wish). I buy $2000 in restoration parts and spend 100 hours of my own time on fixing it up. Then I turn around and sell it in Hemmings for $40,000. I've just used my skill and knowledge to make a nice profit. However, you average car driver who pays for oil changes can not take advantage of this scenario.

When it somes to investing, people should stick to what they know. Just my perspective as an outsider.

 

[fire&ice]

Diamonds are a great investment...an investment in your future. I have little doubt that a custom such as giving a diamond engagement ring will change. The mystique & sexy nature of a diamond has existed for centuries.

Quite frankly, I don't buy into the media hype of late that diamonds are as plentiful as the expose's report. No one seems to know how much gem quality diamond rough exists.

Do I think I made a good "investment" when I purchased my stone? - NO. But, I did buy something that has "value" and IMHO will retain value. Also, I bought something that will be around for a very long time holding certain "value". I don't plan on selling my stone/ring. My will states who will receive the stone w/ wishes that it be kept "in the family".

Anyone who "invests" in something that they don't have the outlet to buy right & an outlet to sell right has no business buying stones for strickly "investment purposes."

All that said, "A thing of beauty is a joy forever"....William Morris via Mary Poppins.

 

[HelluvaEngineer]

The original post was:

----------------
On 1/24/2003 10

0:32 AM abbott wrote:

Can someone advise me if a diamond is a good long term investment?? At this time it can be very risky to invest in the stock market. We have had good luck with art, but I really want to buy a large quality stone (3.5 - 5ct.) But I just don't know if it would be a safe investment. I'm expecting to spend alot of money.. and if I wanted to sell in 10 years, what could I expect?
----------------

I think it's safe to assume that this person was wanting to buy an expensive diamond, not for personal use, but in hopes of selling it in the future for monetary gain.

That said, I think your definition of "investment" differs from mine.

 

[fire&ice]

----------------
On 1/28/2003 4

8:57 PM HelluvaEngineer wrote:

The original post was:

----------------
On 1/24/2003 10

0:32 AM abbott wrote:

Can someone advise me if a diamond is a good long term investment?? At this time it can be very risky to invest in the stock market. We have had good luck with art, but I really want to buy a large quality stone (3.5 - 5ct.) But I just don't know if it would be a safe investment. I'm expecting to spend alot of money.. and if I wanted to sell in 10 years, what could I expect?
----------------

I think it's safe to assume that this person was wanting to buy an expensive diamond, not for personal use, but in hopes of selling it in the future for monetary gain.

That said, I think your definition of "investment" differs from mine.

----------------

Since the person initially asking the question is a women, I thought she was someone who was trying to "rationalize" a purchase *she* wanted. She was talking about one stone. She never clarified whether she was going to wear the stone.

Was she strictly wanting a return on her investment or a place to park some cash (and enjoy it in the interium)? If needed, could she sell at a profit?

It burns me that of late, the media has hyped diamonds to the point that they are worthless. History, and a LONG one at that, dictates otherwise.

My response was to counteract yours & optimized point that a diamond could be worthless. Those statements are too extreme.

To suggest such, simply defies the laws of history (so to speak).

I was trying to bring some level ground about diamonds. While some places to park or invest money are better than others - nothing is a full proof money maker.

All that said, I have never advocated that, someone who does not know the subtle nuiances of buying & selling stones, should invest in "diamonds".

Perhaps Abbott could state what her primary goal was w/ this "investment".

My point - I think there are much worse places to put one's money.

 

[Richard Sherwood]

Diamonds have been bought, sold and traded for over a thousand years, and have always been rare, always been expensive.

DeBeers just got in on the picture in the last hundred years or so. They didn't start the diamond mystique, they merely enhanced it and promoted it with modern marketing techniques, as any industry would.

The perception that a diamond is not rare is uninformed. Even today, it takes moving 250 tons of earth to find one crystal large enough to yield a one carat diamond. The vast majority of diamonds mined (I believe the figure is over 90%, without checking) are industrial grade. Out of the 10% which are gem quality, the vast majority are small stones, yielding under a third carat. Out of the remaining small percentage which is left, the vast majority have discernible body color and/or inclusions.

Which leaves us with the tiny percentage of diamonds mined which have fine color and clarity. Ask any diamond dealer what percentage of those he encounters with the fine cuts which we see discussed here on PriceScope. He'll tell you he runs across a hundred mediocre cuts before he comes a across a class 2A cut or better. Do you see the pyramid image of rarity unfolding?

The cost to open a diamond mine is prohibitive. In the hundreds of millions of dollars. The continued operation of it is costly as well.

Do not all these factors add up in determining the rarity and value of diamonds? A Mercedes Benz is a pile of metal just like any other car, but the quality and labor intensive manufacture of it gives it value. It has no "intrinsic rarity" value in the metals which make it (unlike a diamond), but the sum of it's components have definite value and resale power.

Ask the European Jews who escaped Nazi Germany with the diamonds sewn into their clothes what they think of the value of diamonds as a tangible asset. Many of them started new lives with those gems.

The first thing the Shah of Iran smuggled out of the country when his government was collapsing was large amounts of diamonds and gems. He knew his currency would soon be worthless, but the gems had value.

The only things with TRUE intrinsic value are the things with which we can feed ourselves. Land, guns & butter. Everything else has manufactured value to one degree or another. Look at the stock market for a perfect example of this. Yet people don't stop for a moment to see that in many cases they are just investing in an illusion. At least with a diamond, you get something to hold in your hand, and put in your safety deposit box.

The 6.25% average annual increase over the past 55 years was for wholesale prices of diamonds across the board. I consider wholesale as a good reference point for the value of a diamond. Everything above that is a profit, that either you make or somebody else makes, and everything below that is a loss.

When you buy, you want to shoot for as close to wholesale as possible. When you sell, you want to sell for wholesale or above.

Consider the following scenario: You purchase a very desirable F/VS2 fine make diamond at 15% over wholesale. For theoretical purposes, we'll say it was a $5000 wholesale diamond which you purchased for $5750. In one year, at the established performance of 6.25% average annual return, the wholesale value of that diamond would increase to $5312. Two years, $5644. Three years, $5997.

So in less than 3 years, the wholesale value of your diamond has appreciated past the amount you paid. From that point forward, it's pure profit.

But here's the key. You have to sell it in order to make the profit. You can't "cash a diamond in" like gold or CD's. You can, but you'll take a bath. Most estate dealers buy at half to two thirds of wholesale when buying at "quick cash" prices.

The key is to sell it to the same market that dealers do, the public. You advertise it in the classifieds, at a price of let's say, wholesale plus 10%.
If you kept that diamond for 15 years (enjoying it every day), and sold it for wholesale plus 10%, you would realize $13,655.00. An $8,655 profit on a $5000 LUXURY INVESTMENT over 15 years. Try doing that with your Mercedes...

If you don't want to go through the trouble of selling it yourself, give it to a jeweler you trust at wholesale on consignment. Most will take it in a heartbeat, it's free inventory. He doesn't have to invest a penny of his hard earned money, yet will still realize his retail profit when he sells it, and pays you.

Or sell it through a local or major auction. Or sell it through the internet.
Or trade it for real estate...

Synthetic diamonds?

What about synthetic rubies? First developed in 1865, and marketed heavily beginning 1890, they were supposed to be the bane of the natural ruby market. Did the ruby market crash? No? Why not? The synthetics often had better color and clarity than the naturals. Why in the world didn't people drop the natural market like a hot potato and flock to the synthetics?

In fact, the exact opposite happened. THE SYNTHETIC RUBY MARKET ENHANCED THE NATURAL RUBY MARKET! Why? Because it got people into the market who couldn't afford to previously. Many of these people then graduated up to the natural market. This scenario has repeated itself over and over again.

Synthetic sapphires in 1905, synthetic emeralds in 1948, synthetic star sapphires in the late 40's early 50's, synthetic alexandrite, synthetic padparadscha, synthetic opal, etc, etc, etc.

Has even ONE of these synthetics hurt the natural market? Noooooooooo....

It's almost laughable. Every one of them is trumpeting as foreboding the collapse of the natural market, yet the natural market continues to thrive as another market opens up and absorbs the synthetic. The demand for fine gemstones, both synthetic and natural has never been higher. The entire world is getting in on the act. Huge third world economies which have begun to prosper (such as China) are adding to the demand. The world's population keeps increasing, and people keep engaging in the age old tradition of adorning themselves with fine jewels. From Cleopatra to Jennifer Lopez.

Rubies, emeralds, sapphires, and diamonds are just plain rare. That's all there is to it. Reporters can scoff at this all they want, but let them try going out and buying a fine 1 carat F/VS2 ideal make stone for pennies. It just ain't gonna happen...

Rich

 

[abbott]

Hello everyone... WOW !!!! I never expected so many responses to my question. As I stated earlier, I have a passion for diamonds and I guess I was trying to justify spending a large sum of money for personal pleasure. Yes, I intend to wear the diamond daily. I do not intend to sell the diamond UNLESS I have a financial hardship and it is absolutely necessary. So... who wants to become my new best friend and help me locate a diamond just above wholesale cost. Abbott

 

[fire&ice]

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On 1/29/2003 10:45:50 AM abbott wrote:

Hello everyone... WOW !!!! I never expected so many responses to my question. As I stated earlier, I have a passion for diamonds and I guess I was trying to justify spending a large sum of money for personal pleasure. Yes, I intend to wear the diamond daily. I do not intend to sell the diamond UNLESS I have a financial hardship and it is absolutely necessary. So... who wants to become my new best friend and help me locate a diamond just above wholesale cost. Abbott
----------------

I hear you sister. I thought that is exactly what you wanted. Men...they over analyze everything! My husband is a spread sheet king - drives me crazy!

Good luck in your search & buy well!

 

[shurikt]

You guys are amazing. I swear that this is some of the most intelligent conversation on the net.

Wow.

 

[diamondsman]

HI Abbott

What kind of diamond are you looking for??I
The margin of most diamond websites are very close to their cost, advantageous to you!!

best regards

diamondsman

 

[okaynow]

I was thinking... Perhaps the technology that will change diamonds will be cutting technology. If machine ever replaces man, then perhaps all diamonds will be cut to ideal specs. Then cut will no longer be an expensive factor. There will then only be 3 C's left; Clarity, Carat, and Color.

 

[optimized]

Wow, thanks for all the kind words, folks. I was afraid that last missive of mine was going to elicit some negative feedback. Nice to know I didn't upset anyone.

I have some thoughts related to the posts which followed mine that I think I'll air now (in my trademark "wildly verbose" manner). This thread has turned into a rousing intellectual exercise, hasn't it?


Barry,

Thanks for the words. Having sold my diamond to me, you probably know better than anyone else here what I was going for at the time. I was never interested in buying a diamond to preserve monetary value; I bought my diamond based on my love for my fiancé. Because of that, I ended up going to pretty great lengths to try to get the very best I could (which is why I eventually bought a not-huge but relatively clean .78 ct. D VS1 stone). I was aware of the marketing machine that created the diamond engagement ring "tradition" and certainly wouldn't have bought such an extravagant piece of jewelry for myself, but I wanted my fiancé to have the best I could provide so that she could cherish it forever as a token of my love. I think that's the only reason I have no regrets about spending all that money. I'm glad I got her the diamond she deserves.


Richard,

"If you'll re-read my posts, you'll see that I have not once referred to diamonds as being an investment vehicle for 'everyday people'. An 'everyday person' is one who doesn't take the trouble to learn anything about the diamond market, goes out and buys a diamond at retail for the psychological purposes of romance and pleasure, and goes on with his life."

Although you didn't specifically say that "everyday people" should invest in diamonds, my post was prompted by my feeling that the general tone of most of the posting professionals was that diamonds were a reasonable investment idea for anyone. As Helluva mentioned, the thread was started by a "regular person" who simply asked (regardless of the ulterior motives since revealed) whether diamonds were a good alternative to the current uncertainty of the stock markets, and majority of the early posts from the pros (including you) didn't seem to draw any distinction between investing as a dealer or a layperson. I'm not trying to slam anybody or anything, but I think if the comments were intended to be directed toward other professionals or other "savvy" people perhaps it would been appropriate to more clearly identify the thoughts as such and warn others (like abbott, who started the thread) to use caution.

"In twenty years your car, boat, entertainment system or whatever is going to be worth a fraction of what you paid for it, while the wholesale value of your diamond is going to be worth more."

Will you personally guarantee that statement? If I buy a diamond at wholesale, will you personally sign a contract guaranteeing me a higher return on my investment twenty years hence? I thought not. As any rational investor would attest, there are no "sure things" in speculative investment. I don't mean to pick on you in particular, but IMO there are just some ingrained ideas you've acquired over the years that I'm afraid may be clouding your judgment a bit on this issue.

As an example of how "sure thing" investments don't always work out as expected, gold had been (and really still is) considered the "universal valuator" for centuries, and was considered a "sure thing" investment. Gold was the single most universal currency in the world. Wars were fought over it and civilizations built on it. The value of gold steadily increased for centuries, and any self-respecting investor held gold as part of his or her portfolio, to guard against inflation and to hedge other "more risky" investments. It was the "gold standard" of permanent value (sorry 'bout that pun, but as I think about it the pun actually helps illustrate just how important gold was to the economies of the world). Then came the crash. Average gold prices peaked at roughly US$600 an ounce in 1980, and (more than twenty years later) ended 2002 at about $340 an ounce. My question is, what makes the value of diamonds any more certain than that of the substance on which the entire world's concept of "value" was based?

"That's what I'm talking about. The word "luxury item" is the key. Just like art, antiques or collectibles. These do not fall in the same category as land, real estate, stocks, bonds, or mutual funds. They are in an entirely different category, which most people will not profit on because they never take the time and trouble to become astute in the market."

I would posit the things you mentioned above are more closely related to the "traditional" investments than you might think in that trying to predict what either category's value will be in the future is anything but certain. Speculation in anything is driven by a perceived future demand for that thing. The value of all of these things can be affected by public perceptions (except perhaps bonds, which, depending on the issuer, are arguably a much more stable investment than anything else we've talked about). How much of the recent stock market slide was the result of a faltering economy and how much was due to a public perception of trouble? Conversely, how much of the run-up on stocks was the result of a perception of prosperity? How much is that "collectible" Beanie Baby I mentioned before worth today? As I stated in my earlier post, all of these things are subject to human fickleness. Very few things in this world have immutable value, diamonds included.

Even beyond the point I just mentioned, the idea that "luxury items" are somehow immune from losing value is a new one to me. In fact, in many respects luxury items are among the items most vulnerable to economic troubles. While it may be true to some extent that there will always be some people with the cash to buy luxury items, when disposable cash gets tight for most of the world people often eschew buying luxury items. Simple economic theory basically dictates that if a pool of buyers shrinks while supply stays constant, the prices for items within that pool will fall. Few products are immune from this condition, including art, antiques or collectibles.

Moving on to some of the things you mentioned in your latest post, first I'd like to thank you for providing some more perspective from inside the industry. I am always seeking knowledge, and your information was very interesting to me.

Having said that, I still come back to some of my original ideas, which I will revisit here.

"DeBeers just got in on the picture in the last hundred years or so. They didn't start the diamond mystique, they merely enhanced it and promoted it with modern marketing techniques, as any industry would."

Although De Beers certainly didn't invent the diamond industry, they are decidedly the reason diamonds are priced the way they are today. There is no shortage of information (in the article posted by Helluva and numerous other places) about their efforts to control diamond rough output in an attempt to control pricing. This isn't an opinion, it's documented fact. Whether their efforts are simply to maintain a benign stability in the market or to keep prices artificially high is subject to debate, but the fact that they still essentially control diamond pricing is pretty clear. One fact to consider though is that in the centuries before De Beers was in existence, diamonds truly were far less commonly available than they are today, yet their "value" has still consistently risen. This could be due to a number of factors, but their hand in maintaining the price structure is pretty evident in the markets.

I don't blame De Beers for the marketing successes they've had; I just point out that much of the reason why the vast majority of men in America (and some other countries) give diamond rings as an engagement token is due to the influence of their marketing over the last seventy years, not because it's an age-old American custom. The fact that this "tradition" is less than 100 years old would seem to make the permanence of it somewhat questionable. I'm not saying it won't remain a tradition, but the fact is it's not exactly a "cultural touchstone" that has been in place for centuries and is thus unlikely to ever change. As the article Helluva linked to noted, while De Beers basically enhanced an idea that was already in existence in America, their campaign basically rewrote 1500 years of Japanese marriage custom. If a custom as ingrained as that can be changed, so can our much newer, almost mandatory, custom of giving diamonds.

"The perception that a diamond is not rare is uninformed. Even today, it takes moving 250 tons of earth to find one crystal large enough to yield a one carat diamond. The vast majority of diamonds mined (I believe the figure is over 90%, without checking) are industrial grade. Out of the 10% which are gem quality, the vast majority are small stones, yielding under a third carat. Out of the remaining small percentage which is left, the vast majority have discernible body color and/or inclusions.

Which leaves us with the tiny percentage of diamonds mined which have fine color and clarity. Ask any diamond dealer what percentage of those he encounters with the fine cuts which we see discussed here on PriceScope. He'll tell you he runs across a hundred mediocre cuts before he comes a across a class 2A cut or better. Do you see the pyramid image of rarity unfolding?"

As far as this ongoing "rarity" issue is concerned, it helps to keep in mind that all the numbers that typically get bandied about to illustrate how little of the diamond production is used in jewelry aren't really all that relevant without a point of reference for comparison. Just because a small fraction of diamonds mined are gem-grade is meaningless without some perspective of the overall output. As outlined in the excerpt I put in my comments to fire&ice later in this post, according to The World Diamond Council current production is approximately 114 million carats of rough per year yielding sales of 67 million pieces of diamond jewelry, with production expected to climb. The information I've been reading leads me to believe that while the incidence of gem-grade diamonds were indeed quite rare historically (my figures indicate closer to 20% of rough is gem-grade), better methods and increasing efficiency are helping to maximize yields and reduce costs. I've read the "250 tons of earth" statement many times, and it strikes me as shaded a bit by a marketer's perspective. Even within the context of the "250 tons" statement a one-carat diamond is supposedly a 1-in-1000 find, which would mean the 250 tons of earth also produces 999 diamonds of less than a carat. While four diamonds per ton would still seem quite small, I can tell you that a ton of earth isn't as much as you may think (1-2 cubic yards). Add to this the fact that just about every diamond that gets polished and sold is likely to be around for a very long time indeed (a diamond is forever, after all), and logic dictates that diamonds are getting less rare all the time.

Your examples of European Jews and the Shah of Iran using diamonds as easily-transported value is interesting, but has much more to do with past value than with whether diamonds will be worth more in the future (which is what the thread is ostensibly about). There's no question that diamonds have historically been a good way to move wealth around without getting a hernia, but the dynamics of the industry are changing, which makes one wonder whether past performance has any relevance as an indicator of future value. Nice footnotes to the discussion, but kind of irrelevant in the grand scheme of things.

"The only things with TRUE intrinsic value are the things with which we can feed ourselves. Land, guns & butter. Everything else has manufactured value to one degree or another. Look at the stock market for a perfect example of this. Yet people don't stop for a moment to see that in many cases they are just investing in an illusion. At least with a diamond, you get something to hold in your hand, and put in your safety deposit box."

And with that extremely erudite comment you have essentially justified and corroborated everything Helluva and I have been saying throughout this thread. "Investing in an illusion" is an excellent way to put it, and I would argue that many people are coming to terms with the truth of that statement (especially in the stock market, which is really almost the classic Ponzi scheme dressed up in a three-piece business suit). Investing in diamonds, stocks, Beanie Babies or any number of other things is a risky proposition with no good guarantees of appreciation. The question may become though, would you want to put $20,000 into an investment that you can "hold in your hand and put in your safety deposit box" if you knew that it would be worth a fraction of that price in a few years, or decades? Throughout this thread I haven't argued against owning diamonds at all, I've just been trying to advise caution when considering them investments.

Your example citing the 6.25% rate of return extrapolated over a few years is interesting, but again is based on past performance, which is in no way a definite indicator of future results. I don't have any desire to continue beating this dead horse, but I think it's important to differentiate between historical and future performance. Speaking of beating horses, a couple of hundred years ago it probably would have been a given that buying stock in a horse whip company would be a good "investment." After all, the world was needing more and more horses to support a growing human population, and those horses needed to be whipped (sorry, PETA folks). The industry grew steadily for centuries, but with the advent of mechanical engines all that changed, and I'm fairly confident a horse whip investor would have eventually taken a bath on that stock despite the fact that it was a certainty to the people of the day that there would always be a market for whips. Although this analogy is meant to be a bit extreme, it effectively illustrates how something that seems a "sure thing" can be anything but.

I found your comments about the growth of non-diamond synthetic gems to be fascinating. I haven't researched much beyond diamonds so a lot of that information was new to me. I agree with your suggestion that the growth of the "natural" gem counterparts to the synthetics probably arose from wider availability of the latter, which in turn increased interest in the former. Interesting stuff, to be sure.

One question it does raise though (which perhaps you can answer): What if there is absolutely no way to tell whether a gem is natural or manmade? In the case of diamonds, I know that GE and others produce synthetic diamonds, but the industry as a whole has not been threatened too much by it because the synthetics can be identified with a fair degree of accuracy by experienced graders. But, until it was determined that they could be identified as synthetic, there was a very real fear that the new product would have a grave impact on a market whose valuation is so closely tied to a perception of "rarity." Now, what if a new method of production is developed that suddenly allows some company to flood the market with huge supplies of cheaply produced synthetics that are completely indistinguishable from natural diamonds? Is this not the sort of thing that would pound the value of all diamonds into the ground? Where would that leave diamonds as an investment vehicle? Again, I'm not predicting this will happen, but it's a possibility that would change the entire dynamic of the market and would likely destroy the return on any investment in diamonds today.

Anyway Richard, I'm really enjoying this thread, and I hope you are too! When my posts get as long as this one I sometimes start to feel afraid that folks will think that I'm "arguing" with them, when in fact it's just a friendly discussion to me. I hope you feel the same way I do! It's obvious that we see the topic from almost completely opposite perspectives, but the exchange of ideas is quite intellectually stimulating to me.


Diamondsman,

Thanks for the applause! I know what you mean about the lengths of my posts, but I've never really had much luck controlling my typing fingers when they get going. This post is no exception.

Leonid,

Can I fill up an HTML page, or what?

Helluva,

We are most decidedly on the same page here. You bring up a few good points about vulnerabilities in the diamond markets that I've thought of frequently while I was shopping for my fiancé's diamond. In the end though, I found that I wanted to spend the money because she wanted a diamond ring. I could have resented the industry for their devious plots to separate me from my hard-earned cash, but I gradually realized that if my sweetie wanted a diamond, it was the least I could do to fulfill that wish after all of the wishes she has fulfilled for me. It was expensive, but it was worth it.

An interesting aside you may find amusing: Several years ago a good friend of mine had introduced me to the machinations of the diamond industry in regards to the aggressive marketing of engagement diamonds. He and his girlfriend (now wife) mutually decided to eschew a diamond engagement ring so as to not fall victim to the hype. Neither of them regret the decision, but he has already informed me that he will be tapping my new wealth of knowledge about diamonds when he buys her a diamond ring for their tenth anniversary in a couple of years. Such is the power of the diamond industry and their marketers!


fire&ice,

"Quite frankly, I don't buy into the media hype of late that diamonds are as plentiful as the exposé's report. No one seems to know how much gem quality diamond rough exists."

:

"Rough diamond mining companies produce annually some 114 million carats of rough, worth some $6.8-$7 billion, providing meaningful livelihood to some 2 million people working in the various stages of mining, processing, distributing and retailing, enabling the annual sale of some 67 million pieces of diamond jewelry worldwide. With new mines coming onstream, others being expanded and some being closed, it is expected that by the year 2005 world production may increase to over 120 million carats worth some $8.9-$9.2 billion. --Mazal u Bracha July, 2000"

So, how long does production go on at this rate before some of that "rarity" is diluted? I have no idea myself, but the numbers are getting pretty large. Carbon is the fourth most common element in the universe. How much of that is in the form of diamond? I've read that there are estimated to be approximately 1000 kimberlite volcanoes in the world (the type that expose diamonds). Of those, an estimated 100 of them have "significant" diamond mineralization, but only about thirty of them have ever been or are currently being mined. Up until the late eighteenth century almost all diamond production came from India. Nowadays over twenty countries have active diamond excavations, and more projects are being researched. It would seem that the rarity of diamonds is very much a subjective and debatable issue at this point, especially with so many unknowns.

This graph shows the dramatic rise in diamond output over the past hundred years.

"My response was to counteract yours & optimized point that a diamond could be worthless. Those statements are too extreme."

For the record, I never intended to suggest that diamonds would ever be "worthless." I am only suggesting that the assumption that diamonds will always appreciate in value is a pretty risky position. I have no idea what diamonds will be worth in the future, and neither does anybody else.

Btw, nice call on your prediction about Abbott's underlying motivation for "investing" in diamonds. You women and your secret language are spooky sometimes...

Okaynow,

You bring up an interesting point, but I suspect that there will be someplace for a "cut rating" for quite a while to come, mostly because there seems to be no "correct proportions" for a cut diamond. Different cuts yield different results, and what one person considers "ideal" may not be at all what another person would choose. Different styles can accentuate different characteristics of a diamond's optical performance. Having said that, I think technology will certainly make cutting much more consistent in the future, but I suspect there will still be different schools of thought as to what an "ideal cut" is, so I think there will still be "four Cs" for quite a while.

Anyway, I guess I've finally made it through this post. Again it is one of my epics. I hope I haven't bored you all to tears with it. I've never been able to figure out why I enjoy these forums so much, but something makes me want to participate in the discussions, and participate I do!

-Tim

[/u]

 

[fire&ice]

Opt & hellof - may I venture a quess that you all are relatively young.

I had my husband read the very first post by abbott. I asked him what he thought - phrasing it to be - what he thought about the investment quality of a diamond. His response - it's moot. She wants to rationalize a diamond purchase. Opt, you have a lot to learn.

I maintain that one could put their money in worse purchases; but, I have made quite a healthy living in the Art & Antique world hedging when to buy & when to sell. The demand for great items EXCEEDS supply even in these unsettling times. Humans need to surround themselves with "beautiful" (one's own perception inserted here)objects.

Any investment counselor will dictate "past perfomance *INDEED* indicates future performance". - ran that one by my broker. That said, one needs to track present day performance. After all, we all *bought* diamonds. History has indicated that electronics drop in prices hedged away by new technology, etc.

Opt, it is admireable to put your desire to please your to be before your "rational" thoughts. Personally, I don't think *that's* going to change. Hence, my thought on the "staying power" of diamonds.

edited to add: Just my prediction - I believe that demand will keep up with supply.