Diamonds have captured the imagination of civilizations since the dawn of humanity. Since the early 1800s, the popularity of diamonds has grown reliably year after year. Although part of this is due effective and expansive marketing techniques from diamond miners, a great deal can be attributed to the industrial revolution. Diamonds have a wide range of industrial uses, and as the world became more industrialized, this demand naturally increased. At the same time, tradition (and clever marketing) have made diamonds an essential part of the courtship process in civilizations around the world. For all of these reasons, some investors have incorporated diamonds into their portfolios. If you are considering doing the same, there are some things you should think about before putting your hard-earned money into the hardest substance known to man.
Where does the demand for diamonds come from?
Although the most prolific and iconic role of diamonds is when a man offers one embedded into a ring to the woman he loves, the reality is that jewelry makes up only a small portion of the demand for diamonds worldwide. Only about 20% of diamonds actually make it into jewelry. The remaining 80% are used in a variety of industrial functions, including: drills, surgical equipment, industrial lasers, and essentially any place where a super hard substance is necessary.
As the world continues to industrialize, and as countries like China and India continue to increase their industrial capacity (as well as their middle class’ demand for industrially produced goods), the demand for diamonds should continue to increase. This increase in demand has been reflected in the price of diamonds over a long period of time. Since 1960, the price of diamonds has increased tenfold, with half of that price increase occurring since 2000. Although the financial crisis of 2008 slowed the price increase, it never stopped it completely. As the worldwide economy gradually recovers and begins to boom again, the demand for diamonds and the industrial products that require them is likely to boom as well.
Investors are already investing in diamonds
There are a number of reports about diamond investors cropping up worldwide. Diamond wholesaler Vashi Dominguez reports that his clients are increasingly purchasing diamonds for investment purposes, and he expects the trend to continue indefinitely. Although Mr. Dominguez certainly has a vested interest in seeing the expansion of the diamond investment market, his story is far from the only one being reported. As worldwide fear over economic conditions continues, having a stable and physical asset can provide literal and emotional security for investors and families alike. As governments around the world continue to print currencies in an attempt to stabilize their economies, cash has become somewhat less attractive to those trying to preserve their wealth. The gold and silver markets have seen a volatile, but ultimately upward, price change since 2008, and most investment experts agree that precious metals prices can only go up in the long-term.
Many of the reasons the make precious metals like gold and silver attractive also apply to diamonds. Gold and silver have a number of unique industrial applications, have a finite supply that requires industrial capital, labor, and time to mine, and have applications in electronic goods that will only increase as the world becoming increasingly dependent on electronics.
One significant difference, however, is the difference in how precious metals and diamonds are priced in the market. On the one hand, metals like gold and silver are traded on a highly liquid global market, in which the price per ounce is known on a second by second basis down to the hundredth of a cent. On the other hand, diamonds are primarily traded on a private market, in which the price is not always exactly known, and can fluctuate wildly from day to day and even from dealer to dealer. In addition, not all diamonds are the same. There are a number of properties and qualities that can dramatically alter the value of any diamond. This is in stark contrast to the liquid and stable precious metal market, and also opens up the potential for fraud and other abuses. In addition, ethical and moral issues, such as the “blood diamond” market (in which African Warlords responsible for the death of thousands could be profiting from diamond sales), bring up concerns among investors as well.
Should I invest in diamonds?
Despite the concerns surrounding diamonds and their use as an investment vehicle, there are a number of reasons you should consider adding them to your portfolio. According to a report by Fox Business, the demand for diamonds isn’t going anywhere. For all the reasons already listed in this article, there is good reason to expect the price to gradually increase over time. However, much like precious metals, diamonds should be considered a long-term investment and not a “get rich quick” scheme. Their primary function in a portfolio should be to provide a tangible asset with which to preserve your wealth. If used in this context, and only bought and sold by reputable dealers, the risk of fraud or loss of value should be reduced to an acceptable minimum.
How to invest in diamonds
There is more than one way to invest in diamonds. You do not necessarily have to purchase and physically take ownership of every diamond in your portfolio. In fact, keeping such a large portion of your saved wealth in your home is not a good idea anyway. At the very least, you should put most or all of your diamonds in a highly secured (and preferably insured) location; a safety deposit box at a major banking institution being one example.
In addition, you can invest in “electronically traded funds” or ETFs, instead of physically owning the diamonds yourself. ETF are an investment vehicle similar to a company stock. However, instead of the price of your investment being determined by the buying and selling of company shares, it is determined by the price diamonds on the global market. Index IQ and GemShares are two well-known examples of diamond ETFs. Another option is to purchase shares in the companies that mine diamonds. Although the price of your stock will not be directly related to the price of diamonds on the market, you will still have exposure to the price. Logically, the more expensive diamonds are, the more profitable the companies that mine them will be. Just make sure to choose companies that are well-run, and if possible, one that pays dividends.
As with any investment, diamonds can be a great asset or a huge liability. Make sure you do your research and due diligence before investing your money anywhere.