April 13, 2009

Diamonds are NOT an Investment

Diamonds are pretty. Diamonds make great jewelry and most of us will end up giving or getting a diamond ring sometime in our lives. While they make great jewelry, diamonds do not make good investments.

There are a number of reasons that diamonds do not make good investments.

The BIG problem with diamonds as an investment is that there is no public market in them. You can't simply go to your local stock broker or bank and cash in your diamonds. In order to sell a diamond you'll have to go to a jeweler or pawn broker. When you buy the diamond you are normally paying a retail price. So the diamond has a mark up in the price you pay above wholesale. Then when you sell the diamond you will get quoted a price below wholesale so that the buyer can make a profit and then resell at wholesale value.

The article Have You Ever Tried to Sell a Diamond? from The Atlantic in 1982 discusses the whole diamond business and how investing in diamonds is difficult.

A couple examples of reselling diamonds are covered in The Atlantic article. First a long term experiment tried in England years ago:

"in 1970, the London-based consumer magazine Money Which? decided to test diamonds as a decade long investment. It bought two gem-quality diamonds, weighing approximately one-half carat apiece, from one of London's most reputable diamond dealers, for £400 ... tried to sell the diamonds in 1978 ... Most of the stores refused to pay any cash for them; the highest bid Watts received was £500, which amounted to a profit of only £100 in over eight years, or less than 3 percent at a compound rate of interest. If the bid were calculated in 1970 pounds, it would amount to only £167."

So over 8 years they saw 3% gain without considering inflation. Not particularly good.

This quote also gives us an example price from 1970 we can compare to today's prices. We can do a quick compare to see how those 1970 prices compare to today's prices. They bought two half carat diamonds for £400. That is about $584 in today's exchange rate for about $292 for a 0.5 ct diamond. Today I searched BlueNile and Amazon for loose diamonds. The cheapest 0.5 ct. diamonds I found were $573 on BlueNile and $465 on Amazon. Going from $292 in 1970 to $573 today is a 1.7% rate of increase over 39 years.

Then they also say: "For example, Brod estimates that a half-carat diamond ring, which might cost $2,000 at a retail jewelry store, could be sold for only $600 at Empire." (keep in mind that article was written in 1982). That would have been a 70% loss in value between buying and selling.

For something more recent, Yahoo has an article The Great Used Gold Rush of 2009 that talked about people selling their old jewelry and gold. They say that resell on a 1 carat diamond ring : "Of course, what you can expect to be paid will always depend on the diamond, but for an average near-colorless and slightly imperfect stone, expect close to $1,000 or more." If you were to go and buy a 1 carat ring today you'd spend at least $1500 but more commonly closer to $2500-$3000 range. The very cheapest 1 ct. loose diamond I found was about $1400 on Amazon and 1 ct. diamonds started at over $2200 on BlueNile. So you're talking about buying a ring for $1400 to $3000 and its resale value being around $1000. Right off the top you're losing 25-66% of the purchase value.

Another major concern with treating diamonds as an investment is that the entire world diamond market is manipulated and controlled to some extent by the De Beers cartel. This means that the prices paid for diamonds are artificially influenced by DeBeers. Why is this a concern? The DeBeers cartel is artificially inflating diamond prices to suit their own interests. At any time its possible that another entity could develop their own diamond source and undercut DeBeers and this would then cause the entire market for diamonds to be impacted. I do not think it is too likely that DeBeers will lose their grip on the diamond market but it is a possibility.

Key reasons Diamonds do not make good investment:

  • You have to pay a markup when you buy and get a discounted price when you sell.
  • They are not liquid.
  • Long term gains have been single digit % levels.
  • The entire market is controlled by a cartel.

Picture by mafic

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