26 Nov 2015

Diamonds Truly Are Forever, and a Very Good Long-Term Investment

Rare gems are not only good investments that increase in value over time but also a good strategy to transfer wealth between generations.

There are diamonds, and then there are rare diamonds. The 16.8 carat “Sweet Josephine” pink diamond that sold at auction for $28.5 million in November was incredibly rare. Its sale, by Christie’s, was followed by Sotheby’s sale of the “Blue Moon of Josephine,” a 12.03 carat blue diamond that is even more rare, for $48.4 million. Both were flawless. Both, described in the mainstream press as a “gift” for the buyer’s daughter, actually were incredibly smart purchases, because they were tangible investments that will allow a low-maintenance transfer of wealth for generations.

Real estate sales can take months or even years, but for tangibles it can take only days, due to market liquidity and self-regulation of the business.

The world of true diamond investing isn’t found at the local Zales. Of all the diamonds mined each year, only 30% are sold for retail purposes. The largest consumers of diamond jewelry are the United States, China and India, in that order. In fact, according to a Bain & Co. analysis, those three countries consume about 60% of the world’s diamond jewelry, with the U.S. being near 40%. That said, China’s recent economic stumble, which put pressure on white diamond prices, didn’t necessarily hurt rare coloured diamond investments, as the “Josephine” auctions illustrated, largely because the key with these precious gems is supply, not demand.

Diamond investing typically comes in three forms: buying the actual product, buying an investment fund that buys/sells in the business and buying stocks of mining companies or producers. The last option can be the riskiest, and recently mining company and producer stocks have been weak. For example, De Beers, one of the world’s leading diamond producers, said its underlying earnings were down 23% in the first half of 2015, and the CEO of its parent company Anglo American (AAL.LN) said he expected the diamond business to be challenging for the second part of 2015 as well. Likewise, Rio Tinto (RIO), one of the world’s largest mining companies, has seen its stock fall more than 75% from a peak of just over $138 in May 2008 to $33.60 today.

So when it comes to investing in diamonds, the better options for high-net-worth individuals and family wealth offices are to look for private equity funds or work individually with dealers of gemstones. And for lasting value, colored diamonds are largely the only way to go, unless the white diamonds are part of a jewellery art piece.

For example, where a flawless white diamond might be worth $30,000 per carat, a flawless vivid pink diamond could sell for US$1 million per carat and a vivid red for US$2 million per carat, and those prices have continued to climb.

How rare are coloured diamonds? Mines hold auctions once a year, and this year only 65 pink diamonds, with an aggregate weight of 9 grams, were sold from Rio Tinto’s Argyle mine in western Australia, which produces 90% of the world’s pink diamonds. To put it another way, of the 135 million carats mined this year, one in 10,000 carats is coloured, and most of those are the lower valued yellow diamonds. The rarer, vivid coloured diamonds of pink, red and blue account for just one in 100,000 carats.  Coloured diamond prices have risen 11% per year for the last 10 years, and the rarest have risen 15% to 20% per year. 

Of course, for investors, purchasing actual gems or tangible assets is a long-term strategy, and is used largely to diversify assets beyond the standard investments.  Stephen H. Silver, chairman and CEO of S.H. Silver Co. Inc., who has been in the tangible asset business for 36 years, recommends that his clients put 10% to 15% of their assets in tangible investments, which include antiques, fine art and, of course, rare jewels and jewelry. He suggests that when contemplating diamond investments, investors should be aware that coloured diamonds are the most rare and most stable asset. Clients that buy diamonds are looking for alternative investment strategies to preserve and transfer wealth to the next generation, not for cash flow.

Another attractive factor is that these tangible assets are also easier for investors to divest. Real estate sales can take months or even years, but for tangibles it can take only days, due to market liquidity and self-regulation of the business.

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