Diamonds as an investment – does it make sense?

Today I will share my views on diamonds as an investment.

I will share a few great articles that explain the diamond business, the monopoly of De-Beers over the last century and artificial diamonds.

Diamonds as an investmentSource: Wikipedia

At the outset, if you are buying diamonds for yourself or for your spouse for ornamental reasons, it is a consumption decision. It is not an investment decision.  Nevertheless, consider that you are possibly being fooled by twisted market forces.

What are some recent articles in the media saying?

Read these and do not forget to come back to Capital Orbit!

Business Today article on diamonds – July 2012

Moneycontrol article on diamonds – September 2012

A few factors given in favour of diamonds as an investment are:

  • Gold has become expensive while diamonds have become cheaper
  • Diamonds are getting more standardized hence their value can be ascertained better
  • Certifications for diamond buying are making it easier for customers.

Are gold and diamonds similar as investments?

Since diamonds and gold both are used in jewellery its easy to confuse both of them as good investment options. But this is not the case.

Gold traditionally has been used as money for hundreds of years. Plain and simple. I have explained its merits as an investment option in an earlier article.

There are reasons for gold having been adopted as money. It satisfies a few important requirements.

  • Gold can be sub-divided and sold without a loss of value. If you go to a jeweler and want to sell 10 gm gold he might say that he can pay you today’s price after deducting 5%. If you break the gold in half and sell it, the payment will be half of the earlier amount less 5%.
  • You cannot do this with diamonds. If you broke your diamond in half, the value would not drop by half the value but by a much bigger proportion.
  • All you need to know in gold is purity and weight respectively. So if it is 24 karat and 10 gm, you need to purely multiply it by gold price which is a publicly available figure and obtain the value of gold.
  • Diamonds are graded and valued based on colour, clarity, cut and weight.
  • Price for diamonds is subjective to a large extent.

The Atlantic article – important points

In 1982, Edward Jay Epstein wrote a detailed piece in “The Atlantic”. Many of the facts dug up by Edward Jay Epstein still hold.

  • De Beers, a company created in 1888, has been in a monopoly player in the diamond trade for most of the last century.
  • There has been concerted marketing for many decades across countries by De Beers to convince people of the need to buy diamonds as engagement rings and jewellery.  Essentially, creating a need which did not exist earlier.
  • The best part of the article then follows where Epstein asks about the price you will get if you go to sell a diamond.
  • In most cases, he found that retailers were not even ready to buy back the diamonds. If they were ready, they bought them back at a big discount, which meant a big loss for the customer.

The Atlantic article on diamonds by Edward Jay Epstein

Wired.com article – important points

  • Artificially made diamonds are already available in the market. These are true diamonds (diamond is a form of elemental carbon as per chemistry) and not substitutes like cubic zirconia.
  • In fact, they are superior to natural diamonds in structure and purity because they are manufactured in laboratories with scientific precision.
  • The technology behind diamond manufacturing is getting cheaper.
  • If there is no difference really, what else could De Beers do? Well, they have started harping on the fact that natural diamonds are better because they are not made in a factory. Its a romantic story, if you want to believe it.
  • To preserve its monopoly they have even tried to force labeling on artificially made diamonds to differentiate them from natural diamonds.
  • How does it matter to a consumer really, except by perception? But compelling lower prices may change old perceptions.

Wired.com article on artificial diamonds

Summary

  • A monopoly player can rig prices and there are enough reports to suggest De Beers has kept prices higher than what they should be.
  • Customers (yes, that is you) buying from a monopoly producer usually have poor bargaining power and end up overpaying.
  • Artificial diamonds which are as good or if not better than natural diamonds are adding to the world’s supply of diamonds.
  • If the monopoly situation changes or manufactured diamonds shake up the market, there is no guarantee that present prices will hold.
  • Be aware of why you are buying diamonds. If you are speculating, it is a different matter. Else, I do not see any reasonable basis for diamonds as an investment.

 

What are your views or counter-views? Are there any other sides to this question that I may have missed?

Join the Start Stock Investing E-Course. It's free.

15 lessons over 15 weeks. Over 500 people who have already signed up. Start off. Learn how to invest in stocks for the long-term.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>