Investing in Diamonds: the new frontier for trading

0
293

Over the last 5 years, the global economy has known many ups and downs – but mainly downs. It is during these difficult times that people start to watch out for their money and look for real alternatives. It is also during these times that we learn and appreciate the advantages of physical commodities. This is why we see the increase in the value of gold, silver and lately diamonds. The use of diamonds as an investment and financial hedging tool has grown rapidly over the last few years. The reason is obvious and actually makes lots of sense:

Diamonds do not take up room: Diamonds have forever been used as an excellent means of transfer. The fact that such a small item can be worth so much money is astounding. You can easily keep a one million dollar diamond in the smallest of safes.

A diamond is durable – It does not break or wear off: As the hardest substance on earth you do not have to worry about anything happening to it. All you have to do is to make sure you do not lose it! (and even that can be insured).

Inflation Proof: This is actually true to most physical commodities. Real estate, gold, silver and diamonds usually appreciate in compliance to inflation. Unlike the others, diamonds are more durable and movable. This is also why even if you do not want to buy diamonds for investment buy just considering an alternative form for putting some money aside diamonds make a good choice.

You can enjoy it while you have it: Since diamonds do not wear off and technically, there is no meaning to selling a “second hand” diamond, you can mount it and wear it while you use it for investment purposes.

Psychology: It is physical. You can hold it, look at it and even wear it. It makes you feel safer unlike stocks and other financial items, which are rows on a computer screen.

History, natural history and origin

The name diamond is derived from an ancient Greek word that means “proper“, “unalterable“, “unbreakable“, “untamed”.  Diamonds are thought to have been first recognized and mined in India, where significant alluvial deposits of the stone could be found many centuries ago along the rivers Penner, Krishna and Godavari. Diamonds have been known in India for at least 3,000 years but most likely 6,000 years. Diamonds have been treasured as gemstones since their use as religious icons in ancient India. Their usage in engraving tools also dates to early human history. The popularity of diamonds has risen since the 19th century because of increased supply, improved cutting and polishing techniques, growth in the world economy, and innovative and successful advertising campaigns. In 1772, Antoine Lavoisier used a lens to concentrate the rays of the sun on a diamond in an atmosphere of oxygen, and showed that the only product of the combustion was carbon dioxide, proving that diamond is composed of carbon.

Later in 1797, Smithson Tennant repeated and expanded that experiment. By demonstrating that burning diamond and graphite releases the same amount of gas, he established the chemical equivalence of these substances. Now we can talk about the natural history of this precious stone. Diamonds were formed billions of years ago under intense heat and pressure when diamond-bearing ore was brought to the surface through volcanic eruption. After the magma cooled, it solidified into blue ground, or kimberlite, where precious rough diamonds are still found today. Natural diamond is formed where carbon has crystallized under exposure to high pressure and temperature. The pressure must be between 45 and 60 kilobars and the temperature between 900 and 1300 °C. These conditions occur naturally only in the lithospheric mantle, below the continental plates, and at meteorite strike sites. 

In the lithospheric mantle, the proper temperature and pressure are usually found in depths of 140-190 kilometers. The correct combination of temperature and pressure is only found in the thick, ancient, and stable parts of continental plates where regions of lithosphere known as cratons exist. Presence in the cratonic lithosphere for long periods of time allows diamond crystals to grow larger. The slightly misshapen octahedral shape of rough diamond crystal in matrix is typical of the mineral. Its lustrous faces also indicate that this crystal is from a primary deposit. Through studies of carbon isotope ratios (similar to the methodology used in carbon dating, except with the stable isotopes C-12 and C-13), it has been shown that the carbon found in diamonds comes from both inorganic and organic sources. Some diamonds, known as harzburgitic, are formed from inorganic carbon originally found deep in the Earth’s mantle. In contrast, eclogitic diamonds contain organic carbon from organic detritus that has been pushed down from the surface of the Earth’s crust through subduction before transforming into diamond.

These two different source carbons have measurably different 13C:12C ratios. Diamonds that have come to the Earth’s surface are generally very old, ranging from under 1 billion to 3.3 billion years old. The high pressure and temperature required for diamond formation also occur during meteorite impact. Tiny diamonds, known as microdiamonds or nanodiamonds, have been found in meteorite impact craters. These can be used as one indicator of ancient impact craters. Diamonds formed in extraterrestrial space, then deposited on earth by meteorites, have been found in South America and Africa. Diamonds are usually brought to the Earth’s surface or closer to it by volcanic action and dispersed in an area by water erosion or the action of glaciers.

The latter are usually not in high enough concentrations to make them commercially viable sources of diamonds. Volcanic pipes that reach 150 km or more are relatively rare, but they are the ancient conduits of magma that transported diamonds closer to the surface, where they can be mined. Certain minerals which are formed and transported from the depths in the same conditions as diamonds, are used as indicators by prospectors looking for sources of diamonds. The most common ones are chromian garnets (usually bright red Cr-pyrope, and occasionally green ugrandite-series garnets), eclogitic garnets, orange Ti-pyrope, red high-Cr spinels, dark chromite, bright green Cr-diopside, glassy green olivine, black picroilmenite, and magnetite. Every natural diamond is immensely old, formed long before dinosaurs roamed the earth. The youngest diamond is 900 million years old, and the oldest is 3.2 billion years old. 

The four “C”

When you are planning on purchasing a diamond it is important that you know as much as possible about how diamonds are classified. There are four topics you need to become familiar with: Cut, Color, Clarity, and Carat Weigh.

Cut: When we speak of cut we are more interested in the proportions of the diamond as opposed to its shape (Round Brilliant, Marquise, Pear, Princess, etc.) Every diamond regardless of its shape gets it brilliancy and scintillation by cutting and polishing the diamond facets to allow the maximum amount of light that enters through its top to be reflected and dispersed back through its top.

Color: Diamonds come naturally in every color of the rainbow. However most people are concerned with diamonds in the white range. The Gemological Institute of America (GIA) rates the body color in white diamonds from D (colorless) to Z (light yellow). The best color for a diamond is no color at all. A totally colorless diamond allows light to pass through it easily, resulting in the light being dispersed as the color of the rainbow. Colors are graded totally colorless to light yellow. The differences from one grade to the other are very subtle and it takes a trained eye and years of experience to color grade a diamond. 

Clarity: The clarity of a diamond is determined by the amount and location of flaws, or blemishes, in the diamond when viewed under 10 power (10x) magnification. GIA rates clarity grades in diamonds from Flawless to Imperfect 3. The Diamond Shopping Network offers you diamonds from the Imperfect 1 grade through Flawless. Most diamonds contain very tiny birthmarks known as “inclusions.” An inclusion can interfere with the light passing through the diamond. The fewer the inclusions, the more beautiful the diamond will be. Diamonds have the capability of producing more brilliance than any other gemstone. A diamond that is free of inclusions and surface blemishes is very rare…and therefore very valuable. 

Carat-Weight: This is the weight of a diamond measured in carats. As the carat weight of a diamond increases so does its rarity and therefore its price. One carat is divided into 100 “points,” so that a diamond of 75 points weights 75 carats. The carat-weight of a diamond is the easiest measurement to determine. Most importantly, two diamonds can be of equal carat-weight, but their value can differ greatly due to their cut, color, and clarity. 

Investing in diamonds

Diamond investment should fall into your category of alternative investments with all it entails.
This means that they should be a small portion of your portfolio etc. The idea is actually quite simple. As I mentioned, investing in diamonds is based on the fact that diamonds are physical commodities. As such, you can easily buy them everywhere, even online. The recommendations below are the basic guidelines, a how to invest in diamonds tips and tricks if you wish. First, you should start at the beginning. Learn the basics, the diamond language. Start with the 4 Cs of Diamonds. Then, keep in mind that this should be a part of your portfolio.

True, unlike stocks, the initial amount that is required is a bit higher but this is no reason to go over the budget or over the ration of your portfolio that you had in mind. Don’t put all the eggs in one basket. In diamond investment like in other investments it may be wise to diversify your “portfolio”. If you had set your diamond investment budget on $20,000 then you should consider buying 2 x $10,000 diamonds or even split it into three.

On top of that, don’t buy two / three diamonds of the same type. If you had your heart set up on a pink diamond then it might be smart that the second diamond will be blue, green or even yellow. You don’t know which will rise more or alternatively which will be easier to sell later on. Also, this is great since it will enable you to liquidate a portion of your portfolio in case you need to allocate some of your investment funds.

Buy only certified diamonds. Do not trust what the seller is saying (or writing in case it is online). Keep in mind that every minor change in a diamond’s attributes means a lot of money. We highly recommend buying diamonds specifically with GIA certificates. This is probably the most known gemological laboratory and also a very strict one. Besides for the buying part of the investment, consider that when it is time to sell your diamonds your buyer will probably also want to see a GIA grading report. When it comes to colorless diamonds the IGI is also considered quite strict but when it comes to colored diamonds the GIA are to this day the only ones to trust.

The pros of investing in diamonds are:

1. High Demand and Low Supply: Since 1949, diamond prices have, on the average, enjoyed large annual increases. This is brought about by the fact that the demand for the stone continues to surge in international markets, particularly in Asia, Russia and the Middle East. The natural and flawless varieties are quite rare. As a result, such gems are very expensive when used to adorn priceless jewelry for both men and women.
The supply of small and low-grade varieties is also falling because of the growing demand for diamond-tipped precision devices in various industries. In addition, the market for colored diamond varieties has shown huge growth within the last three decades.

2. Portability: If you invest in real estate or collectible cars, you cannot bring them with you all the time. However, if you put money in high-quality diamond jewelry, you can wear the pieces anytime and carry them with you when you travel. Loose stones are even easier to carry and take along with you.

3. Independent Prices: Another good reason to invest in this gemstone is the fact that its price is not affected by fluctuations in stock, oil and bond markets. In fact, the value of this precious stone will not diminish even during economic downturns and other political or social troubles. 

4. Easy to Store and Maintain: As a mineral, a diamond is strong and durable. So, it can definitely last for decades. Since the stone is hard, storing and maintaining it is also uncomplicated. If you have a collection of diamonds, just make sure that the gems do not rub or get into contact with one another.
The cons of Investing in Diamonds

1. Requires Huge Capital: Investing in these gemstones can be rewarding, but you will need big money to buy them, as they can be extremely expensive. The natural, flawless and rare ones can easily fetch hundreds of thousands of dollars on the market.

2. Easy to Steal or Lose: The portability of this gem is both an advantage and a disadvantage. Since a diamond can be easily carried around, it can also be easily stolen, misplaced or lost. 

3. Synthesized Stones: Now there are companies that specialize in manufacturing synthetic diamond varieties. It is true that the differences between the artificial and natural stones are still very apparent, but once the technology in diamond manufacturing is perfected, the market could be flooded with high-quality imitation stones. This could pose a threat to the value of natural varieties.

4. Not Easy to Resell: If you invest in natural and flawless diamonds, you may find them hard to resell immediately because of their high prices. In case of financial emergencies, you might be forced to sell your investment at a significantly lower price to attract institutional buyers.
Any investment involves a portion of speculation. All you can do is try to make a smart one based on all of the information you can obtain.

If we try to conclude all that was written above, not surprisingly, diamonds as an investment have their pros and of course their cons. I strongly believe that their upside and potential easily overcomes their cons. Just be aware of the downsides and use it wisely to minimize the risks involved.

LEAVE A REPLY