Diamonds Can Be Investors' Best Friend In A Rocky Economy

Marilyn Monroe, diamonds, gentlemen prefer blondes, blonde, movie

Photo: Flickr / Jack’s Movie Mania

She was an icon of glamour and beauty.But Marilyn Monroe also knew how to appreciate the timeless value of compressed carbon. When she sang “Diamonds are a Girl’s Best Friend,” she was offering a not-so-subtle investor tip to bank on the precious stones.

These days, with the euro crisis, investors are increasingly turning to people like Reinhard Paul, who knows all about gold and platinum, pearls and precious stones.

But the favourite stone of this jeweler, whose store is on Kaiserstraße, Nuremberg’s fanciest shopping street, is the diamond.

Since 1985 Paul has specialised in diamonds and coloured gemstones, and he is the chairman of the Deutscher Diamant Club (German Diamond Club), an association of German jewelry retailers.

Paul considers jewelry made of skillfully cut and set diamonds an “accessory to the personality of the wearer, male or female.” He points out that for many years they have found favour not only with American and European women but with wealthy men and women in China, India, and the Gulf states.

He has noted a particularly sharp increase in demand for diamonds “bought purely for their investment value” in the past few months. He believes that, along with precious metals like gold and platinum, gemstones like diamonds are also suitable as a capital investment, in the sense of securing capital long-term. According to Paul, the prices for even the smallest diamonds have soared over the past year.

A number of experts believe that prices will rise between 21% and 32% over the next five years. In 2012 alone, the sector has seen 7% growth. Paul recalls that in 1970, you could get a good-quality one-carat stone for $4,000; today that same stone would cost you $15,000, and if it were absolutely top-quality, you could double that figure.

A lot of value in a tiny package

And indeed, investment advisors the world over have discovered the advantages of diamonds. They pack a lot of value into a very small space. As easily transportable items with a stable value, they constitute a nice emergency reserve. Unlike gold and platinum, the value of diamonds is not quoted on a daily basis. Diamond exchanges do not have official rates.

Anxious investors, looking at investments that are considered stable in these uncertain times and thinking of buying diamonds, should, however, check out and heed the warnings of experts and consumer advocates. Many investors have had bad experiences investing in diamonds short-term, when they’ve tried to reconvert the jewelry quickly into cash.

If you get more than two-thirds of the original purchase price short-term for a jewel, you’re doing very well in many cases, as VAT and profit margins can be a third of the price. But some diamonds are virtually unsellable. Reinhard Paul says he’s observed many inferior-quality stones on the market.

Stiftung Warentest, a German consumer advocate group, warns inexperienced buyers with no diamond knowledge about potential losses. While they say that diamonds costing between 2,500 to 50,000 euros and up are a good crisis-proof investment with excellent long-term prospects, they are ill-suited to buying speculatively and short-term.

Also, scams in the diamond business are increasing. Buyers are constantly warned to avoid sellers who advertise or cold-call and sell ignorant victims expensive soldered diamonds with fancy-looking provenances and certificates. To gain trust, sellers offer a buy-back guarantee – but only if the diamond is returned exactly as purchased, which effectively means that a jewelry expert would be unable to ascertain its value, because an evaluation requires dismantling the jewelry to examine it thoroughly.

With diamonds, the “four Cs” determine value: Carat for weight, Clarity for purity, colour, and Cut. colour is the most important quality, and the major price determinant. Large stones are much rarer than small ones, and a single 5-carat stone will always be worth more than five 1-carat stones.

Over the last 50 years, prices for uncut diamonds have almost always risen, and experts expect they will continue to rise over the next five to 10 years. At the same time, reserves are dwindling, and pessimistic forecasts say that the supply of raw diamonds will be exhausted within the next 20 to 30 years.

In the opinion of Reinhard Paul, investors who see diamonds as a long-term investment are on the right track. Jewelry is never suitable for speculation, or for short-term investment, he says. Its primary function is to be worn. “The best returns are the day-to-day joys of fine jewelry– that sparkle in the eyes of the wearer.”

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This story was originally published by WorldCrunch.

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