Invest in Diamonds Introduction 

How to Invest in Diamonds

Very few people have heard of the coloured diamond market, the reason for this is that only 1 in 100,000 diamonds produced are coloured Diamonds.

The process by which Diamonds are formed requires the presence of trace elements and a distortion to the diamonds structure in order for colour be created within the Diamond. If Nitrogen is present it can impart yellow or orange to a diamond’s shade whilst the presence of  Boron will impart a deep blue and hydrogen a violet shade.

Some of the world’s most popular coloured diamonds are a purplish pink which are produced in the Argyle mine inAustralia. These are produced in such small quantities that a year’s coloured diamond output would only half fill an ashtray.

Currently this supply of coloured Diamonds is produced in an open cast mine and it has been announced by Argyle mines that they intend to convert the mine to an underground one. Experts assess that the effect of this is likely to reduce the supply by about 40% as well as reducing the size of each stone.

The coloured Diamond market is not very well developed unlike the colourless diamond market. The reason for this is that the coloured market suffers from an irregular supply in the past. De Beers controls the price of the colourless market through either releasing supply onto the market or withholding supply to maintain the price.

The coloured Diamond market is considered demand driven with the demand for coloured Diamonds greater than the supply at any time. The effect of this demand driven market is that the price of coloured Diamonds has shown double digit growth since records began nearly 40 years ago, in fact in 2009 prices grew at a staggering 40%.

The current economic turmoil and low returns that can be earned whilst investing in Equities or Property have lead to investors looking for new asset classes to store their wealth. Many wealthy investors have moved into Gold but with Gold at or near all time highs some investors feel Gold is not such a good store of wealth.

The focus has moved onto coloured stones as a store of wealth and economic conditions are such that 15 to 40% annual returns are likely again, Current returns in 8 months of 2011 have shown price rises of 25%.

It has also been reported thatChinahas started moving its foreign reserves out of holding dollars and into hard assets. It is commonly known that they are increasing their holdings of Gold but less commonly known is that they are also increasing there holdings of Colourless and coloured Diamonds.

Why Should You Consider Coloured Diamonds in Your Portfolio? 

Some of the reasons for choosing coloured Diamonds as an Investment are as follows:

• As a hedge against inflation.
• There is a universal standard for the valuation of coloured Diamonds.
• It is an easy market to invest into.
• They are highly portable and offer complete privacy of ownership as there are no reporting requirements to any tax authorities. It is an ideal way to transfer wealth between jurisdictions.
• Coloured Diamonds are a natural resource which has a very limited supply; this reduces the volatility of investing in this asset class.
• There is very little correlation to other asset classes such as stocks, bonds and property.  It is an ideal portfolio diversifier to reduce the risk in a portfolio. The market is independent of Government regulation and control.
• On a price per carat basis coloured Diamonds are the most expensive gem stones on the planet, they retain their value and have similar characteristics to fine paintings as an asset class.

The Performance of Coloured Diamonds 

If you had invested in a 1 carat Fancy Blue Diamond in 1970 it would have cost approximately £5000. By 2005 this would have increased in value to over £180,000. The market has shown that the price of a Coloured Diamond doubles in value every 3 to 5 years.

The current performance over the last 3 years has shown returns significantly higher than that, with little chance of prices slowing in the near future. Some experts in the market are suggesting that the prices of these Diamonds could double in value in the next 12 to 24 months. The reason for these phenomenal growth rates are as follows:

• Scarcity due to mine related shortages.
• BHP Billiton production fell by 24%
• Rio Tinto saw its production fall by 23%
• Australia’s famed Argyle mine reported a 30% decline in production.
• De Beers production fell by 4.1%
• Increased demand from investors includingChinatransferring its reserves from US dollars to Gold and Coloured Diamonds,
• Widespread hoarding due to the fact that investors no longer trust governments or banks and are looking for portable ways of protecting their wealth.

The Investment Process 

The cheapest coloured Diamonds start at around £10,000 to £12,000. Generally Diamond brokers try to encourage new clients into their baby programmes which go up to £25,000. One of the factors to consider is how good the broker’s trading desk is and how many clients they have. The advantage of this is if you need to liquidate your Diamond holding a good broker can probably sell your Diamond on in about 5 to 7 working days. You must consider that you can only liquidate your investment if another investor wants to buy.

This is very important for the preservation of your liquidity.  As a general rule the brokers will tell you that you should be comfortable with a holding period of 3 years. In this time they hope to show you a significant profit in which they will take their commission on the backend sale, which is normally between 2% and 4%.

Once you are satisfied with your investment they hope to build up your holding in Diamonds over the long term, which appears to be a very reasonable business strategy for long term gain for all parties.

Summary

Coloured Diamonds are considered Investment grade and can be a great store of wealth. The market is growing considerably at the moment and in the near future there seems to be no reason for this to slow. The economic fundamentals seem to support the likelihood of double digit growth over the next few years. Unfortunately due to the high price of the stones it is not a market that a small investor can readily enter, but if you have around £10,000 to £15,000 this may be a way of storing your wealth and the likely volatility of this asset class would appear to be less than for Gold. The liquidity of the asset should be considered though as it would take a week or two to exit your position if you need your funds.

If this is a market that you want further information on or a recommendation of a reputable diamond broker contact www.Alternativeinvestmentsinfo.com and we can put you in touch with one that we recommend.