Diamonds: now an investor’s best friend?

They are rare, beautiful, valuable and a girl’s best friend but traditionally diamonds have not been considered an asset class in their own right. They do not share the “haven” status of gold and their prices are more volatile than those of the precious metal. While the value of spot gold has gained about 25 percent this year, diamond prices have fallen by at least 10 percent, in line with the poor performance of the luxury industry, according to US-based IDEX Online Diamond Prices, which tracks global asking prices for the polished gems.

Some jewellery specialists are doubtful about the merits of diamond investing. David Bennett, the Geneva-based chairman of jewellery for Europe and the Middle East at London auction house Sotheby’s, said: “Like art, we would not advise someone to buy diamonds for investment purposes, although people do. We feel diamonds should be bought for the joy of wearing them.”

Diamond investment has had a controversial history, as for most of the last century, the market was dominated by a cartel led by mining group De Beers. In recent years, however, the market has broadened, with De Beers controlling 45 percent of it and Russia and Canada becoming the leading external suppliers.

But the growing demand for tangible assets and portfolio diversification has led to the launch of a number of diamond investment funds this year, which believe they can achieve double-digit returns for investors.

In March 2009, alternative investment manager KPR Capital launched a Cayman Islands-domiciled, investment diamond fund with a minimum investment of USD 250,000 (EUR 168,168).

This month, investment boutique Emotional Assets Management & Research launched a fund which invests in collectables ranging from fine art and rare stamps to diamonds and diamond jewellery. The fund is targeting a growth rate of 15 percent per annum with a minimum investment of GBP 100,000 (EUR 111,967).

Dazzling Capital, a London-based company investing directly in period jewellery, also opened its doors this month. The company is co-founded by former Christie’s auctioneer Humphrey Butler, former jockey and chartered accountant William Sporborg, and Christopher Holdsworth Hunt, co-founder of City brokerage KBC Peel Hunt.

The company, which requires a minimum investment of GBP 10,000 with an estimated 11 percent return, counts Lady Madeleine Lloyd Webber, wife of the British composer Sir Andrew Lloyd Webber, as one of its investors. Investors can also rent Dazzling Capital jewellery for a nominal fee of GBP 50.

Other investors said diamonds were too niche to gain a significant following. Scilla Huang Sun, the head of equities at Swiss & Global Asset Management, said it did not have a diamond fund because the class was too narrow to merit a fund of its own.

Diamond trading is growing in sophistication. Until recently, gems had been considered an illiquid asset. Auctions are rare and gem valuation was considered more of an art than a science. But in January, the Dealers Organisation for Diamond Automated Quotes, an online diamond exchange managed by Dutch bank ABN Amro, was launched.
The Belgium-based exchange attempts to overcome other traditional barriers to investment in the diamond market, such as high sales fees and low liquidity, and offers two-way auctions for polished diamonds, the first cash market for diamonds.

Diamond funds provide diversification benefits by investing in a range of pieces but many investors may want to buy their own diamonds, not least because they get to wear the jewellery when they want.

Some gems hold their value better than others. Holly Midwinter-Porter, a gemmologist at UK jeweller Boodles, said: “If you want to buy diamonds for investment purposes, they should be big and fancy. Red and green are the rarest and, unlike white man-made diamonds, are finite as they are only found in one or two areas in the world.”

She added that rare diamonds were a long-term investment and their portability made them more appealing than gold or art to some investors.

Another option for investors is the vintage diamond jewellery market, which is considered capable of offering better returns. Auctioneer Butler brokered a USD 4.5m deal with The Louvre museum in Paris in 2004, for an antique emerald and diamond necklace and earrings by Nitot, given by Napoleon Bonaparte to his second wife, Marie Louise of Austria. The owners had bought it for a fraction of the sale price a number of years before.

Private buyers are taking advantage of a rebound in diamond prices, although buying at auction can mean paying an eye-watering buyers’ premium of up to 25 percent plus VAT at houses like Sotheby’s and Christie’s. The seller is also charged a commission of between 10 percent and 15 percent up to GBP 150,000, so the auction house can take as much as 40 percent out of each transaction.

Last December, a record amount was paid for a diamond at auction. The 36-carat blue Wittelsbach diamond sold for USD 24.3m at Christie’s London auction. This May, a record was set for a vivid-blue diamond, with the seven-carat Josephine diamond changing hands for USD 9.4m at Sotheby’s in Geneva.

At another Sotheby’s Geneva sale this month, the star lot is a rare vivid-green diamond, expected to sell for up to USD 5m. It is barely the size of a small coin but its rare colour, a result of radiation in the rock, could make it a record-breaker.

Stephen Lussier, executive director of the world’s biggest diamond miner De Beers Group, expects prices to grow strongly. He said that after a difficult year which had seen De Beers sales drop by over 10 percent net, a global scarcity of diamond mines and a surge in demand from China and India could turn diamonds into a sparkling investment.

© 1996-2009 eFinancialNews Ltd


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