Under Pressure: Are Diamonds a Good Investment?

Safe-haven assets are becoming more popular as economic uncertainty rises and traditional investments suffer. Some still think the U.S. dollar to be the best way to retain value during a bad market, but even fiat currency must be reconsidered due to record inflation and the dollar slowly losing its reserve currency status. 

Firstly, investing in diamonds is more similar to investing in a heterogeneous asset like blue-chip art than it is to investing in a homogenous commodity like gold. One reason is that the diamond market is highly illiquid, especially as they get larger and more expensive. Another reason is that buying the asset at retail usually makes it harder to make a return on investment in the secondary market. Lastly, the main thing that distinguishes diamonds from gold is that diamonds are not fungible, meaning they can't be broken down and sold separately.

A diamond investment is a lot more like an art investment because finding the best diamond to invest in usually requires some level of expertise as well as access to the dealer market. Most of the money in the diamond business is made from wholesale and retail activity, so investors should always seek a trustworthy appraisal from an independent third party in order to maximize value. The difference between being a retail diamond customer and a diamond investor is gaining access to the industry through dealers and experts.

When looking for diamonds to invest in, the main thing to look for is quality. Buying a diamond that is of too low quality may be a bad investment, but buying a large fancy diamond could be harder to make a return due to a lack of market demand. Investors don't want to buy diamonds of middling quality, but they also don't want something that's so exclusive that it's too hard to unload. Investors often refer to the standard measurement of diamond quality known as the four C's: carat, clarity, color, and cut.

The first attribute of a diamond is its mass measured in carats (200 mg) or points (2 mg). Generally, bigger diamonds are of a higher value than smaller diamonds, but the value of a diamond doesn't consistently correlate with its carat. For example, the value of a 0.99-carat diamond on the wholesale market is nearly half that of a 1-carat diamond, even if all other attributes are the same. While this means that bigger diamonds tend to go up exponentially in price, this does not necessarily translate to an appreciation that can be turned into profit.

The second attribute is the clarity of the diamond, meaning the visual appearance of any inclusions such as blemishes or surface defects. While clarity is an important indicator of a diamond's quality, investors can't tell the clarity of a diamond with their naked eye. Rather, determining the clarity of a diamond requires magnification as well as an expert who knows how to identify features of a diamond that could impact its value on the market.

The third attribute of a diamond is its color, meaning whether it's colorless or has some sort of hue. Colorless diamonds—also referred to as white diamonds—are completely transparent diamonds. Colorless diamonds are the most valuable, but they are also the rarest. The next most valuable diamonds are the fancy colored diamonds, which include natural hues like pink, blue, or yellow.

The final and most important attribute of a diamond is its cut. Similar to the color grading scale, a diamond cut is also scored on a graded scale that ranges from poor and fair to very good and excellent. While the cut is the most crucial and easy to identify factor of a diamond investment, it is still valuable to get multiple expert opinions on where a particular stone falls on the scale. The cut is the only attribute of a diamond that's based on craftsmanship, so the best way to find an excellently cut diamond is to buy one from a skilled cutter who knows how to produce them.

When considering a diamond to invest in, the best thing to do is to bring it back to the basics. Since diamonds are largely showpieces with no inherent economic value or utility, their value becomes highly speculative and subject to fundamental market forces. One way to invest in diamonds without exposure to diamonds as an asset is by buying stock in diamond companies. But, if you want to be a retail investor in diamonds rather than a retail consumer of diamonds, you must look at the commodity through the lens of supply and demand.