If you are thinking of investing in diamonds, this article examines the 4Cs of diamonds, how the value of a diamond is determined and how to invest in diamonds.
What determines the quality of a diamond?
Diamond quality is assessed according to a concept known as the 4Cs of diamonds: cut, colour, clarity, and carat.
- Cut is the quality of the diamond’s angles, proportions, symmetrical facets, brilliance, fire, scintillation and finishing details. The grades are: ideal, excellent, very good, good, fair, and poor. The cut of a diamond determines its beauty.
- Colour is a measure of how white or colourless a diamond is. It is graded alphabetically from D to Z with D being the most colourless and Z being noticeably brown or yellow.
- Clarity is how free the diamond is from flaws and inclusions. It is graded on a ten–point scale from FL (flawless) through to I2 (inclusions 2). Flaws and inclusions detract from the optical properties of the diamond reducing its brilliance and beauty.
- Carat is the weight of the diamond. One carat equals 0.2 grams. Diamond value is exponentially related to its weight.
What determines the value of a diamond?
The price of diamonds is determined to a large extent by the Rapaport Diamond Report which relates the 4Cs of diamonds to a fifth C, the cost.
The report presents a grid of the first three of the 4 Cs: cut, colour, and clarity and provides the value in terms of hundreds of dollars per carat. The price of a diamond is the number of carats squared multiplied by the price of a one carat stone.
As the price of diamonds fluctuates, the report is published every week. There is no scientific basis for determining the price; it is merely the opinion of the authors of the report, and the prices are the New York “High Cash Asking Prices.” However, the report is used by jewellers worldwide.
Investing in diamonds
Diamond trading is an unregulated market and difficult for retail investors to get involved. The re-sale value of diamonds has been reduced significantly by the ending of the De Beers monopoly and new diamond discoveries.
For example, over the last ten years, the price of rough diamonds has been highly volatile. The increasing wealth of China has had a significant upwards effect, but that has been counteracted by an oversupply. However, investing in diamonds has potential and can be an interesting hedge.
How to invest in diamonds
There are three ways of investing in diamonds:
1. Acquire a physical diamond
An advantage of this is that you can have the diamond set in jewellery and wear it. Buying through a jeweller is unwise as they have a high (100% +) mark up, but diamonds can be purchased through a trader at close to wholesale prices.
Disadvantages include the potential of having to pay VAT and tracking the value of your investment.
2. Invest in a fund
While few investment funds specialise in diamonds, they do exist. An alternative is to invest in a commodities fund that includes diamonds in their portfolio, although such funds would usually have only a small investment in diamonds.
3. Trading diamond mining companies
Buying shares in a diamond mining company listed on a recognised stock exchange could be an exciting if risky investment. An alternative is to invest in Exchange-Traded Funds that include diamond mining companies.
Diamond mining process
If you want to learn more about the diamond mining process, please click here.
