I frequently get asked if I would recommend an investment in rare fancy colored diamonds. My initial reaction when you use the word investment and diamonds in the same sentence would be a resounding "No, it is not a good investment."
My reasoning for coming to this conclusion is that diamonds fail the basic criteria of any good investment.
Problem 1: Price
Diamonds are only a good investment if you can buy them low and sell high, like any good investment. The biggest problem is that the companies that are selling these investment grade diamonds are selling them at a mark-up similar to what a jeweller would mark up a piece of jewellery. The mark-up is substantial, meaning it is unlikely that anyone who purchases a diamond would be able to liquidate the stone and find a profit.
Example: A 1 Carat Fancy Yellow Diamond is being sold for $20,000.00. The wholesale market price for the stone is $10,000.00. The investor has already lost half his investment the second the transaction is complete. Comparably an investment in stocks or bullion will cost an investor only a small commission of say 5%, not 50%.
Problem 2: Holding Time
The time needed for the investor to turn a profit with diamonds is huge. The figures I have seen on websites promising huge returns are pure speculation and questionable. Diamonds have never moved in history anywhere near what is being speculated. All the experts I have talked to agree that it is pure hype and speculation with no basis in reality. The only people that may be able to turn a profit are the investor's grandchildren.
Problem 3: Carrying Costs
An investment in diamonds will require insurance. This will again add to the cost making it more difficult for the investor to recover the initial investment.
Problem 4: Liquidity & Selling Costs
This is the biggest problem with a diamond investment. If someone decides to liquidate the investment, you need a market to sell it and there is no market for diamonds that an investor can access. A diamond broker like Beck Gold & Diamond Brokers is going to want to purchase the diamond below wholesale. That way I can sell it at wholesale and make a small profit. An investor will lose at least half his or her investment if they choose to sell in the near future.
An investor will be required to Auction the diamond and again be hit with commissions usually in the 25% range.
The other option will be to sell it privately. This will be extremely difficult if not impossible.
Diamonds are not a liquid investment. They would be considered the opposite, illiquid. Any investment with liquidity problems should be considered very high risk.
Problem 5: Risk
Investing in diamonds must be considered the most high risk investment there is. Most investment specialists that I talk to agree that because of the reasons outlined, Rare fancy colored diamonds must be considered pure speculation. Most investment advisors don't recommend investments of this nature. This is the type of investment for the super sophisticated investor and not the average person. One should never invest more than 3% of their portfolio in an investment this risky.
Most investment professionals and diamond dealers and appraisers that I have talked to agree that if you want to take a crap shoot on an investment savings, than fancy colored diamonds may be for you.
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