Sparkling: Diamonds could be the investors’ best friend

As gold loses its shine, this most precious of stones may become an attractive alternative

As gold loses its shine, this most precious of stones may become an attractive alternative (Getty Images)

For centuries diamonds have been a symbol of wealth coveted by brides-to-be and collectors, but could these most precious of stones also prove the ordinary investor’s best friend?

Gold has traditional been the preferred commodity for many investors, but now that it is down from its peak, diamonds are an attractive prospect if you’re looking for an alternative. In the last five years, one to five-carat diamonds provided annual returns of 12 per cent and this year, global diamond prices are predicted to increase by around 10 per cent, while the price of the best gems could jump as much as 50 per cent, according to gem trading company Diamond Manufacturers. However, such claims coming from firms involved in the trade should be taken with a pinch of salt.

Prices have been driven up by demand from the emerging middle classes in India and China, the lack of major mining discoveries and, when it comes to the price of cut diamonds, the market is still tightly controlled by the likes of De Beers who have diamonds in store.

If you have a magpie’s weakness for shiny things, there are three ways to invest in diamonds: you can buy the gems and store them to sell at a later date; you can buy shares in diamond-mining companies; or you can gain exposure via diamond funds.

Holding the physical asset means you can set the diamonds into jewellery and make the most of its aesthetic quality until you’re ready to sell. Buy your gems through a reputable diamond trader rather than a jeweller who will add a retail mark-up of as much as 300 per cent compared to prices on the wholesale market. Vashi Dominguez, chief executive of Diamond Manufacturers, advises spending £5,000 on a quality stone and be prepared hold on to it for at least five years.

“Each diamond should have come with a certificate from a laboratory which confirms its grade – the GIA is the best known and one of the most-respected labs, the Dutch equivalent, HRD, also gets mentioned. Other certificates will be less trusted when reselling,” says Adam Laird, investment manager at independent financial advice firm Hargreaves Lansdown.

The most-important issue for investors is that the diamond trade is an unregulated market blighted by a lack of transparency. There is an index – the Rapaport Diamond Trade Index – but this only serves as a guideline as the vast majority of diamonds don’t actually trade at these prices.

The “four Cs” help to determine the value of any given diamond – the cut, colour, clarity and carat – but every diamond is unique, like a snowflake or fingerprint, which means they must be valued individually. A lot of work goes into an uncut diamond before it becomes the gem seen in fine jewellery and the cut is what gives a diamond its sparkle. Colourless diamonds (graded D, E or F) are rare and demand the top prices, but anything lower than grade H has become too yellow and is best avoided. Size is, in the diamond world at least, important – the price of five-carat diamonds increased by 170 per cent from 1999 to 2011, while three-carat diamonds increased by 145 per cent over the same period.

While all of this may add to the appeal, it also means that as an investment they are extremely tricky to value accurately and even seasoned experts disagree on qualities and values. It’s easy to imagine how easily dealers could take advantage of investors.

If you buy in the UK, diamonds are subject to VAT so you lose 20 per cent from the off and you also need to factor in the cost of storage and insurance (you can add diamonds as a specified item on your home and contents insurance)

To sell you can go to an auction house or ask a jewellery store to find a buyer for your diamonds (they’ll take a 10-15 per cent commission). If time is of the essence, the quickest way to sell is back to a diamond dealer, although you are unlikely to get the best price.

If you prefer to invest in a specialist diamond fund, UK investors are limited to Pink Iguana, an Enterprise Investment Scheme. However, you need a minimum £10,000 and this involves speculative investment in high-risk, unquoted companies.

One of the easiest and cheapest ways to invest in the diamond sector is to back the mining companies and manufacturers. An actively managed commodities fund is fairly accessible and diversifies some of the risk associated with fluctuating prices.

“We recommend getting access to diamonds through the JPM Natural Resources fund. This fund invests in gold and precious-metal mining companies, alongside energy and base metals. However, as there are very few viable diamond miners, these make up only 3.8 per cent of the overall fund,” says Patrick Connolly of independent financial adviser Chase de Vere.

You can also invest directly in diamond-mining company shares. Petra Diamonds and Gem Diamonds are among the few diamond-mining companies listed on the stock exchange, but one of the biggest diamond firms is De Beers, which has been in majority ownership of London-listed Anglo American since the end of 2011. Other notable names include Alrosa, a Russian mining company, and Canadian-based Dominion Diamond Corporation. Be warned, however, that shares in individual companies are high-risk and the price will not always move in tandem with the diamond price.

“With regards to investing, diamonds are a specialist area,” says Mr Laird. “I would recommend that any investor should only devote a small amount of their portfolio to it – maximum 5 per cent – but smaller investors may find it unfeasible given the costs. It is an area only for investors with a long time horizon.”

Sparkling statistics: The facts

1. More than 99 per cent of diamonds are now from conflict-free sources and traded under the UN-mandated Kimberley Process

2. There is thought to be less than 20 years of supply remaining in the major operating mines. Total reserves of the three largest undeveloped mines is less than one year of the current total global production

3. Gahcho Kue diamond project in Canada is the world’s largest new diamond mine, with an estimated reserve of 49 million carats. If it is approved, will take around five years to start producing (estimated to commence in 2018)

4. Gahcho Kue will operate for 11 years and produce 4.1 million carats per annum (just 3 three per cent of current global production)