Diamond Investment Offers Unique Opportunities And Unique Risks!
By Antoinette Matlins, gemologist-consultant and author of many award-winning books, including Diamonds: The Antoinette Matlins Buying Guide: How to Select, Buy, Care for & Enjoy Diamonds with Confidence and Knowledge (GemStone Press)
In the diamond industry, people are paying close attention to the rate at which prices for large diamonds (over five carats) of very fine quality (D-F color/FL – VS2 clarity) have been escalating over the past year, with no indication of reversal. All of the major auction houses are seeing record-setting prices: at a recent Sotheby’s auction in Geneva, five diamond lots—with stones ranging from 10.69 carats (D/VVS1) to18.00 carats (G/VS2)—sold for over $1,000,000! The historic 34.98 carat Beau Sancy diamond, a stone with a royal history going back over 400 years, fetched $9.7 million dollars, almost five times its pre-auction estimate, and it is not of exceptional quality; its color is very tinted (K) and it is slightly included (SI1 clarity). The following month an 8.01 carat fancy-color vivid blue diamond with VVS1 clarity fetched $13 million in Hong Kong.
Most experts agree that prices will go much higher. Supporting this are gloomy predictions pertaining to the fact that mine production has been decreasing and extraction costs increasing. Some are predicting that the leading mining companies will withdraw from gemstone mining and focus much more heavily on more profitable minerals and metals since diamonds and gemstones represent a very small percentage of their total profits. And if so, since minor players will not have the resources to invest in expensive exploration and extraction, it is unlikely new sources will be discovered.
These predictions, if accurate, combined with increasing demand from emerging economies, point to continued price increases, as well as an increase in artificially enhanced material being sold without disclosure. We're already seeing it. Color-altered diamonds are of particular concern because there are so many in the market. Some are permanent and others are temporary; tinted diamonds can be transformed into “colorless” or “fancy colors” using surface coatings (see below for important information on simple techniques to detect these surface coatings).
To further complicate matters, there has been an increase in the number of counterfeit laboratory reports accompanying stones that are not the quality the “report” indicates.
Some treatments can be easily detected by knowledgeable, experienced gemologists but others require sophisticated testing only available at major gem testing laboratories (see below). When considering any gemstone for investment, having a report from a respected gem-testing laboratory is essential, but it is equally important to seek an independent gemologist-appraiser—with respected credentials—to confirm that the report is legitimate and that the stone has not been damaged in any way after it was issued.
A sound investment in gemstones also requires the ability to obtain what you want at prices as close as possible to "wholesale" or below. You cannot buy “retail” and then sell back to a jeweler and expect to make money. Other sources of fine, rare gems, include auctions, estate sales; even flea markets and pawnshops.
We are also seeing a re-emergence of private diamond and colored gemstone investment funds, and I can’t overstate the importance of taking time to learn before considering investment. In the late 1970s, when Wall Street “discovered” “diamonds and gemstones, virtually all of the popular investment publications such as Business Week, Fortune magazine and others began to recommend them to investors. Investment houses specializing in diamond and gemstone funds sprang up across the country. Many of them succeeded in conning buyers out of tens of thousands of dollars or more. Investors knew nothing about the products or the market dynamics. At that time, there were no books to help lay people understand the ways in which gemstones could be created, duplicated or altered to look better than they really were. With the Wall Street impetus, it didn’t take long for diamond prices to strengthen. In 1978, the wholesale price of a 1-carat diamond of the rarest quality (D/FL) was around $6,100; by March of 1980 the wholesale price of such a stone had soared to $62,000! In September 1981, the price for that same quality stone plunged to $23,000, and by 1985, it bottomed out at about $9,600 per carat. Some investors, conned into buying fakes, lost everything they’d invested. Some purchased stones in sealed containers, with warnings—if the seal was broken, all buy-back guarantees were voided. Shockingly, many didn’t realize that if you couldn’t remove the stone from the sealed container there was no way to know if it was what it was represented to be! The same scenario occurred with colored gemstones, where the absence of universal grading standards made it even easier to exploit investors.
Most people about to purchase a fine diamond for investment also comparing prices in order to get as close to wholesale – or below – in order to increase the potential appreciation. Price, however, is tied to quality, which is determined by the four Cs: color, clarity, cutting precision, and carat weight. While each of the four Cs has an impact on determining how rare a diamond is, and thus, its relative value, most people, including many diamond dealers and retailers, have only a superficial knowledge of each of these factors, and lack the experience and in-depth knowledge to understand their impact on the beauty and value of a specific stone.
It is also impossible to make a sound buying decision based on a lab report alone; any diamond must be seen, and, when more than one diamond is under consideration, seeing them to compare side-by-side is essential. It is also valuable to have guidance from an expert who can explain the differences and their impact on the stone’s desirability for investment.
To underscore this point, let me share an experience I recently had while searching for a diamond for one of my own clients. I learned about two diamonds that were almost identical according to the GIA reports. One, however, was significantly cheaper than the other. Nonetheless, even though I knew there must be a reason, I decided to examine both stones because the cheaper stone might have been okay, depending upon the reason(s) for the cost difference. I examined the cheaper stone first. Despite it having the “same” clarity grade (VS2), it had a crack that extended into an extremely “girdle” (the edge or perimeter of a stone is called the “girdle”). An extremely thin girdle alone can be cause for concern if it extends for any distance around the stone. This stone’s extremely thin girdle extended almost 1/3 of the way around one end of the stone. Diamond is the hardest natural substance, but it is also brittle and a thin edge can be easily nicked or chipped. In this case, the extremely thin girdle at one end would have been a serious fault on its own. But this wasn’t all; the crack was present within the extremely thin part of the girdle, making it far more likely this stone could be damaged. This stone was cheaper because it had a very high probability of being seriously damaged from a sharp blow! Even though it received a very good clarity grade (because it had almost nothing else inside the stone), it was not a “good stone.” Someone who didn’t examine it carefully might have thought they were getting a bargain, when this was clearly not the case.
In addition to understanding that laboratory reports tell only part of the story, investors also need to be aware that there are counterfeit GIA reports. In addition, a diamond can be damaged or altered after a report was issued.
There are many pitfalls, but even so, the world of diamonds has changed in ways that provide unique investment opportunities for the serious investor. As with other specialty investment areas, successful investment requires extensive knowledge, or the availability of expert counsel to guide you in making a careful selection, one stone at a time.
Today however, there is also much more information available about what to look for and how to avoid the risks. There are quicker, easier ways confirm the facts. There is greater awareness of the quality factors that affect rarity, desirability and value. There is greater due diligence with regard to verifying facts before money changes hands.
The best advice I can offer? The wisest initial investment in diamonds is to take time to learn as much as possible about their sparkling history and allure, about the factors that set one apart from the other, and about the hidden dangers as well as the delights!
And no matter who the seller is, follow my 3-step approach to diamond acquisition:
1) Make sure the seller describes each of the 4Cs to you. Also, ask explicitly about treatments and whether or not there is anything about the stone that would make it more prone to damage.
2) Make sure the seller puts all of the representations he has made about the diamond, in writing, on the sales receipt.
3) Verify the facts with an independent gemologist-appraiser who holds respected credentials. Visit one of these websites to find someone reliable in your area: www.appraisers.org; www.accreditedgemologists.org; www.americangemsociety.org.
The last step is the most important step. Buyers should never make the mistake of assuming that if the seller is willing to put everything in writing that they “must be telling the truth,” therefore causing the buyer to skip this last step. Some of the most unscrupulous jewelers have been in business for many years because they realize they can put virtually anything in writing without risk of someone ever checking it out.
Only by finding someone with the “right” credentials and taking the time to have them verify the facts, will you know whether or not the seller was reliable. NOTE: there are many unscrupulous appraisers working in collusion with dishonest jewelers, especially in “wholesale diamond districts” around the world. This is why it is essential for buyers to seek someone with a respected certification, from an organization that has strict rules of professional practice which are enforced (such as the sites listed above).
If everything checks out, you can be confident about your purchase. If not, you will have documentation that will enable you to get your money back. Regardless of store policy, if the facts have been misrepresented, the law requires sellers to offer a refund.