Is Diamond Investing Well Worth The Risks Involved?

Mark sent me a message yesterday for the first time asking me a bunch of questions about investing in diamonds and if he should consider it at all, after having done some research by himself on it. After a few short messages back and forth, I decided to share with you his questions and my answers because all of his questions and concerns were legitimate and are shared by many. Below are the comments and questions in the order they were sent…

“Hello, I’m interested in acquiring an investment diamond. I’m not sure of the amount “yet” but I have some questions…i’m just not sure about diamonds in general as an investment asset, I recently just bought a diamond ring at what one would consider a very good price, still if I sold it tomorrow I would lose about 15% from online buyers and 12% using the buy back option from the diamond company.”

1. What is the entry level for diamond investing?

2. As I don’t want to lock up large amount of capital without it working for me, can I loan cash against a diamond and if so what would be an estimated interest rate PA and LVR?

3. can I have an investment diamond set in a ring and still maintain the investment?

4. why 5 years to see a return, I presume because there are substantial markups resulting in the diamond requiring catch up for a few years in its annualized capital appreciation?

5. can the diamond be purchased via OTC for a large purchase?

ANSWERS:

I will make some general comments on the questions and comments in mixed form but I am sure that the answers will be clear to some and perhaps confuse others…

In general, diamond investment is not for everyone. Do not fall for all the online marketing and “deals” that are offered. It is all marketing. In fact, in France, it is illegal to market diamonds for investment on the internet because of all the misleading information and fraud that occurred in recent years.

The approach to buy a piece of jewelry such as a diamond ring and buying a diamond for investment is completely different, rightfully. When Mark mentioned above that he bought a diamond ring at a very good price. What is really a good price? if a ring is “retailed” at $1000 and now it is on “special” for $200, is that a good deal? relatively, yes since it is an 80% discount. But if the “original” price was $250 and now it is $200, is it still a good price? much less attractive since it is only a 20% discount…yet the price is still $200. All it means is that Mark felt that he was willing to give up a certain amount of money for this ring, which Mark felt that he was getting a good value for his money. This goes for any type of a personal purchase.

Mark then discusses the potential loss should he want to sell the ring back the next day. Putting aside the fact that normally, most countries have certain rules about returned merchandise to stores after purchasing, should mark buy any personal item, from a t-shirt, to a car to perfume or any other personal product and would want to sell it the very next day, he would not get back his original paid price. So this claim falls onto any item, not diamonds rings. 

Mark mentions a 12% discount should he sell it back to the original company. Let’s not forget that the company that sold it buys it at a lower price, again, like any other product (and again, assuming that there is no rules in regards to returned merchandise). Why would any business buy back an item at the exact price they sold it at? are they not a for profit organization? are they a charitable organization? how much does the value of a car go down once it is out of the lot? so why do people concentrate on diamonds only?

In diamonds, like many other products there is a value chain. There is the rough diamond that is mined by companies like De Beers and Alrosa for example. Then these companies sell the rough diamond to manufacturers who then polish and sell the diamonds to traders and jewelry manufacturers. Then the polished diamond in placed in a ring and sold to a retail store that then sells it to a private individual. The same thing goes for a shirt or any other retail product.

from this explanation, it is obvious that buying a ring at a retail store will not be considered an investment; because of each layer of additional markup, as mentioned by Mark.

when it comes to investments, the process is different. The excuse of some people saying that in the stock market it is more transparent or all investors are equal, are also wrong. Retail investors are equal, but institutional investors can have a better price by doing large transactions outside the normal channel and therefore get a discount to the retail published share price on the exchange. I invite you to inquire about it…

Let’s look at the questions asked above.

1. What is the entry level for diamond investing?

There is no single answer. There are only opinions based on experience. That is why working with an individual that knows diamonds and investments and has an educational background and experience in both is instrumental. Many online diamond sellers will claim that you can start with as little as $10,000 or even less, at $5000. stay away! for $5,000 and $10,000 buy bonds and shares of companies, and get a better value for your capital considering liquidity factors and risk/reward analysis. More importantly, those that are ready to diversify their portfolio and add diamonds should do so after having stocks, bonds and some other traditional financial instruments and investments that are more common, perhaps mutual funds. 

A Certified Financial Planner will always tell his clients that it is advisable to put no more than 5% in any single asset (other than his main residence), that is outside the normal and more liquid investments. If a person has $1 million of investible assets other than his primary residence, then no more than $50,000 should be invested in diamonds. In my opinion, based on the risk/reward mechanism and consideration, I would say that diamond investment should be reviewed by those that have at least $5 million of investible assets. This is based on a proper diversification plan.

we have to take into account that as people, it would be very hard for anybody to see value when investing $100,000 in something that weighs less than 1 gram for example and that is so small (read my review on wealth concentration and that will help you to further understand what I mean).

2. As I don’t want to lock up large amount of capital without it working for me, can I loan cash against a diamond and if so what would be an estimated interest rate PA and LVR?

In recent years some non bank lending facilities emerged and lend money using Luxury Assets as collateral. Not only diamonds, but also works of art, collectible and luxury watches, boats, cars, etc… It is true that diamonds, normally, do not produce any type of income. Diamonds can only fluctuate in their value, thus creating capital gain or loss. There is a possibility to borrow funds using diamonds as collateral. These loans are normally non recourse loans, meaning the owner is not personally liable for the loan. The lenders hold onto the assets as collateral via a contract. As the borrower pays back the full loan, the asset is then returned to the owner. Should the borrower not return the loan, the lender keeps the asset and sells it on the open market in order to get back the money lent. 

This is somewhat similar to a bank mortgage loan, and the real estate is used as collateral. These non bank loans are normally more expensive than regular bank loans due two main reasons. The first reason is that these types of loans are guaranteed by the asset, which is less liquid and so the risk is higher, making the interest ate of borrowing more expensive. The second reason being that these types of loans are not mainstream and there are not enough lenders, it makes it more expensive (the law of supply and demand). A potential borrower cannot walk into his bank and ask for a loan using his diamond as collateral. Normally the interest rate on these types of loans can be anywhere between 1.5%to 3% monthly. These types of loans are normally for short term purposes or to invest in a potential acquisition which will yield a higher rate of return than the cost of borrowing. How much can be borrowed? it all depends on the type of luxury asset, but for diamonds it can vary between 35% to 80% of its wholesale value. This ensures the lender that the eventual disposition is easier.

3. Can I have an investment diamond set in a ring and still maintain the investment?

Absolutely. This will not decrease the value of the diamond. We have seen many diamonds passed on from generation to generation set in jewelry, and their value remains the same or increase over a longer period of time. This is not a depreciable type asset. Using it as jewelry does not diminishes value, like a used car for example.

4. Why 5 years to see a return, I presume because there are substantial markups resulting in the diamond requiring catch up for a few years in its annualized capital appreciation?

If the diamond is unique and rare, and it was acquired for a reasonable price in the current market, then a longer period of time is required for appreciation due to the risk/reward as well as liquidity issues. If we use real estate as an example, and a current market value of a house is $1 million and that right after it was acquired, the new owner for some reason needed to sell it. Will it sell for the same value? it sure can, but it also depends on how fast the owner requires the capital. What if it took 3-6 months to be sold the first time around? 

Is there a guarantee how long it will take to sell now? not at all. If the owner needs to sell it right away, then he will have to sell it at below market value in order to attract a potential buyer. Even if we wait in order to sell at the original price of $1 million, there are still all the costs that accompanied the acquisition such as lawyer fees, closing fees, brokerage fees and any other fees. A diamond can be in a similar position. Can it sell at current market value, sure but a buyer still need to be found. In a diamond case there are no surrounding fees except for a broker fee paid. If you need to sell it faster, it needs to be offered at less than market in order to attract more potential buyers. 

So why 5 years? why not 1 year or 2? based on experience, it can take anywhere from 2 weeks to 2 years to sell a diamond and because liquidity is more challenging, it should be an asset to be held longer.  If the diamond is unique enough and rare enough than its value will increase exponentially overtime due to supply and demand. Even if demand remains the same, supply may decrease substantially, which will cause the value to increase substantially. An investor should be in a position to buy a diamond at the wholesale value rather than retail. Liquidity is better at the wholesale level rather than retail. There are more potential buyers in the wholesale market than retail market. 

An investor will still need to use an expert to find him the right diamond at the right price, not only for now but also to guide him through the full process of acquisition and disposition in the future. Investing in diamonds is no different than a proper financial plan. There are two ways to invest in a diamond. The first is by finding a diamond that can be acquired for less than current average market value (in the wholesale market) and then re-offer it on the market for a potential return, similar to a business and inventory. The second way is a buy and hold strategy. i this case if the diamond is rare enough it may be worth paying even above current average prices so that in the future (at least 5 years), the effect of a much lower supply will substantially increase the value of the diamond and will still be easily sold due to the rarity factor.

5. Can the diamond be purchased via OTC for a large purchase?

Diamond investment is not regulated by any governmental body, although I strongly believe it should be regulated one way or another. I believe that whenever the word investment is used and it relates to a financial type transaction, it should be regulated like any other financial investment product. The acquisition or disposition of a diamond is not done via any type of Over The Counter or any other regulated platform. There are websites that offer a list of diamonds available for sale but the majority is targeted to the diamond industry and its participants like dealers and brokers. In some countries, like israel, the industry is somewhat regulated. Anybody that wants to deal with loose diamonds must be licenses by the government and normally the person is also part of a diamond industry association. Jewlery sales can be done by anyone that applies for a business license.

Feel free to send us any questions so that we can address them and make them available to any potential investor.

We are available for a private consultation in regards to diamond investment planning. We have expertise in both the Investment industry as well as in the Diamond industry and can facilitate transactions.