In February 2016, the Rapaport Group launched its “Investment Diamond Grading Report”. This was Rapaport’s one way to officially enter the market for investment diamonds. The company decided that issuing their own investment certification, which would be in addition to any other certification that a diamond would have, would ensure that their criteria would be the standards that the investment diamond world would eventually come to revere and prefer. The report is only issued to diamonds that are certified by the GIA (Gemological Institute of America), in addition to other pre-determined characteristics based on the 4 C’s that Rapaport feels are investment criteria.
What is an Investment Grade Diamond?
According to Rapaport, investment grade diamonds are only those diamonds that meet the following characteristics:
– Must be Certified by the GIA
– Round Brilliant
– 0.50 carats and above
– Colors D-H
– Clarities IF-VS2
– Excellent Cut, Polish and Symmetry
The diamond also must meet all the details according to its own A1 and A2 specifications in this table:
The A1 and A2 specifications for investment diamond criteria according to Rapaport Image credit: Rapaport Group
Why do people need such a certificate from Rapaport? Does it make them feel more secure?
Over the last 40 years, Rapaport has built himself a very strong brand name, and is quite possibly even considered a household name in the diamond industry. He is now taking advantage of this position and “milking it” (for obvious reasons), and adding new products to increase sales and revenues. Is it ethical, considering his dominant position in the industry?
Rapaport also publishes a list of several investment diamonds via his daily Rapaport News. The following are some examples of diamonds that he recommended in his daily emails.
Recommended diamonds on the July 17, 2017 table Image credit: Rapaport Group
Recommended diamonds on the July 13, 2017 table Image credit: Rapaport Group
Recommended diamonds on the July 12, 2017 table Image credit: Rapaport Group
Recommended diamonds on the July 11, 2017 table Image credit: Rapaport Group
Recommended diamonds on the July 10, 2017 table Image credit: Rapaport Group
Recommended diamonds on the July 6, 2017 table Image credit: Rapaport Group
Recommended diamonds on the July 5, 2017 table Image credit: Rapaport Group
What do these charts mean? Well, obviously it gives the main characteristics of the diamond. The real question is about the last column, “RAP%”. Is the column the price at which the diamonds are really selling for? Or is it the asking price by a seller? Why are they all negative?
Rapaport publishes an infamous price list every Thursday known as the red list (simply because it is printed on red paper). This is a wholesale price list for diamonds but it does not reflect the true prices of diamonds. In reality, manufacturers acquire rough diamonds, then polish them, and then sell them. The difference in price between the rough diamond to the polished diamond and to the Rapaport list is quite big. As Rapaport is a business that trades in diamonds, it is normal for them to desire to maximize profits since the business is a for-profit organization, like in any other industry. The difference here is that the Rapaport price list does not follow the markets, otherwise, why would diamonds ever sell at such a discount to the wholesale price? There are other diamonds, of larger sizes, that sell at a lesser price difference than the Rapaport red list.
Are all Rapaport designated “investment diamonds” are truly an investment?
Well, similar to how most accountants answer questions; it all depends! But on what? Rapaport claims that “The new report conservatively grades diamonds based on Gemological Institute of America (GIA) standards”. What does “conservatively” mean?
Is Rapaport being strict enough about what constitutes an investment diamond? It all comes down to rarity in investment diamonds. Of course, it depends on the size of spectrum we are looking at if we are to qualify rarity. Are yellow diamonds rare? If we looked at the full diamond spectrum, including colorless and fancy color, the obvious answer would be yes, since only 0.01 % of global supply on a yearly basis would be considered fancy color diamonds. In this example, all fancy color diamonds, including yellow diamonds, are rare. However, if we only look at fancy color diamonds only, then yellow would not be considered a rare color. Instead, red, orange, violet, purple, blue and pink diamonds would be considered rare, and therefore their value much higher. During the past year or so, some yellow diamond prices have declined, while blue, pink and red diamonds prices have continued to increase. It would be interesting to see exactly how Rapaport qualifies their rarity criterion.
Currently there are 1.8 million diamonds trading on RapNet, their online diamond buying and selling database that is accessed by a members-only system. What type of diamonds of these 1.8 million would be considered rare? What percentage?
In economics, rarity has an element of time attached to it, as well as demand. As demand increases, and specific diamonds are sold, there are less available and therefore price will naturally increase.
For example, for the sake of our analysis, I logged into RapNet as I was writing (July 19, 2017) and filtered the catalog to see what would happen. I chose the following filters: Round brilliant shape, 1.00 carat to 1.10 carats in weight, D color, IF clarity, 3X (excellent cut, polish and symmetry), no fluorescence, and GIA certificate. There were 260 available in the results, and 128 of those had the GIA and Rapaport IDR that were either “RapSpec” A1 or A2. Are the Rapaport certified diamonds valued more, and hence easier to ultimately sell from a psychological standpoint because they added their own certification? I conclude that the GIA certification is more than enough to ensure you have the best quality diamond with these characteristics, and that Rapaport certification is not necessary.
I changed the filters slightly to include 1.00 carat to 1.99 carat diamonds, and the supply increased to 956 unique diamonds, with the same characteristics.
Let’s take a pause for a second and look at what I view as a rare diamond. Let’s remember that if you want to invest in diamonds, you should do so on the condition that it is for the purpose of diversification, and that you are not putting all your proverbial “eggs” in one investment basket. The second condition is that you hold onto it for the long term. An investment diamond is not something that you buy today and sell tomorrow. If this is your purpose then you should invest in bonds.
I am stricter on the characteristics for a colorless diamond when it comes to investment purposes than Rapaport seems to be.
Rapaport characteristics for investment:
Shape: Round Brilliant
Size: 0.50 carat and over
Excellent Cut, Polish, Symmetry
Diamond Investment & Intelligence Center characteristics for investments:
Shape: Round Brilliant
Size: 3.00 carat and over
Excellent Cut, Polish, Symmetry
Our investment spectrum is narrower. If you buy the best, i.e. from the cream of the spectrum, you will have an easier time to sell them later.
Based on Rapaport, there were 160,337 investment-quality diamonds available for sale on RapNet. Based on DICE’s characteristics, there were only 968 investment-quality diamonds available – just 0.6% of what Rapaport suggests.
Before we take a stance and say with finality that our criteria are far superior, it is important to note: If we look at the bigger picture, even 160,337 diamonds are rare enough. If each is purchased by 1 investor, they can all be sold in a matter of minutes around the globe – so there is no straight answer. However, diamonds smaller than 3 carats (Rapaport criterion), would have a larger investor base due to the entry cost of investment. Lower entry point into this industry, does not mean it is meant for all type of investors. Investors with lower capital available, should, normally, consider bonds, equity first, then go onto more unique investment vehicles.
How Rare Do You Want Your Diamond to Be?
As a financial advisor, I feel that I must stress that investing in diamonds is not meant for each investor. You have to have a certain high level of net worth. Remember that you are only investing for diversification, and normally, no more than 5% of your investible assets should go into any 1 asset class. Even if we go up to 10%, which is double, if you have $1 million, no more than $100,000 should be invested in diamonds. It also depends on your risk tolerance. That is why you should fill out a KYC with your financial advisor to see if diamond investing is even suitable for you. Just because your friend does it, it does not mean that it is for you as well. Also, consider that your regular financial advisor will most likely will not recommend you go into diamonds. why? because he does not understand the asset, and will not earn a fee if you go into this investment.
For those that are worth around $5 million, the maximum investment should be $500,000. at this level, investors should consider investing in fancy color diamonds, which are rarer.
Diamond investing can and should be a straightforward and trustworthy experience, and any question that you could possibly have should be able to be answered to your satisfaction. As time goes on, Rapaport will not be the only ones issuing a diamond investment certification. Even De Beers plans on issuing such certifications for their diamonds in the near future. When a for-profit organization, company, or corporation is the source of the certification, it is important to have a healthy dose of skepticism as to the necessity and validity of the certification. For those not immersed in the diamond or even investment industries, it can be enormously helpful to consult with a third-party advisor (as opposed to a salesperson at the corporation) as to the true investment value of the diamond which you are evaluating. A new non-profit organization called the Global Diamond Investment Council (GDIC) has been founded. The main goal is to hold all diamond investment industry participants to the highest code of conduct by issuing an affixed seal of approval to those who adhere to the GDIC’s high ethical standards.
Got any questions about investment diamonds or certificates? Ask us in the comments or by email!
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- Global Diamond Industry Transparency And The Culture of Provenance, Series III
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- Bain & Co. 2019 Diamond Industry Report: Strong Origins a.k.a. Provenance, Stricter Financing and a 50 year review (Strong Origins: Current Perspectives On The Diamond Industry, Plus A 50-Year Review)