Rock Solid Investments?

We are living in shaky financial times. Low consumer spending amounts to reduced profits for businesses. Declining profits for corporations translate into tumbling stock prices in the financial markets. And many economic analysts agree that the hard times are far from over.

Are investors doomed to watch their nest eggs dwindle further in the months ahead? With confidence in traditional investment vehicles sorely shaken, are there alternatives for those looking to achieve steady yet moderate to high returns on their money? The answer could be tucked away in a jewelry box.

Whether gracing the fingers of committed lovers, adorning the ear lobes of socialites of all stripes and genders, or etched into the dentures of pop culture artists, diamonds—aka Ice, Rock, Bling Bling—are today’s de facto symbols of romance, wealth, and status. The precious stone’s cachet may be rising even further. According to recent buzz, diamonds could shore up investment portfolios by offering protection from the double-edged sword of inflation and the gloomy long-term economic forecast.

In a June 2008 interview with the British newspaper Telegraph, leading diamond consultant Martin Rapaport made the case for diamonds as a feasible source of investment, equating the growing demands for the large precious stones with an increase in their value. New wealth, from countries like Russia, China, and India, and from the established oil-rich Middle Eastern dynasties, is fueling an unexpected market for luxury goods such as high end jewelry. In the diamond market especially, the trend is further propelled by the falling value of the American dollar, the currency in which the gems are priced. The result? A fresh roster of global billionaires who want in on the bargains.

The rising appetite of the newly rich and their wives for big stones, whose supply is limited by diamond makers, has created a demand that in turn has driven up the value of the diamonds, making them an attractive hedge against inflation, according to Rapaport, CEO of Rapaport Group of New York, which publishes the Rapaport Diamond Report, a weekly magazine regarded as the industry guide for the pricing of diamonds. Tight supply, growing demand, wealthy clients, increasing appreciation, tidy returns. The equation appears to add up.

But is this mode of investment right for everyone?

Hold off on that run to gleefully stock up on these precious baubles. Despite Rapaport’s endorsement, many financial analysts warn against such a venture. Diamonds as investments pose a challenge for a host of discouraging reasons. A diamond’s value should depend on its rarity, cut, and quality, but fashion trends often have a disproportionate impact on diamond prices. A period of price increases similar to those we are currently experiencing could easily deflate when luxury consumers turn their eyes to the next big thing. Remember what happened to natural pearls? They lost some of their value with the introduction of lower priced cultured pearls. These days some high quality synthetic diamonds are outshining their natural counterparts, and at lower costs too. The possibility of even more superior quality synthetics flooding the market in the near future could make long-term investing in the real thing a dicey prospect.

While many traded commodities such as gold, corn, and heating oil have terminal markets—broker exchanges, clearing houses— none exist yet for diamonds. The majority of the gems are sold through jewelry retailers who mark up prices to offset their own operating costs. However, when individual buyers try to offload diamonds, often back to retailers, the gems are purchased at below wholesale cost. Diamonds, unlike other commodities, are also subject to VAT in the United Kingdom and in European Union countries, as well as sales tax in many other countries. Other concerns to consider include buying high quality non-conflict diamonds from reputable sources and the costs of providing insurance
and security for your new investments.

A more prudent option is to consider investing in companies that mine diamonds and other precious metals. Think over this fact: approximately 20 percent of diamonds mined annually end up as decorative consumer goods; the remaining 80 percent serve a decidedly un-sexy but very utilitarian purpose. Because of their hardness, and their resistance to wear and heat, diamonds often turn up in parts for lasers, drills, surgical equipment, and more. Thus, while demand for diamond jewelry and accessories will often be susceptible to the whims of fashion trends, industrial need for powerful precision equipment will continue to grow. The steadiness of the latter market offsets the shifting nature of the former, and shares in a company could provide better diversification than
purchased diamonds.

As with any form of investment, knowledge is key. Learn as much as you can about the market, assess your tolerance for risk, and make a move, experts say.

Sounds like a rock solid plan.