The Truth About Diamonds as an Investment: The 2012 Report

At the beginning of each year, I produce a study for my clients entitled “The Truth about Diamonds as an Investment” that highlights the short and long term appreciation (or depreciation) results of diamonds for the prior year and the previous ten years. I compare these results to popular, alternative investments to make the report more valuable and interesting.  Enclosed is the 2012 Report.

To insure my research is correct, I consult the Rapaport Diamond Report, an internationally acclaimed publication that monitors and reports the pricing action of diamonds. Rapaport takes no position relating to the merit of diamonds as an investment, but simply reports the results of its research.

The opinions and investment analysis contained in this report are solely those of bidiamonds.com.

Review of 2011

• 2011 was a year that clearly demonstrates why you need to invest in select diamonds on a long term basis.
• The prices of all sized investment grade diamonds soared in the first 6 months of the year, due to trader and manufacturer speculation, international fiscal problems in Europe and the US, currency fluctuations and the expectation of high consumer confidence. Prices of some diamonds increased as much as 40% in the first half of the year, with 30% being the average. To add to the rising prices, miners required higher prices for their diamond rough.
• The second half of the year couldn’t have been more different.  Consumer confidence and demand fell because of the continued difficulties with the US and European economies. Traders and manufacturers were left with large amounts of high priced inventory resulting from aggressive buying during the first half of the year. Due to slacking consumer demand, dealers had to reduce prices to attract customers and satisfy their banking requirements by reducing large inventories. Miners also reduced the price of their diamond rough due to reduced demand, further aggravating price declines. All of these factors contributed to an overall average price decline of approximately 12% to 13% in the second half of the year.
• For the year, overall price appreciation for diamonds averaged about 19%.
• A short term trading anomaly occurred with the pricing of smaller diamonds during the year. Historical appreciation rates for smaller diamonds (.5 carat and 1.0 carat) have been lower than returns of larger size diamonds (3 carat & 5 carat). Last year, the appreciation rates of smaller diamonds actually exceeded those of larger diamonds, with the exception of 3 carat sizes.

ONE YEAR RETURN ON HIGH GRADE ROUND DIAMONDS FROM 1/1/2011 UNTIL 12/31/2011 COMPARED TO ALTERNATIVE INVESTMENTS

Comments:

• Gold continued its steady long term trend of appreciation increasing 8.9%, which was less than its 10 year appreciation average of 18.7%.
• Platinum prices took a major tumble (-22.8%) due to concerns about demand from the auto and jewelry industries, reducing its 10 year appreciation average from 10.8% to 8.5%.
• Five carat diamonds appreciated only 4.6%, which was below its 10 year appreciation average of 10.2%.
• Three carat diamonds appreciated 20.2%, which is significantly above its 10 year appreciation average of 8.9%.
• One carat diamonds appreciated 17.2%, which is also much higher than its 10 year appreciation average of 4.8%.
• Half carat diamonds appreciated 17.5%, which is also considerably above its 10 year appreciation average of 1.5%.

TEN YEAR RETURN* ON $1000 INVESTED IN HIGH GRADE ROUND DIAMONDS FROM 1/1/2002 UNTIL 12/31/2011 COMPARED TO ALTERNATIVE INVESTMENTS

*Percentages represent compound annual rates of return.

Diamond Characteristics that Relate to Price Appreciation:

• Size Makes A Difference.  Larger diamonds continue to have better price appreciation potential than smaller ones over the long term. The significant appreciation of smaller diamonds in 2011 must be considered a short term anomaly. Larger diamonds are likely to return to their long term rate of appreciation in the future. Investors and consumers should continue to focus on 3 and 5 carat diamonds for wealth preservation and long term appreciation. Serious investors should also consider 10 carat diamonds.
• Quality Makes A Difference.  A diamond’s quality can have a dramatic impact on its appreciation potential, with the higher quality diamonds experiencing higher rates of appreciation over the long term. Diamonds that have any individual grade below a “G” color grade, an “SI1” clarity grade or a “Very Good” cut quality will not have much, if any appreciation potential.  (For a complete understanding of the diamond grading system, please review “What Does Certification Really Mean?) These lower grade diamonds should be purchased for their beauty and sentimentality, but as an investment they are “dead money”. Unfortunately, these are the diamonds most people buy. There may be exceptions, but not many.
• Certified Diamonds are the Better Investment. Certified diamonds are graded and certified as to quality, so you know what you are buying. Since at least 97% of all purchased diamonds are not certified, most consumers have little to no understanding of what they are buying and rely solely on the jeweler’s good faith as a guide.  The best way to determine quality and potential for appreciation is to select Gemological Institute of America or American Gem Society Laboratories graded diamonds. If you are spending a large amount of money, you will certainly want this information.

Outlook for 2012

• There is a short term trading strategy in the securities markets that advises “don’t fight the tape”.  In other words, don’t buck the trend.  As we commence a new year, the same international political and economic factors that prevailed in the final 6 months of 2011 continue into 2012. Investors are advised to proceed cautiously, preserve liquidity and be prepared to take action at lower possible prices.
• Long term investors are also advised to proceed cautiously and look for favorable buying opportunities. If you do make an investment, you have comfort in knowing that patience should reward you in the long term.
• I expect that pricing of diamonds for the first half of the year will be flat to slightly down, in sharp contrast to the previous year, due to reduced speculative buying and a return to more normal buying activity.
• It is possible to see increasing prices form the middle to the end of the year, but nothing that resembles the price increases of 2011.
• Diamond miners will likely maintain their 2011 year end prices of diamond rough for most, if not all, of 2012.

The author: Paul Buchanan is a Graduate Gemologist, Graduate of the American Institute of Diamond Cutting and has 30 years of finance and investment experience. You are invited to comment or contact me at 760-268-0100 or info@bidiamonds.com.

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