Diamonds have been treasured as gemstones since the ancient times. The popularity of diamonds has risen since the 19th century because of successful advertising in spite of a greatly increased supply. They are not normally used as a mainline store of value during times of crisis, due to their lack of fungibility and low liquidity, but may still be useful during times of hyperinflation. Nearly 20% of mined diamonds are used in jewelry and 80% for industrial uses such as lasers, drill parts and surgical equipment.
Wholesale diamond price has been controlled by the De Beers Group, which has an estimated 40% to 50% of the market. Botswana is currently the largest producer of diamonds with mines operated by Debswana, a joint venture between De Beers and the Botswana government, however, since the 1980s, other producers have developed new mines in Russia, Canada and Australia challenging De Beers’ dominance. The United States is the biggest consumer of diamonds in the world. The U.S. accounts for 35% of diamond sales, Hong Kong 26%, Belgium 15%, Japan 6%, and Israel 4%. The price of diamonds fluctuates with global demand and the world economy.
Diamond prices may vary widely depending on a diamond’s carat, color, clarity and cut, what we call the four C?s factor, although there is no universal world price per gram for diamonds. Numerous institutions have varying standards which can be used to aid in diamond identification and pricing. Gemological Institute of America, American Gemological Society and International Gemological Institute are three such institutions. Some firms offer “investment-grade” diamonds for sale to the public. A prudent investor should ask for a written promise to rebuy the diamonds at or near the purchase price within a specified period. Diamonds may thus be considered as a problematic investment, as it may be easy to buy a diamond, but it is not easy to sell one unless one is already an established diamond merchant.
Another problem for an investor is that purchasers other than established jewelers will be paying retail for a stone but can get only wholesale at most if they sell it back to a jeweler. Today there are a few funds that are investing in diamonds, as these funds purchase unique diamonds which are often very large in size or color, each stone is checked by a few professionals and negotiated until the fund decides to purchase it. Only after this a marketing team goes into action and through an extensive work the fund yield is gained. Grading and certification by recognised laboratories goes some way to redressing this. Colour and clarity grades are parameters which need to be determined by gemologists.
The increasing quality and size, also presents a threat to the value of polished diamonds as a long-term investment. A cautionary example of such a price fall caused by introduction of a new simulant strongly undermining the prices of a natural gem was the permanent fall in natural pearl prices with the introduction of cultured pearls. In part because of the social acceptability of wearing cultured pearls to much of the market, customers migrated from the natural to the lower priced cultured product. There are several factors contributing to low liquidity of diamonds. One of the main is the lack of terminal market. Most commodities have terminal markets, and some form of commodities exchange, clearing house, and central storage facilities. Diamonds are also subject to value added tax in the UK, EU, and sales tax in most developed countries, therefore reducing their effectiveness as an investment medium. Most diamonds are sold through retail stores at very high profit margins. As diamonds in larger sizes become increasingly rare and valuable, any easily visible and readily understood pricing system has been difficult to establish.