Published in The Market magazine, November 2011.
A cut above
The value of diamonds and gemstones has risen steadily over the past few years, but as an investment they are not for the faint at heart. Skill and patience is of the essence, but choosing a gem is ultimately a personal affair, as each stone has its own unique spirit.
Gemstones, diamonds in particular, have an undeniable allure. The way the light plays with the colours in a ruby or emerald, or how a perfectly polished diamond will have a sparkle brighter than any other stone.
“Diamonds have always been surrounded by an aura of mystery which no other gemstone on earth has ever matched,” says Andrew Coxon, president of the Institute for Diamonds at De Beers.
First discovered in India in 9 BC, diamonds were considered “unconquerable” as they could not be polished with the equipment of the time. Revered as talismans from Mother Nature, these rough stones were originally worn by royals for protection, but soon enough a new tradition was born: diamonds as tokens of love. Coxon describes the most romantic ring he has ever seen: a 500-year-old rough diamond set in a gold band, with the stone touching the skin. The inscription reads: “When you cannot see me please think of me.” A diamond never wears out, meaning it literally is forever.
While a quality diamond or gemstone will keep its value over time, investors need to be aware that this is not for the skittish. Diamond prices have risen by nearly 50% in the past 18 months, reaching historic highs in August. Demand is rising from new markets in Asia, while supply remains constrained as old mines close and new ones open. For buyers concerned with conflict diamonds, The Kimberley Process Certification Scheme has been established to verify the diamond does not come from a conflict area or other illegitimate sources. So does this mean investors should make room in their safes for some super-bling? Not necessarily.
When looking for a gem that will stand the test of time, the risks are significant. It requires years of training to recognise a fine stone, fashions change, and pricing depends on a wide range of tricky factors. As investments, diamonds and gems are a true game of skill and patience.
“The fastest rises in price have been in auctions houses selling fancy colours of any size and non-fancy [white] colours from 3 carats and above,” says Coxon, noting that rising prosperity in Asia has been the biggest driver for price. Furthermore, unique diamonds can fetch stunning prices at auction: recently a round, 5-carat brilliant blue diamond was sold in Hong Kong for $10 million, doubling its estimated price.
A fine art
Coxon compares a diamond to a work of art: each piece is unique. “What makes a diamond beautiful is not mentioned on any grading report, but you will see it with your own eyes when you try the diamond on your hand […] and see which one you do not want to take off,” says Coxon, explaining that three factors are found in unique combination in each stone: “Fire, or dispersion; Life, or scintillation; Brilliance, how bright and transparent did Mother Nature make the diamond.”
While the choice of cut comes down to preference, a classic shape such as round or princess will probably see better longevity than a so-called fancy shape like heart or pear. “The modern cushion cut is the latest trend, it is classic but need not be a deep stone, so all the money is in the face, not hidden in the depth,” says Coxon, who bought one for his wife. While diamonds will be graded also according to carat, clarity and colour, Coxon recommends not necessarily going for the diamond with the highest spec, but the one that speaks to you; “It is a very individual and emotive choice.”
Digging for treasure
Investors looking for a less personal way to gain exposure to the sparking stuff could consider buying shares in a diamond mine. Petra Diamonds, Gem Diamonds and Firestone Diamonds are among exploration companies listed on the London market, while Gemfields and Richland Resources provide exposure to the pursuit of coloured gemstones. But the risk is significant, warns Nick Mellor, mining analyst at Ambrian Capital.
“As mining goes, diamonds are fairly complex. There are certainly easier commodities to consider for a better risk to reward ratio,” says Mellor. “I would advise investors to look for existing, profitable diamond mines, and focus on companies that have demonstrated they can target profitable projects. Go for diamonds as opposed to gems, as this is the bigger market where pricing and demand is easier to determine.”
As with any mining operation, diamond companies will carry out a number of tests to try and determine what kind of grade, colour and quality can be expected from a new mine, but the variables are significant and will vary depending on the gemstone in question. “The variations in factors, such as the geologies, means you have to be an absolute expert to gauge the risk in this space. It is a very technical area.”
A luxury item
Generally speaking, the price of diamonds will follow the health of the overall economy. “With gemstone miners, you are buying exposure to luxury goods demand, mostly in the Western world but increasingly also in Asia. This demand will lag any movement in the gross domestic product, so gems could make a nice secondary play after a period of sustained growth,” says Mellor.
Although diamonds and gold both come out of the ground, gold works differently because demand also comes from the financial market. Investors buy gold as a hedge against economic uncertainty, but diamonds are almost solely for decoration. For coloured gemstones, each has its own market which must be studied by a potential investor. First to mind come the so-called ‘Big Three’: rubies, sapphires and emeralds, but it may be worthwhile to keep an eye on newer trends:
“Some gems have a very finite global reserve life. Take tanzanite, a deep blue stone mined by Richland Resources: the only place it is found in the world is a remote part of Tanzania where the resource base will only last for another 10-15 years. You may think the price of tanzanite will rise as it has such a finite supply, and you may be right. But one of the things that have made diamonds so popular is the marketing,” says Mellor, pointing out how although diamonds are not rare, they are still seen as an exclusive product.
“Colour is very subjective,” says Jason Williams, director of GF Williams, a gemstone specialist located in London’s Hatton Garden jewellery quarters. In addition to the ‘Big Three’, other stones enjoying popularity at the moment include aquamarine, kunzite, tanzanite and differently coloured tourmaline. While rarer stones can be popular, Williams recommend focusing on quality when buying a gem: “You must buy what is fine.”
Having said that, Williams does not actually recommend buying coloured gemstones for investment purposes, because they carry such high risks: “We have clients who trade in them, but we advise customers to consider them mainly for jewellery.”
While a high quality stone will retain its value, the main problem is the lack of liquidity in the market. You may buy an amethyst or agate today and see a handsome return in ten years’ time, but if you find yourself in a squeeze a few years down the line you could find yourself nursing a loss. In other words, flexibility on timing is key.
All that glitters
In the past few years, the price of opals has fallen due to additional supplies coming to the market from Ethiopia. This has resulted in a squeeze on pricing of opals from Australia, its historic source. Ethiopian opals look a little different, but they have good clarity and colour play, says Williams, explaining how gem pricing is often affected by changes in the supply:
“Rubelite, the red variation of tourmaline, has been on the market for four decades, so the source is diminishing. Finding nice colours and clean pieces is harder now, meaning the price has doubled in the past three years.”
Sapphire, which is measured according to commercial quality tiers, is facing a squeeze on the mid-tier supply from Thailand, where the mines are almost extinguished. Consequently, the price has gone up by 30% in the past 12 months. Investors who bought into this market at the right time it would have seen a nice payout.
Williams warns that some of the newer treatment methods will artificially enhance the colour of a gemstone, significantly affecting the value in a way that is almost impossible for a layman to catch. It is therefore crucial to consult an expert, and avoid the temptation to go topaz-shopping while on holiday.
“If you buy a single stone, you may choose to verify the quality by getting an independent assessment,” says Williams, emphasising that whose opinion you get is vital. Always pick a well-reputed independent adviser, but a UK buyer may opt for a European assessment, while someone looking to sell in Japan may choose a Japanese stamp of approval.
A personal choice
One problem for investors is how different markets will value coloured gems differently. While diamonds have a price hierarchy, coloured stones are assessed much more subjectively. This is often about light, says Williams, explaining how the sun brings out colours better, but in a less sunny country like the UK, the same stone may look too dark: “This is why it is important to look at a stone in neutral daylight, as artificial light can stimulate the colour.”
A serious vendor will not mind if an investor takes their time choosing a stone, possibly returning numerous times to catch range of lighting conditions. Ultimately, which stone you end up taking home is a matter of personal choice, a process that speaks to the allure that has made diamonds and gemstones so coveted through the ages:
“When I am considering a gem I will often leave it on my desk for several days to study. When you look at the stone, you have to like it,” says Williams. “It has to speak to you.”
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Diamonds: The Four Cs
Carat: a measure of weight, one carat equals 0.2 grams. The name stems from the carob seed, used in early trading as counterweights for scales.
Clarity: refers to the inclusions (flaws) within the stone, plus external marks. Clarity is graded according to the visibility of these blemishes under tenfold magnification. FL means flawless, ranging downwards to IF, VVSI, VS, SI and I.
Colour: A white diamond should be virtually colourless. The best colour grading is D, continuing through G to J, down to Z.
Cut: The quality of the cut depends on the precision of the angles, symmetry, proportions and polish. The cut also determines the Fire, Life and Brilliance of the diamond. Fire means how light disperses into the colours of the rainbow; Life describes the movement of light inside the stone; Brilliance speaks to the overall light reflected from the diamond.
Souce: De Beers