October 18, 2010

Diamonds: a Cut Above

For an investment worth protecting, diamonds can be a BFF--best friend forever

 

When miners at the Leseng mine in the Kingdom of Lesotho unearthed a giant diamond, they could not believe their eyes. Weighing 478 carats in its rough, uncut state, and boasting remarkable color and clarity, it has the potential to yield a 150-carat stone. Once cut, the diamond is expected to fetch at auction a record-breaking market price in the tens of millions of dollars.

Add jewelry to works of fine art, grand estates, period furniture, collectible cars, rare vintage wines, and other possessions of deep emotional and financial value.

Diamonds are a global currency considered less volatile than gold, silver and other precious metals—and viewed by some as a hedge against more traditional, albeit less-aesthetically pleasing, investments like stocks and bonds. Small wonder why in an economy dominated by the topsy-turvy stock market, many high-net-worth individuals are buying more “bling.”

By the middle of 2010, rough diamond prices established by the Diamond Trading Company rose 17% from average prices recorded at the beginning of the year. Historically, the story is even better. A five-carat investment-quality diamond of exceptional color and quality will sell at wholesale for $349,500 today as compared to $240,000 four years ago, according to Gem Guide, which is published by Gemworld International. For truly extraordinary pieces of jewelry, market prices are stratospheric, doubling and tripling in value in the course of a decade.

Regardless of their value, diamonds, gold and other precious gemstones and metals are fun and exciting to own and wear. The only downside is the risk of misplacement, damage and theft—the latter the primary cause of financial loss. Fortunately, there are ways to reduce these threats and mitigate potential financial costs through insurance.

Market Mania

Like a lot of investment bubbles in the first decade of the third millennium, diamonds skyrocketed in value, virtually doubling in worth between 2003 and 2007, when the bubble finally burst. Rather than plunge like other markets—the precipitous fall of the stock market over the same period comes to mind—large, exceptional diamonds merely tripped, dropping to late-2006 levels. Overall, the descent in prices was insignificant compared to rising values in previous years.

Not every diamond or jewelry piece will greatly exceed the original investment value over time—only those graded superior via the “Four C” metrics—cut, clarity, color and carat size. That said, even modest half-carat diamond prices were up 9% in 2009. For more substantial pieces in the five-carat and up range, values shot up 40% over the same period, reports The Rapaport Group, which forecasts diamond demand.

Like the recently auctioned Picasso painting Nude, Green Leaves and Bust that sold for a record $106 million—$26 million more than expected—the investment performance of diamonds can be breathtaking. A diamond necklace of nearly 150 carats with D-color (almost colorless) and Asscher-cut stones (considered an excellent cut) that sold in 2006 for a reported $525,000 was purchased for nearly triple that amount ($1.42 million) in November 2009.

Apparently, no gem is priceless, including the world’s largest uncut diamond—the Great Star of Africa, also known as the Cullinan Diamond. Discovered in 1905, the rough stone weighed in at 3,106 carats. Although its cut shape at 530 carats makes it the second largest cut diamond in the world after the Golden Jubilee Diamond, left, at 545 carats, both gems, part of the British Crown Jewels today, would likely find willing buyers were they offered for sale at auction tomorrow. Their rarity virtually guarantees rising value—hence their investment appeal.

Next week’s Blog: Preventing Loss or Damage

Andrew McElwee is executive vice president of Chubb & Son and chief operating officer of Chubb Personal Insurance. He can be reached at amcelwee@chubb.com.

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