Diamonds Truly Are Forever, and a Very Good Long-Term Investment

Rare gems are not only good investments that increase in value over time but also a good strategy to transfer wealth between generations

The “Sweet Josephine” pink diamond sold by Christie’s for $28.5 million. (Photo: Christie’s) The “Sweet Josephine” pink diamond sold by Christie’s for $28.5 million. (Photo: Christie’s)

There are diamonds, and then there are rare diamonds. The 16.8 carat “Sweet Josephine” pink diamond that sold at auction for $28.5 million in November was incredibly rare. Its sale, by Christie’s, was followed by Sotheby’s sale of the “Blue Moon of Josephine,” a 12.03 carat blue diamond that is even more rare, for $48.4 million. Both were flawless. Both, described in the mainstream press as a “gift” for the buyer’s daughter, actually were incredibly smart purchases, says one gem dealer, because they were tangible investments that will allow a low-maintenance transfer of wealth for generations.

The world of true diamond investing isn’t found at the local Zales. Of all the diamonds mined each year, only 30% are sold for retail purposes. The largest consumers of diamond jewelry are the United States, China and India, in that order. In fact, according to a Bain & Co. analysis, those three countries consume about 60% of the world’s diamond jewelry, with the U.S. being near 40%. That said, China’s recent economic stumble, which put pressure on white diamond prices, didn’t necessarily hurt rare colored diamond investments, as the “Josephine” auctions illustrated, largely because the key with these precious gems is supply, not demand.

Diamond investing typically comes in three forms: buying the actual product, buying an investment fund that buys/sells in the business and buying stocks of mining companies or producers. The last option can be the riskiest, and recently mining company and producer stocks have been weak. For example, De Beers, one of the world’s leading diamond producers, said its underlying earnings were down 23% in the first half of 2015, and the CEO of its parent company Anglo American (AAL.LN) said he expected the diamond business to be challenging for the second part of 2015 as well. Likewise, Rio Tinto (RIO), one of the world’s largest mining companies, has seen its stock fall more than 75% from a peak of just over $138 in May 2008 to $33.60 today.

So when it comes to investing in diamonds, the better options for high-net-worth individuals and family wealth offices are to look for private equity funds or work individually with dealers of gemstones. And for lasting value, colored diamonds are largely the only way to go, unless the white diamonds are part of a jewelry art piece.

HASelect – Novel Diamond Private Equity Fund LLC, based in Chicago, is a private equity fund that invests in the rare gem market. The absolute return fund, which has a minimum investment of $100,000, uses colored diamonds as its underlying product, says Alan Landau, who runs the trading out of Hong Kong.  He notes that white diamond prices might be more volatile, but colored diamonds are more valuable. For example, where a flawless white diamond might be worth $30,000 per carat, a flawless vivid pink diamond could sell for $1 million per carat and a vivid red for $2 million per carat, and those prices have continued to climb.

How rare are colored diamonds? Landau says mines hold auctions once a year, and this year only 65 pink diamonds, with an aggregate weight of 9 grams, were sold from Rio Tinto’s Argyle mine in western Australia, which produces 90% of the world’s pink diamonds. To put it another way, of the 132 million carats mined this year, one in 10,000 carats is colored, and most of those are the lower valued yellow diamonds. The rarer, vivid colored diamonds of pink, red and blue account for just one in 100,000 carats.  Landau says colored diamond prices have risen 11% per year for the last 10 years, and the rarest have risen 15% to 20% per year. He says the first Novel colored diamond private equity fund netted 30.7% return for investors over a 2.5-year period.

Of course, for those uber-wealthy investors, purchasing actual gems or tangible assets is a long-term strategy, and is used largely to diversify assets beyond the standard investments.  Stephen H. Silver, chairman and CEO of S.H. Silver Co. Inc., who has been in the tangible asset business for 36 years, recommends that his clients put 10% to 15% of their assets in tangible investments, which include antiques, fine art and, of course, rare jewels and jewelry.

Silver deals in rare gem stones: rubies, emeralds, sapphires and diamonds. In 2010, he donated the Cullinan Blue Diamond necklace to the Smithsonian. Like Landau he suggests that when contemplating diamond investments, investors should be aware that colored diamonds are the most rare and most stable asset. His clients, he says, are looking for alternative investment strategies to preserve and transfer wealth to the next generation, not for cash flow.  “This is the sandbox that the super-rich play in,” he says.

He adds that like the Cullinan Blue Diamond necklace, which contains 5.32 carats of blue diamonds and 251 other diamonds, unique or antique jewelry pieces are strong investments, and like art, rarity and collectability are part of the value. Another example of a collectible piece of jewelry is a necklace that has 95 carats of de-flawless type 2A pear-shaped diamonds, all perfectly cut.  What makes it so valuable is the collection of diamonds that match perfectly together. Today gathering that number of perfect diamonds for one piece would take five years or more to do. The value is the collection of stones together not the diamonds individually.

That said, Silver has bought larger colored diamonds and re-cut them, making them more valuable by capturing the vivid color. For example, he says he bought a pink diamond that was 1.75 carats, itself incredibly valuable at $250,000. But by re-cutting and re-angling the facets, he was able to get a red diamond and sold it for seven times his investment.

He also says that tangible assets are easier for investors to divest. Real estate sales can take months or even years, but for tangibles it can take only days, due to market liquidity and self-regulation of the business.

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