If you are a retail investor or a consumer thinking about buying diamonds as a form of investment, you will be thanking me for saving you thousands of dollars (if not tens of thousands) by the end of this article.
It has recently come to my attention that a growing number of businesses (both online and offline) are marketing diamonds as investments that will “appreciate in value” and “grow your wealth”.
As a consumer advocate, I noticed a disturbing trend of queries from shoppers who are treating engagement ring purchases as investments.
Likewise, there is also a similar phenomenon in the financial markets where blogs and businesses are actively recommending retail investors to buy diamonds as an alternative form of investment.
Now, I need to get an important point across and will be honestly blunt here.
If you are a non-trade person and fall into either of the categories described above, please stop whatever you are doing and read the next sentence carefully.
You would be a fool to think you can make money by investing in diamonds.
This is a dire warning to all would-be diamond investors and you would do well to heed it. Otherwise, you will find yourself in the unpleasant situation of losing money faster than flushing it down the toilet.
That sentence has summarized this entire article for you. However, if you are interested to find out why diamonds are terrible investments, grab a cup of coffee, sit back and start reading…
Over the years, I’ve heard of countless reasons why diamonds are supposedly good investments from financial ‘experts’ and jewelry retailers. And for the record, these investment reasons are just outright nonsense.
Here’s what you will likely hear in sales pitches or read about in marketing materials:
Now, I could literally list more reasons to fill up the entire page but I’m not going to do that. Instead, I want you to do a quick Google search using terms like “investing in diamonds”, “why invest in diamonds”, “make money diamonds”, “financial investment diamonds”.
I want you to check out some of the search results and read through some of the justifications for yourself. After that, take a step back and ask yourself where is the information originating from.
Did you notice a trend?
If you can’t, try questioning the motives behind people/businesses who publish these information. It shouldn’t come as a surprise that the people preaching the benefits of diamond investments are the same people who have a financial motivation to do so.
The point I want to make here is: do not blindly believe everything you read or hear without applying any critical thinking.
Think about it. If are diamonds a good investment as advertised, why would retailers or commission-based salespeople be lining up to sell you their “golden goose”?
The answer is really straightforward.
That’s because the typical consumer/retail investor always loses money when they dip their hands into diamond investing. The fundamental reason behind this is that diamonds depreciate in value the moment they are sold.
Like buying a car, the moment someone walks out of a jewelry store with a diamond ring, it instantly loses a huge portion of its value. You should also note that the resale market for diamonds is illiquid and most people will have an extremely tough time selling a diamond.
With that, let’s dive into indepth reasons why people lose money when investing in diamonds…
Diamonds have recently become cheaper. Should you be running out to buy one now?
Economics 101 teaches you to buy low and sell high in order to make a profit. And herein lies the biggest problem.
When you buy a loose diamond or an engagement ring from high-street or any other retailer, you need to understand that you paying a mark-up anywhere between 30%-200% for retail pricing.
I will illustrate this with a simple example.
Let’s say a diamond costs a retailer $1,000 from the supplier and we assume this is the diamond’s intrinsic value (in real life it’s going to be less). If you paid the retailer $1,500 for the diamond, you would have immediately lost 33% of your capital ($500/$1,500).
In order for you to make a 10% return on your diamond investment, you would have to sell the diamond for $1,650 ($1,500 + 150). This means that the world diamond prices must rise by 65% in order for a $1,000 diamond to appreciate to $1,650.
That’s taking an extremely optimistic view on prices to climb that high in the market. How likely is such a scenario going to happen and how many years do you think it would take to do so?
“Hey! If I Could Buy at a Wholesale Price, I Would Be Able to Make Money!”
Since buying at retail prices is a sure-fire way to lose money, I know some quick thinking readers would immediately be thinking of buying from alternate sources such as a direct wholesaler.
That’s easier said than done.
Before I explain further, let’s set things straight about the differences between wholesale and retail.
Cambridge defines a wholesaler as: “someone who buys and sells goods in large amounts to shops and businesses”. They also defined a retailer as: “a person, shop, or business that sells goods to the public.”
From experience and the emails I received from readers, I know that consumers frequently get suckered into “wholesale” scams and this is a prevalent problem in the industry.
So, how does it work?
Basically, the scam works by taking advantage of greed and the stupidity of uneducated consumers. I’ve actually written an entire article on wholesale diamond scams and how to avoid them. If you are interested to find out more, click here.
In order to market their goods in better light, unethical retailers often claim to sell at wholesale prices. This is done to give the false pretense of lower prices so that the buyer feels like they are getting a great deal.
The truth is, wholesale prices don’t exist for non-trade personnel. And get this, wholesalers will not deal with the public or individuals directly unless you buy in BULK volumes.
If a seller claims they are offering “wholesale” prices and you are only buying a couple of stones, guess who the sucker in the transaction is?
The bottom line is, if you are buying an individual stone instead of buying in bulk volume, you are transacting with a RETAILER at RETAIL PRICES.
This is why I mentioned earlier; if you are a non-trade member or don’t have indepth knowledge of the industry, stay away. Otherwise, you will find yourself at the losing end of an investment.
And that’s just one of the problems a typical diamond investor would face. There’s more to come.
The term “investment grade diamonds” is often loosely used and uneducated buyers usually fall prey to marketing shenanigans. Many people fail to understand this. Just because a diamond is a fancy intense pink or has D color/IF clarity ratings, it doesn’t mean the diamond is going to be a good investment.
I will reiterate; diamonds are terrible investments. You are almost guaranteed to lose money regardless of buying them from retail or your “secret” wholesaler contact.
Tell me if this sounds like you (because I get emails like these regularly):
“Hey Paul, I just came across this 5 carat diamond with a D color and IF clarity rating graded by GIA. I’m interested in buying this diamond because the jeweler told me its value will go up overtime due to its rarity. Also, it makes for a perfect anniversary gift (or an engagement ring) for my wife.”
Well, let me pop that bubble because these diamonds are NOT rare in the context of being investment grade. Let me show proof by performing an inventory search for 5 carat sized diamonds (D/IF/FL) on BlueNile.
Screenshot captured on 9th August 2017. 16 diamonds with D color IF/FL clarity.
Likewise, I often hear salespeople touting 1 carat or 2 carat sized diamonds as being good investments. After all, it seems like some of the most popular sizes that people buy for engagement rings. The truth is, a D color IF clarity diamond at these sizes is really no big deal. There are plenty to go around.
Screenshot captured on 9th August 2017. 353 diamonds between 1 carat to 2 carats with D color IF/FL clarity.
Mind you, these screenshots only represent a very small subset of diamonds available in the market. To give you some perspective into the grand scheme of things, BlueNile is just one out of the thousands of retailers in the industry.
In reality, the amount of inventory is going to be significantly larger when you take into account the inventories of other retailers plus the pool of diamonds in private vaults and collections which aren’t placed for sale.
If a D color internally flawless diamond is truly as rare as sellers claim them to be, you better think again. Why is there an ample supply in the market and what makes the particular D/IF diamond you are going to buy any special?
Just to be clear, this rule applies to the lower spectrum of fancy color diamonds too. And when I mean lower end, I’m referring to colored diamonds below the range of 1-2 million dollars.
If you think buying a 0.5 carat fancy intense pink diamond is a great investment because it is “rare” and “coveted”, you are simply being delusional. After reading this, if you still believe someone who tells you what an awesome asset a 3 carat fancy yellow diamond is going to be, you probably deserve to get ripped off.
Screenshot captured on 9th August 2017. 99 yellow diamonds available above 3 carat sizes.
By now, I hope you are seeing a pattern here. Are the diamonds you are buying for investments really that rare and limited in supply? Are other collectors willing to pay an arm or leg for that stone? What makes the diamond you are going to invest in so special?
As I had just shown you, it’s not that hard to do some simple research and look at the statistics for yourself.
I’m going to dish out some honest advice here: Don’t expect gemstones to be good investments when their intrinsic value is less than 1-2 million dollars. What may seem like a one-of-a-kind fancy orange diamond or 5 carat internally flawless diamond is really nothing special compared to what’s available in the broader marketplace.
The people who turn a profit on “investment grade” diamonds (e.g. 0.50 carat fancy pink diamond or a 2 carat IF diamond) are usually the dealers/retailers who are actively marketing and selling to foolish wannabe investors.
Businesses that advocate buying diamonds as investments often sugar coat the ease of selling a diamond and how simple it is to liquidate your investment for cash.
In theory, everything sounds easy because you could theoretically walk into any jewelry store to offload your investment or quickly sell your diamond to someone down the street. The argument is that the demand for diamonds is always going to be there.
However, the reality is far from that.
As a retail investor or an average consumer, you will quickly realize how difficult it is to unload your investment when the need arises.
Jewelry stores (yeah, try bringing the diamond back to the place you bought it from), pawn shops or selling the diamond off to another individual are the typical options available for a small transaction (less than $50,000).
And if you are an investor who thinks you can make a tidy sum of profit in this manner, I’m sorry to say you will be in for a rude shock (unless you somehow managed to con someone who’s just as dumb to believe in the notion of diamond investing).
Let me give you a run down on the business side of things. This will provide you with a better idea of how things work in the industry and why selling a diamond is going to incur you a capital loss.
First of all, diamonds are expensive and most physical stores don’t keep lots of them in their inventory. If you do the math, you will quickly understand why. If a business was to buy 100 diamonds worth $1,000 each, a million dollars of their working capital will be locked up.
This is why many jewelers sell diamonds on consignment or call in goods from their suppliers only when required. They don’t have to fork out the cash upfront until a sale takes place with a customer. As much as possible, jewelry stores don’t want to carry physical inventory or have their cash tied to them.
Now, imagine if you are a business owner and someone walks into your store to sell a diamond ring, what would you pay for it?
Are you going to pay the seller the retail price (typically 50-100% above wholesale prices) for the ring?
The answer is no because you won’t be able to make a profit.
Are you going to pay the seller the wholesale price that you can get from your supplier?
The answer is again no because you are taking on the risk to pay upfront for an item which you may not be able to resell in near future.
If you want to buy the ring, you are going to offer way below the wholesale price in order to mitigate your risk. And even if you agree to sell the diamond on consignment, you are going to take your cut by charging a commission.
This is what’s going to happen when you sell diamonds…
I hope this is making sense to you as a consumer. If you try selling your diamond to the jewelry shop or pawn store, these people are going to pay you significantly less than what it would cost them from their supplier. Otherwise, why would they want to buy the item off you?
And of course, the next thing I’m going to hear in the comment section is some smart alec who would say: “Why don’t you sell your diamond to another consumer directly? This can be done easily on Craigslist or eBay right?”
Well, that’s a possibility and as I mentioned earlier, unless you manage to find another fool who actually think they are getting the better side of the deal, you are very unlikely to turn a profit with peer to peer resale sites.
After all, why would any consumer in the right mind pay a stranger on eBay the same prices if he can get a brand new piece from a proper jewelry store that has store warranties too?
Would you? I hope the answer is obvious to you.
As a seller on the secondary market, you can consider yourself extremely lucky if you only suffer a 20-30% loss of your capital. And remember, we haven’t even factored in the cost of your time and effort in the selling process yet.
Now, I’m not saying that it is impossible to generate a return on investment on diamonds. Clearly, if you think the diamonds offered by mom and pop stores or even the “specialty” retailers are good investments, you deserve to be ripped off for not doing your due diligence.
However, if you are smart enough to do some research, you will quickly realize that the diamonds that make good investments have traits that make them one-of-a-kind.
The real investment grade diamonds have traits that include:
If you are really serious about making a worthwhile investment, these are the types of diamonds you should focus on. These traits are exactly why a minority of diamonds appreciate in value whereas the majority will simply burn a hole in your pocket.
It should also come as no surprise that these are the types of diamonds for investments. They often command the highest prices and are found at record breaking auctions.
I know I may sound like a snob but there’s no better way to say it. If you don’t have the deep pockets to afford stones like these, you really shouldn’t be thinking about diamonds as investments.
What about going digital and performing direct trading?
If you are a finance savvy retail investor, you might have heard of the Singapore Diamond Investment Exchange (SDix). SDix was launched in May 2016 and it is the world’s first commodity exchange trading in physically settled diamonds. One interesting feature of this platform is that it allows potential investors to browse and buy single stones graded by GIA.
And like any other financial markets, the world of diamond trading is a shark tank where professionals have huge leverage over the everyday investor.
Another caveat here is the lack of tangible information (apart from a GIA grading report) to make an educated purchase decision. As I explained in this article, 2 diamonds with identical specifications on paper can be totally different from each other in appearance and performance.
But that’s not the main issue with this trading platform.
The problem is that investment grade diamonds are non-existent on the exchange. What you get there are just the typical low end goods you can easily get anywhere else. So, you are essentially back to square one.
If you are dead set on getting exposure in the diamonds trade, stocks of mining companies or jewelry retailers are far better options to consider rather than buying physical diamonds for investments.
This is because you get better liquidity with stocks and transparency of market prices.
Here’s a list of companies that might interest you. I’ve included their corresponding stock symbols for your convenience.
Tiffany & Co – NYSE: TIF
Signet – NSE: SIGNET
Rio Tinto Ltd. – RIO.AX
Anglo American PLC – AAL.L
Dominion Diamond Corp. – DDC.TO
Lucara Diamond Corp. – LUCRF
If investing in diamonds is as straightforward as what others have made them out to be, you probably won’t be seeing any jewelry stores in business. Every single jeweler would be in the business of investing rather than selling to consumers.
In my opinion, the media is partly responsible for sensationalizing the astronomical returns and record breaking prices from diamond auctions. Unfortunately for most people, physical diamond investing is a fool’s game for the average joe.
If you do not have the ability to procure investment grade diamonds (typically cost upwards of 1 million dollars), you shouldn’t be in the market.
And even if you are a high roller, ask yourself whether you really understand what you are buying and whether you fully comprehend how the diamond trade works.
In conclusion, diamonds are meant for adornment and for visual enjoyment. But please don’t buy an engagement ring and view them as a form of investment. You are only deluding yourself into thinking it will hold its value.
Now, thank me for writing this article because I just did you and your wallet a huge favor.