On May 15, Christie's auction house sold a huge diamond to the Harry Winston firm for $27 million, setting a new record price for a colorless diamond in the process.
And while diamonds have been a girl's best friend long before Marilyn Monroe crooned those words, it's always been tough for investors to get into the game. Diamonds are considered one of those esoteric fields; an area of investing too small, complex, and exclusive to bother with for most.
Let's face it, up to now, there's much more subjectivity in rating diamonds than gold. And that makes it more challenging for investors if they want to hold the physical asset.
But it's worth the effort: Historically, diamonds have proven themselves to be very price stable – with a growth kicker. What's more, technology is making standardization of gemstones easier, making valuations more transparent.
That means diamonds are becoming an increasingly popular store of value.
According to the Financial Times, between 1999 and 2011, three-carat diamonds have risen in value by 145% while five-carat diamonds have risen 171%, as measured by the Rapaport Diamond Trade Index. The thinking is the relative price stability of diamonds is due to the fact that there's little speculative capital in this sector, estimated by some at no more than 1% of the market.
Like other commodity markets these days, diamond prices are most influenced by global economic growth. Larger developing nations, especially the BRICs (Brazil, Russia, India and China) are growing their middle-class populations.
According to Kris Schellhas of the Investment Diamond Exchange in Los Angeles, China has seen diamond demand compound 32% annually since 2005. What's more, Chinese and Indian buyers often view diamonds not only as jewelry, but also as a store of wealth.
In China, diamonds are the fastest growing discretionary purchase.
Matt Manson, President and CEO of Stornoway Diamond Corp. (TSX:SWY), a developing junior diamond miner, also sees diamonds increasingly being thought of as an investable asset. According to Manson, "The target in the future is to have 15-20% of world diamond demand be people purchasing diamonds for just this purpose, for physical diamonds as an investment vehicle."
2 Factors That Change Diamond Investing
Beautiful as they may be, getting to the point where diamonds are a more common physical investment has proved difficult.
By comparison, gold and silver are much more straightforward. One ounce of 0.9999 physical fine gold has a worldwide market price, so anyone can easily determine its value at any point in time.
Not so with diamonds. The biggest challenge is determining value, because each diamond is unique.
But thanks to some significant developments in the diamond market, that's been changing.
The first obstacle was achieving a free market in the diamond trade.
For the longest time, even this basic goal was impossible thanks to the "De Beers Factor". You see, De Beers effectively ran a monopoly of the diamond market for a century.
But De Beers went private in 2001, and by 2004 its diamond stockpile had become depleted. That opened the door to a free market for diamonds, one where price discovery was made possible by allowing the forces of supply and demand to work unencumbered.
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.