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Is investing in diamonds only for the rich?

Diamonds, the gems that have symbolized love and marriage for decades, are beginning to attract wealthy investors as a commodity investment with potentially high returns.

Negligible yield on fixed-income investments and volatility in the equity markets are driving the search for a relatively stable investment that can pack some punch in returns. The wealthy have been turning to hard assets they can enjoy, including jewelry, art and even collectible cars. Investing in diamonds is a natural alternative.

Until recently, diamonds were off the radar screen as a pure investment for a variety of reasons, including lack of price transparency and a liquid trading market, as well as difficulty in establishing uniform standards of quality among stones.

"Each stone is very unique," says Brent Fykes, senior investment partner at GenSpring, a multifamily office for individuals with at least $20 million to invest. For the most part, "An ounce of gold is an ounce of gold, but it's not like that for diamonds."

But with increasing global demand for the gem, companies are emerging with plans to replicate the success of gold and silver by developing diamond-backed exchange-traded funds or mutual funds.

Until the Securities and Exchange Commission approves such a fund or ETF, U.S. investors are largely limited to buying and selling physical gems, typically through a dealer. But whether considering a fund, ETF or physical ownership, "it's a sucker's bet" to get involved in the diamond trade unless you know what you're doing, according to Martin Rapaport, chairman of Rapaport Group and the RapNet Diamond Index, a resource for diamond pricing.

Buying and selling stones

The buzz around investing in diamonds has been fueled by news this spring of spectacular auction sales and rising prices for both rough and polished gems.

In April, Sotheby's sold a 74.79-carat white diamond for $14.2 million in competitive bidding that took the price far above its presale estimate of $9 million to $12 million. In May, Christie's sold a pear-shaped, 101.73-carat rock for $26.7 million.

With increasing global appetite for diamonds and a limited number of mining operations, supply and demand are working in the investor's favor and driving up prices.

A report from Bain & Co. notes that global sales of diamonds increased by 18 percent from 2010 to 2011, with most of the growth coming from India and China. In 2011, supply contracted by 3 percent. As a result, the price for rough diamonds increased by 31 percent, while the price of polished stones rose 24 percent.

Another research firm, Wealth-X, reports that prices of rough diamonds have risen by nearly a third since 2005 and are likely to go up another 20 percent by 2017.

"Supply will probably increase 2 percent to 3 percent per year over the next decade, versus demand of about 7 percent per year," Rapaport estimates. The overall view is that prices will go up because of buying in markets such as India and China, where new wealth is emerging, although demand in those countries has been waning with the softening economies, he adds.

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