investing

Is investing in diamonds only for the rich?

The reality of buying and selling diamonds, however, is not dictated simply by the principles of supply and demand. It's not like the average investor can go out and purchase a diamond and expect to sell it for a profit, says Edahn Golan, an analyst specializing in the diamond industry."You have to have what's called an 'early hand,'" he says. "Every time a diamond changes hands among dealers, there's a markup in price. If you buy from a polisher, it's considered firsthand. Many collectors already know who is an early hand trader."

Rapaport says there are four principles of diamond investing: price transparency, quality assurance, transaction costs and liquidity. Before buying and trading in gems, investors should understand how each of these affects their purchase.

Singapore Diamond Exchange, which sells diamonds at wholesale, offers one way to build a portfolio of diamonds and is similar to using a broker, says Golan. However, there are fees, and investors still need to understand what they're buying.

In addition to a cache of knowledge, investors interested in diamonds will require a hefty sum of cash. Until there is a fund or ETF available, small investors won't gain much from a physical investment in the gems, says Rapaport. "It's not yet prime time for the small investor," he says. "Our company deals with people who have $100,000 or more to invest."

Investing in diamond ETFs

Because of the difficulty in pricing diamonds, ETFs and mutual funds based on the value of the gemstone have remained elusive. However, there are two prominent initiatives for ETFs, Golan says, from Index IQ and GemShares. Both companies have applications under review with the SEC.

The way the ETFs would work, Golan says, is the companies would buy and store physical diamonds, probably 1-carat, round white stones, since those held their value during the 2008 recession and are more readily traded. Shares would be issued to investors and an index created to track the changes in value within the wholesale market.

An ETF might be a good way to begin investing in diamonds as a commodity, Rapaport says, as long as prices can be reliably tracked and investors understand that diamonds have boom and bust cycles just like the equity market.

But Fykes says if clients express an interest in diamond ETFs, he would advise caution. "I think the funds will have a hard time getting confidence in pricing," he says. Currently, the industry allows a certain amount of leeway in pricing among appraisers, which is a challenge, he adds, whereas prices of gold and silver are more established and straightforward.

Mutual funds, and even ETFs, can also fall victim to redemption issues, Fykes says, which sometimes force managers to sell at a loss in order to pay off investors. A similar scenario recently occurred with bond funds as investors fled on speculation of rising interest rates. And earlier this year, gold ETFs were facing redemption issues as prices fell. "If you have to sell diamonds back to the dealer, it's kind of like selling a used car," says Fykes. "You know you'll take a haircut."

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