Q: I am interested in investing in Pink Diamonds. Are they a good investment?
A: Pink Diamonds have received considerable media attention over recent years due to the record prices being attained for some stones at auction. As an investment asset class, the annual rate of return for the past 15 years has been reportedly in excess of 15% p.a. The key drivers of the price increase has been a combination of the demand for Pink Diamonds and the scarcity of supply.
Western Australia’s Argyle Diamond mine produces 90% of the world production of Pink Diamonds. Less than 1% of the diamonds mined from Argyle are Pink, demonstrating the rarity of these diamonds and the scarcity of current supply. With the Argyle mine foreshadowed to close at the end of 2020, both investors and speculators are driving up the price of available diamond stock.
Pink Diamonds can be bought from a dealer or at auction. An entry level investment grade Pink Diamond will cost in the vicinity of $20,000. Like any collectible, the challenge is understanding and determining fair value for the diamond. Whether it be from a dealer or an Auction house, you should insist that the diamond is independently certified and valued.
Valuing gemstones is an imprecise science and often involves trade-offs. The value of a pink diamond is generally governed by the size, colour and clarity (lack of internal flaws) of the stone. Generally, as the size of the stone increases, lower colour and clarity grades are accepted. The deeper the colour or greater clarity of a smaller stone may increase its value.
Investment grade gemstones typically sacrifice carat weight and clarity in favour of colour. Generally, the more intense or deeper the colour, the more valuable the stone. Fancy Red is the most coveted colour but incredibly, individual colour grade scales exist for red, purplish red, purplish pink, pink, pink rose, pink champagne and blue.
Ultimately valuing gemstones is subjective and the value will always be determined by how much someone is prepared to pay on a given day.
The Auction or Dealer fees to trade Diamonds will range up to 10% for both the buyer and the seller. Ongoing management costs may include secure storage, insurance and regular valuation.
Diamonds and collectibles are characterised as an “alternative” investment. For diversification and risk management purposes, they should represent a relatively small portion of your investment portfolio.
Like any investment, there are risks; prices may fall if buyer interest wanes, the supply of stock for sale increases or new sources of Pink Diamonds are found. You could also have your diamonds stolen or just misplace them.
Be wary of any advertising promising vast returns or focussing on past performance. Be wary of those promoting Pink Diamonds as being suitable for all investment portfolios or as a substitute for mainstream asset classes. They are not easily traded as there is no centralised Diamond exchange or market to trade. They are an illiquid niche investment that should only be considered by those who can afford to take the risk and have the time to wait to sell.
The pleasure in owning collectibles is to appreciate and enjoy the asset; whether it be a painting on a wall or a wearing a beautiful gemstone.