Buoyed by the appeal of "real assets", there is considerable interest in holding diamonds as part of a specialised portfolio, argues an experienced businessman in the field.

Editor’s
note: The following article on the business of investing in diamonds is by Alexander
Waldman, chief executive of Waldman Diamond Group. This publication is pleased
to share his insights; it should stress that this website does not necessarily
endorse all the views expressed here not endorse the products and services of his company. As ever, we welcome responses from
readers. 

A recent article at this
website, entitled "'Alternative
Alternative' Investments: Super-Specialized Asset Classes Attracting
Attention," piqued my interest.

The article reported on a meeting of the New York Hedge Fund Roundtable
which attracted "a capacity crowd of curious financial professionals,
underscoring the surging interest in alternatives in this anti-equity era, no
matter how obscure, illiquid or opaque the asset class may be."  The asset classes in question were wine, art
and stringed instruments.

In a way, I was relieved that diamonds were not listed on that meeting's
list of "alternative investments", but then diamonds - and diamond
investments - are neither obscure nor illiquid, and certainly not opaque.

Cynics in the investment world have described the
market for polished diamonds as fractured and opaque, and have warned that
investors might wind up shouldering higher costs related to storage, insurance
and other transactional expenses than they’re used to paying in more popular
parts of the commodities marketplace. Despite growing interest from investors,
most financial advisors have steered clear of diamonds due to their lack of
expertise and understanding of pricing and value models.

At the same time, gem and jewellery market makers have
been slow to offer diamonds as a commodity for investment, perhaps because of
the large profit margins that are earned through the retail market (between
30-50 per cent), or perhaps because they prefer not to speculate on the future
value of their stock-in-trade. The various diamond bourses around the world
continue to restrict access through membership, making it difficult for
outsiders to buy diamonds at wholesale prices.

Over the past 30 years, the prices of polished
diamonds in all sizes, and particularly in larger sizes, have continued to
rise, as the demand for gem quality diamonds has consistently outstripped
supply. There is an industry-wide consensus that the mines cannot keep pace
with the future demand for polished diamonds, and consumer demand for diamond
jewellery in Asia, South America and Eastern Europe, is expanding and will
continue to grow, even in a depressed global economy. A recent CNBC report cited 10-12 per cent annual
growth in the demand for diamonds in China
and India.

Between 1999 and 2011, the value of 1 carat diamonds
increased by 64.4 per cent, and 3 carat diamonds by 144.9 per cent. From 1982
to 2011, the increase in value of 1-3 carat investment-grade diamonds increased
in correlation with the United States Consumer Price Index, proving them to be
an efficient hedge against inflation and deflation risks. In dollar terms, they
also outperformed gold, sterling, the Euro and the Swiss Franc over the same
period. But are diamonds sufficiently transparent to make them a desirable and
reliable financial instrument for investors?

How to invest

Martin Rapaport, a respected industry spokesman wrote
in his CNBC blog "How to Invest
in Diamonds": "You need to connect with an expert that can give you
direct access to international dealer prices and markets. You also have to
confirm the quality of your investment diamond through independent third party
grading and expert confirmation. It is important that you establish a
relationship with a trustworthy investment diamond expert that can advise you
about timing, ensure quality control and handle your transactions."

Diamonds are routinely sent for
inspection and grading by reputable independent laboratories such as the Gemological
Institute of America. The GIA’s Diamond Grading Report defines the diamond’s
four c’s: carat weight, colour, clarity and cut – and shows the stone’s cut
proportions and any flaws. Only the top 1 per cent of polished diamonds are
considered worthy of investment, weighing 1 carat or more and of superior cut.
These diamonds are laser-inscribed with the GIA grading report reference number
– it's unique “ID number”. This standardised grading system not only enables
investors to confirm their stones are of unimpeachable quality and will hold
their value, but it also equips them to compare the market price of their
diamond with that of similar stones.

In recent years a number of diamond
market price lists have been published on the internet, including the RapNet
weekly list, IDEX Online and PolishedPrices.com. While these lists provide
benchmarks for different types of diamonds, they are usually sold at a discount
or premium price. One platform where investors can track the actual wholesale
purchase prices of diamonds in real time is the Waldman Diamond Company's
online portal. When we launched our Waldman Diamond Investments division, we
simply opened up our existing internet portal, which we use to service our
global jewellery clients, to brokers and investors looking to buy and sell
diamonds at wholesale prices. Suddenly investment diamonds are no longer obscure,
illiquid or opaque!

Not only can you see each stone's
GIA diamond grading report, but our team of expert gemologists let you choose
your diamonds. We will work with financial advisors to match the investment
profile of each client, finding the most appropriate diamonds to suit their
investment budget, strategic objectives and diversification requirements,

So now perhaps this alternative asset class ought to be on the table for
investors, since diamonds are more romantic than violins, more transparent than
paintings, and more liquid than wine!

Alexander Waldman is Founder and Executive Chairman of the Waldman
Diamond Company. The Waldman Diamond Company Group developed interests in
mining, manufacturing and trading.