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Investing In Diamonds

Consideration of Diamonds for an Investment

When thinking long term, allocating a small percentage of an investment portfolio for the purchase of diamonds may provide greater security than keeping cash on hand. Investors must always keep market volatility and surprises in mind, but investment-grade diamonds rarely depreciate. Actually, as less diamonds are mined from the earth and more diamond mines close, the dwindling new supply increases the demand, and therefore the value, of diamonds in existence.

Definition of Investment-Grade Diamonds

Contrary to popular belief, diamonds are not an extremely rare gemstone. The world has an abundance of small, imperfect diamonds. However, large diamonds, clear diamonds, and flawless diamonds are not often found, and diamonds that combine large size with clarity and lack of flaws are rarer yet. These diamonds fall within the classification of investment-grade gems for their rarity and beauty. When compared with standard diamonds, investment-grade diamonds have greater rarity and greater purchase prices but also see greater increases in value, also called appreciation, over time. The ideal quality of diamonds’ four C’s, cut, clarity, color, and carat, vary between white diamonds and color diamonds, but investment-grade gems will lean toward the higher, rarer end of each characteristic.

Qualities of Investment-Grade White Diamonds

The same grading of standard diamonds applies to investment-grade white diamonds. The white diamonds considered investment-grade are those displaying great clarity and color, cut to maximize the diamond's sparkle, and considered larger than commonly found.

Cut

Although each of the four C’s hold importance, a white diamond's cut is the characteristic with the most material influence on a diamond’s beauty and value. The fire and sparkle prized in investment-grade white diamonds come from the details of the cut. Often confused with shape, the cut refers to the proportion and finish of a diamond and receives an assessment of Excellent, Very Good, Good, Fair, and Poor. Investment-grade diamonds should have a rating of Excellent, Very Good, or Good. Avoid Fair and Poor cuts as the diamonds are either cut too shallow, which lets light leak out of the bottom, or too deep, which allows light to leak out of the sides. Investment-grade diamonds are cut to allow light to reflect back out of the top and minimize leakage. The diamond's cut is the hardest to evaluate for a layman, thus the importance of relying on a jewelry professional to assist with selection.

Color

A white diamond’s color assessment falls between the letters D and Z in the alphabet. The letter D, the highest quality on the color spectrum, indicates a diamond has zero color, and the letter Z indicates the greatest presence of color that falls within the white diamond category. As the absence of color raises a diamond’s value and appreciation potential, investment-grade diamonds hold a color assessment of D, E, F, G, or H.

Carat

Carat refers to the weight of a diamond, and one carat weighs 200 milligrams or .20 grams. Larger diamonds, those with a greater carat weight, are rarer than smaller diamonds, so a diamond’s value rises in proportion to its carat weight. Investment-grade diamonds with the highest potential for appreciating are those weighing .75 carats or better.

Clarity

A diamond’s flaws gain visibility in the absence of color, so clarity largely affects the value of white diamonds. This holds true even if the flaws are not visible to the naked eye. Purchase investment-grade diamonds with a clarity assessment of Flawless (F), Internally Flawless (IF), Very Very Slightly Included (VVSI), or Very Slightly Included (VSI) for maximum appreciation potential. For investment purposes, avoid diamonds designated Slightly Included (SI) or Included (I). Rarely do these diamonds see an increase in value.

Qualities of Investment-Grade Fancy Color Diamonds

Investment-grade white diamonds that combine high-end characteristics are rare. The rarity factor increases when applied to fancy color diamonds over white diamonds. In fact, rarity places almost every fancy colored diamond within the investment-grade category. Consider this: Only one carat of every 10,000 carats mined from the earth are fancy color diamonds. Although rarity alone deems fancy diamonds valuable, the four C’s of diamonds still apply, albeit in a particular order of importance. In order of contribution to value, colored diamonds are appraised according to color, carat, clarity, and cut.

Color

Absence of color raises the value of white diamonds, but respecting color diamonds, a diamond’s value increases according to presence of color. The more vivid, intense, and deep is the color, the greater the diamond’s rarity and, therefore, value. Fancy color diamonds receive a color ranking according to intensity of color. Colored diamonds fall within one of the following classifications, listed from least intensity to greatest intensity: Faint, Very Light, Light, Fancy Light, Fancy, Fancy Intense, Fancy Vivid, Fancy Dark, and Fancy Deep. Only consider color classifications that include the word fancy when purchasing investment-grade color diamonds. The Faint, Very Light, and Light classifications more truly fall within the lower-end of the white diamond color scale than the fancy diamond color scale. Regardless of intensity, different colors offer varying degrees of rarity. Be aware that brown and black diamonds do not fall within the range of fancy diamonds and are not investment-grade diamonds.

Red Diamonds

The rarest of colored diamonds, red diamonds have the highest value based upon color alone. These diamonds also offer the greatest potential for appreciating value - a red diamond’s value may double in five years or less.

Blue Diamonds

Blue diamonds closely follow red on the rarity scale. At times, the market has seen blue diamonds’ value double in five years.

Pink Diamonds

Slightly less rare than blue diamonds, pink diamonds may double in value in six to seven years. With larger carat weights, pink diamonds appreciate at the same rate as blue diamonds.

Yellow Diamonds

Yellow diamonds have the least rarity among fancy diamonds but still have greater rarity than white diamonds. When the intensity of yellow falls within the fancy range, a yellow diamond may double in value over eight to 10 years. Note that any value appreciation mentioned only relates to what has occurred in the diamond market, which may or may not again occur.

Carat

As with white diamonds, rarity increases with carat weight. The carat weight of a diamond plays the second largest role in determining a colored diamond's value. However, a smaller color diamond often has a higher value than a larger white diamond.

Clarity

Although still important, clarity factors less in fancy colored diamonds’ valuation than white diamonds’ valuation. This has a valid rationale: The color in fancy diamonds, especially those with deep intensity, often hides inclusions. The same flaw visible to the naked eye in a white diamond may be difficult to detect in a colored diamond. A colored diamond’s clarity will affect its value, but it has less impact than color and carat.

Cut

Although colored diamonds do not have a separate cut assessment, do not judge colored diamonds by a white diamonds cut quality. The best cuts for investment-grade color diamonds are cuts that draw the light deep within the stone to enhance and deepen the color. Cuts deemed excellent for white diamonds do not highlight the natural beauty of colored diamonds.

Diamond Shape

To maximize the potential for appreciation, most investment-grade white diamonds are round brilliant cuts, and investment-grade fancy color diamonds are square, radiant, or oval. There are, of course, many exceptions to these generally accepted preferences.

Certification of Investment-Grade Diamonds

Holding a paper certificate for a diamond increases greatly its potential for increased value. The certificate offers physical proof that the diamond has received an appraisal by a reputable, unbiased entity such as the Gemological Institute of America. In addition to verifying and validating the qualities that determine a diamond’s value, the certificate, by detailing blemishes and inclusions, may help identify a specific diamond in the event of loss or theft.

Separate the Diamond from the Setting

Investment-grade diamonds can be purchased as loose gems or in a piece of jewelry. If the diamond features in a piece of jewelry, have the diamond appraised separately. The value of precious metal settings and any stones surrounding a diamond may depreciate or remain constant while the investment-grade diamond appreciates, so knowing the value of the diamond alone provides investors with an understanding of how their initial investment truly stands.

Conclusion

All investments are subject to the whimsical nature of the market and to fluctuations in supply and demand. Investment-grade diamonds, however, rarely fall in value. Even if the value does not greatly rise, when these diamonds are liquidated, investors rarely see a reduction from their initial purchase price. In a worst-case scenario, investors break even rather than see a profit, but they do not see a loss.

For further questions or information, contact Jewelry Factory president, Bruce Spiegel

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