September 6, 2013 11:58 am

Diamonds: don’t be dazzled

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Buy the rocks, but don’t kid yourself it was for investment

A valued customer walks into a high-end jeweller, buys a multimillion dollar diamond and asks the store manager not to tell his wife. No, he says, it is not for a mistress, but in order to have an asset his wife, whom he loves, does not know about – just in case. True story, according to the dealer. Come the revolution or even the divorce, diamonds are a famously portable store of wealth. The investment case for them is less brilliant.

Rio Tinto’s annual pink diamond tender has reached its final destination in Hong Kong, where some 100 jewellers and collectors will view the best of its Argyle mine, the world’s largest producer of the rare pink rocks. Sealed bids follow. Pink-coloured stones fetch roughly $1m per carat, making them more valuable on that basis than their more common white cousins. Prices for large and rare diamonds, however, have been rising generally. Add static supply and forecasts for steadily growing demand (about 4 per cent a year for the next decade) and you have the beginnings of an investment case. Include Chinese interest and it looks even better.

China’s share of the market has gone from less than 1 per cent at the turn of the century to 15 per cent, or $9.2bn, in 2011, according to Bain. Aspirational trends tend to trickle down from the wealthiest, so it bodes well that while only two-fifths of Chinese households now own a diamond (US, 80 per cent), 90 per cent of China’s richest have one – almost the same as the US.

Prices are one thing. Realising them is another when there is no liquid market and no two big stones are alike. For an investor who makes it out of political turmoil – or a marriage – with the stones, it is not as simple as walking into a jeweller for a quick resale. If two appraisers can differ in their valuations by up to 30 per cent, as Bain says happens, then any refugee probably needs a longstanding relationship with the likes of Harry Winston or Graff to realise the best price.

For diamond lovers without that wherewithal, then better buy shares in the likes of Rio Tinto or Chow Tai Fook – and admit that few people really buy big sparklers for their investment value, whatever they tell themselves.

Email the Lex team in confidence at lex@ft.com

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