Buying Your First Investment Grade Diamond – Here’s Everything You Need to Know
Investing in diamonds is an idea worth considering. It is an asset class that is far removed from bonds and equities and putting some of your investible surpluses into diamonds could allow you to reduce the risk that your portfolio carries.
But buying these precious stones is not as straightforward as purchasing, say, shares in a company or even gold. The value of a diamond depends on a number of factors and arriving at a price that is reflective of its true worth is a specialised task that is the preserve of professionals.
According to the Gemological Institute America (GIA), a non-profit body that is an authority on gems and precious stones, the worth of a diamond is based on a grading system developed in the 1950s. This considers four important factors – the diamond’s clarity, cut, colour, and carat weight.
Another important point to bear in mind is that a relatively small percentage of the US$80 billion diamond industry caters to investment demand. Estimates put this at about 3% to 5%. The remaining portion of the world’s diamonds, approximately 95%, go to the jewellery trade.
The position for gold and silver is quite different. About 20% of gold sales and 18% of silver sales are for investment purposes.
Before making a purchase, it is essential that you understand the basics of how a diamond is valued.
Measuring the worth of a diamond
Here is a primer on the four factors that determine a diamond’s quality (and hence its price).
Colour – GIA has developed a colour scale that ranges from D to Z. The absence of colour signifies a higher value. If a diamond falls under D – F, it is colourless. A grading from G to J puts it under the “near colourless” category. K – M signifies “faint colour.” N – R is “very light’ and S – Z is “light.”
How has this grading scale been arrived at? The GIA laboratory compares the diamond being graded to round brilliant diamonds of known colour, called master stones.
Although the colour difference is difficult to discern, it can have a large impact on the diamond’s price. If you take a “D” and a “G” diamond, it will not be easy to see the dissimilarity in colour. But if the two are placed close together, the variance will be obvious.
Clarity – This refers to the diamond’s internal features and the irregularities on its surface. In industry parlance, these are referred to as inclusions (internal features) and blemishes (surface irregularities).
There are diamonds that have minuscule mineral crystals trapped inside them. These inclusions may get removed at the time the stone is cut and polished. But if they are located deep inside, they may remain and affect the diamond’s appearance.
GIA has a “clarity scale” as well. This has six categories and 11 grades.
|Very very slightly included||VVS1|
|Very slightly included||VS1|
Here is how Clarity characteristics are plotted on a GIA Diamond Grading Report
Cut – The GIA Cut Scale has five grades. These are Excellent, Very Good, Good, Fair, and Poor. A higher cut grade will result in a brighter diamond, an attribute that is sought after and which pushes up the precious stone’s price.
The standard cut is referred to as a round brilliant. This results in the diamond resembling a cone so that it can interact in the most successful way with light.
The cut determines the following features of the diamond:
- Brightness – this refers to the white light reflected from a diamond.
- Fire – the breaking up of white light into its seven component colours.
- Scintillation – the sparkle that is produced.
Carat Weight – A carat is two-tenths of a gram. That’s 0.2 grams. Each carat is divided into 100 points. The accepted practice in the trade is to weigh a diamond to a thousandth of a carat and then round off its weight to the nearest hundredth or point.
Remember that the worth of a diamond, though linked to its weight, is not entirely dependent on it.
Larger stones will usually command a higher price per point than smaller stones. This means that a diamond that weighs one carat will be worth more than the value of four 0.25 carat stones, even if the quality of all five is exactly the same.
Buying your first investment grade diamond
The Singapore Diamond Investment Exchange (SDiX), which was launched in May 2016 provides traders and accredited investors the facility of buying polished diamonds at market prices. In its first year of operation, the SDiX saw a trading volume in excess of US$110 million. This represents 50,000 investment-grade diamonds.
The SDiX facilitates the trading of single stones ranging in size from 1.00 carat to 5.99 carat. Each diamond is certified and has a GIA Diamond Grading Report. Buyers can examine this certificate directly through the platform.
In a recent interview, SDiX founder Alain Vandenborre explained the rationale for establishing the exchange, “… you don’t know where to go to buy and sell diamonds, which explains why the financial market has never (traded) diamonds, unlike gold. They do not touch it because it is opaque, not liquid or transparent.”
The SDiX provides Singaporeans with a method to buy and sell certified diamonds at a price that is market-determined.
If you are planning your first investment in diamonds, what should you buy? The Rapaport Group, which publishes the Rapaport Diamond Report and provides other services to the diamond industry, has some advice for first-time buyers. They say that your first investment should be in a diamond that has the following specifications – Round, 1.01 to 1.49 carat, D – H colour, VS2 clarity, Excellent to Very Good Cut.
Check the resale value
Regardless of where you are buying the diamond from, there is one basic precaution that you can take as an investor. Before finalising the transaction, check the price at which you can sell the same diamond. Ideally, it should be at a rate that is not much lower than your purchase price.