Are Diamonds a Good Investment? incl. DATA

Is an investment in diamond a good investment? In this article we will try to answer that question step-by-step. We will be looking at some data as well to investigate why you should or shouldn’t invest in diamonds.

What is a good investment?

Before we start discussing an investment in diamond we have to agree on the term “good investment”. What do you consider as a good investment?

This could be something completely different compared to what your neighbor thinks for instance. It all depends on what your goal is and what you expect from your investment.

For some people a good investment means gaining a lot of profit in a very short time.

However, unless you are a professional day trader selling and buying stocks daily and who knows what he/she is doing, this is arguably not the best strategy to invest. Regardless if you are buying stocks, funds or alternative investments.

Hence, we would not recommend to invest in diamonds if that is your investment goal.

Let’s zoom in on the factor “time” first.

Long term investment goal

The shorter the time horizon, the greater the investment risk. If you invest money today and need it back next week, chances are rather small that you made profit.

In case the markets go down after you invested, you are then obliged to sell your investment product and don’t have the time to wait for markets to stabilize or go up again.

That is why investing with a longer time horizon is advisable and involves lowers risks.

Now let’s have a look at the factor profit.

Purchasing power

Again, some people may expect high profits from their investments. And of course, if we invest in something we all expect to make some money a long the way somewhere.

But how much profit should an investment make to be a good investment? Is it 5%, 10%, 100%…?

Because upside potential and profit of investments are very hard to predict we will look at it from a different angle: purchasing power.

Purchasing power is a term that is used in economics to measure how much groceries a households can buy for $100.

Due to inflation (=devaluation of money), a household can buy less and less products with $100 over the years.

This means that when you put $100 on your savings account today, you’ll be able to buy less products with those $100 in a year from now.

Looking at the graph above, we see that the inflation was 8,9% in 2022, which means that your $100 at the beginning of the year was devaluated with 8,9%.

That is why it is important to invest to beat the inflation.

To summerize, a good investment is an investment with a long time horizon that weapons you against inflation and secures your purchase power in the long run.

Investment in diamond: Portfolio diversification

An other basic rule is to diversify your investments as much as possible. Don’t put your eggs in one basket.

You can diversify your portfolio in many ways: type of financial product (i.e. stocks or funds), geographical, industries, real estate, alternative investment products (diamonds, art,…)

Investing all your money in diamonds is not advisable. Instead, investing in diamonds can be a good way to bring diversification to you portfolio.

In the next section we will zoom in on why an investment in diamond is a valuable option to add to your portfolio.

Historical diamond price index

First of all it’s important to mention that results in the past do not predict or guarantee results in the future. Nevertheless, it is interesting to see how the diamond prices evolved over the years.

Secondly, doing research about diamond prices over time is not straight forward. There is not just one index to consult.

That is because prices over time can vary a lot between different types of diamonds based on cut, color, clarity, caratage and shape.

In addition, a lot of indexes found online don’t come from trustworthy sources were data can’t be verified.

However, there is one graph that we want to share. This is based on research from “Statista” that indicates the price evolution for 1 ct diamond of the highest quality in US dollars from 1960 until 2016.

Over the past +-60 years diamonds have increased in price. Based on this data, the profit we made if we had bought this type of diamond in the sixties would have been +1045% today.

Off course, it is important to mention that for a different kind of diamond the data could be different.

Crisis resistance

As in every market, prices fluctuate over time. That counts for diamonds as well.

However, there are some interesting numbers to have a look at. More specific, the price reduction of diamonds during crisises:

Diamond prices declined by 16,5% on average between September 2008 and October 2009 during the biggest financial and banking crises of all time.

Compared to other indexes: the price of gold fell by more than 21%, platinum by 59%, the S&P 500 dropped by more than 52% and the Shanghai stock exchange plummeted by more than 69%.

The different markets collapsed and recovered in a somewhat different time span, but polished diamonds proved to be the most crisis-resistant.

This remarkable resistance was already apparent in earlier crises, like at the end of the nineties or the stock market crash of 1987.

Investment in diamond: Supply & demand

Now that we have discussed the evolution of diamond prices in the past, can we say something about the future as well?

As for any investment, there are no guarantees nor certainties. Trying to determine the exact amount of upside potential diamonds have over 5, 15, 30,… years from now is just speculation.

While supply is declining, global consumer demand for diamond jewellery is growing and shifting

Bain & Company

However, prices are always driven by one of the basics in economics: supply and demand. And there is something to say about both in case of diamonds.

On the supply side, studies show that the supply of diamonds are decreasing (Bain & Company). This is caused by the world wide depletion of diamond mines, which makes it harder and harder to mine diamonds.

On te demand side, The BRIC countries (Brazil, Russia, India & China) are characterized by an exploding economy and prosperity, resulting in a growing middle class.

Investment in diamond: the advantages

Investing in diamonds have other advantages than what we have discussed above. Here are few of the most important advantages:

• Protection against inflation, market collapse, currency reforms
• Anonymity (no registration required)
• Bankruptcy proof
• World-wide convertibility, meaning that diamonds are – together with gold – the only international accepted alternative currency which keeps the same value all over the world
• No taxes on value gains (= tax free betterment)
• Hardly no maintenance costs
• Very prestigious
• Price independence – prices are independent of government laws and hence diamonds better retain their values, even during recession.
• Robust price performance – historically diamonds have recovered well from price and economic slumps
• Not to forget: diamonds carry an important emotional value, lasting multiple generations
• Theoretically a (world) war could devalue any currency, real estate can lose its value, new technologies can replace resources, competition can ruin companies, but nothing can systematically undermine the long term value of diamonds. While most diamond mines are nowadays known, with time diamonds will become even rarer, just as any natural resource will. This fact carries the key fundamental boosting effect on the long term value of diamonds.
• Diamonds are – together with quality artworks – one of the very few goods that combine its practical use with its investment aspect. Meaning: while you can wear your diamonds set into/as jewellery, simultaneously they symbolise your most secure investments.
• Strong supply & demand – predicted widening of the supply demand imbalance underpins price with a strong chance of price acceleration
• Finally, while most of the other luxurious goods, such as cars, furniture, furs, etc. lose their value over time, this is not the case with diamonds, precisely because of its durable/unbreakable nature.

Conclusion: are diamonds a good investment?

Yes, based on research and data, diamonds can be a good investment if you have a long investment horizon and want to secure your purchasing power.

However, not every diamond is a good investment. Choosing the right diamond for investment purposes will be discussed in the next article.