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Colored Diamonds Proving Their Worth As Investment Vehicles

27 april 2015

Every diamond needs to find its niche, and with trading conditions in the global trade remaining tough, the colored diamond business is increasingly promoting itself as the investment diamond vehicle.

Colored diamonds account for just 1 percent of the entire diamond market. And some industry observers estimate that there is just one carat of colored diamonds for every 100,000 carats of white stones. And if that was not enough to make colored diamond prices continuously soar higher, supply is falling while demand, particularly from collectors and investors, is rising.

Given that colored diamonds are so much rarer than white diamonds, they naturally cost more than their transparent counterparts. That also means that factors affecting diamond prices and sales are different than those for white diamonds. As has been seen at auctions around the globe over the past several years, demand for rare color diamonds is exceptionally strong. Clearly, however those colored diamonds are not representative of the overall market for the gems, since they are being acquired by the ultra-wealthy.

Nonetheless, they do provide an indication as to the rising demand for colored stones. Indeed, the colored diamond market is such a niche sector that the number of specialists is very small, according to one Israeli colored diamond manufacturer. "I would say that there are very few people overall in Israel who have deep experience in color diamonds. There are very few polishers who have the experience to work with such diamonds. It is a highly specific market.

"You have to be aware of so many factors, and that is why there are relatively few long-standing experts. It is not just a case of understanding color diamonds inside out, and how and where to manufacture and market them. You also have to know the mind of the investor or collector. Are they long or short-term? You have to persuade them that what is basically a color stone is worth hundreds of thousands or millions of dollars and that there is a liquid market that can buy them at a higher price down the road."

Etti Mund, of Hershkovits Diamonds in the Israel Diamond Exchange, said that trading in colored diamonds, as with their white counterparts, has slowed down in recent months. Nonetheless, one of the main selling points is the opportunity to invest in a "piece of masterwork," she said.

"If you look at the prices of colored diamonds over the past 10 and 20 years, you can clearly see that not only have they risen, but that they have actually soared. Demand is mainly seen for certain sizes and colors since their rarity means that prices will necessarily be high so there is a limit to what even wealthy consumers will pay."

Leading Israeli color diamonds company, Leibish & Co, says: "Investment bankers, financial institutions, and business analysts who have investigated colored diamonds as an investment class are often surprised by their results. So much so that in today's versatile market specific stones are considered by many as one of the strongest investment opportunities around. Colored diamonds exhibit investment characteristics that other asset classes can only dream about emulating."

Among the advantages that fancy color diamonds present are that they are internationally recognized, well established goods that have a long history of being collected and traded for hundreds of years. In addition: "Diamonds are small, they weigh next to nothing and they are extremely portable. Therefore, large amounts can easily be transported and concealed in emergency situations. Your entire portfolio can be stored in your pocket, set in a piece of jewelry, or secured in a safe deposit box," says Assaf Wallenstein of Maroz Diamonds.

"Even just a little research proves that over the past 30 years, the price appreciation of natural fancy colored diamonds has dominated the market. Auctions results prove the strength of colored diamonds in today's market, not to mention that they have repeatedly broken auction house records for the highest price per carat ever paid at auction for a diamond or jewel. In addition, fancy color diamonds retain their value and beauty, they are durable, are extremely rare, and are a highly private asset – as well as being beautiful and wearable."

Petra Diamonds Cullinan mine in South Africa is among the best-known source of blue stones, while the Rio Tinto Argyle operation in Western Australia is famous for its rare pink and red diamonds. However, neither of these mines is getting any younger, and the supply of rare diamonds is declining – thus making them even more attractive as an investment.

Several years ago, London-based jeweler Laurence Graff paid a record-breaking $46 million for a 24.78-carat fancy intense pink diamond at an auction in Geneva. As if to illustrate the extraordinary and unpredictable demand for such colored stones, the sale price was well beyond pre-sale expectations of around $1 million per carat.

"What makes colored diamonds so popular and leads people to pay such high prices for them?" asks Wallenstein. "There are many reasons, but perhaps the most important is that, unlike transparent diamonds, I feel that color gives warmth and character. It makes the gem even more irresistible. In addition to that, as with precious gemstones, jewelry set with colored stones can be more effectively worn in a fashion sense. The right color of clothing can be set effectively with colored diamonds."

The investment opportunity provided by colored diamonds is clear against the background of a supply shortage in the coming years due to rising demand from China and the Far East, says Mund. "If we see that collectors and investors are looking at white diamonds as an investment for the future due to the shortfall that we know is coming, then how much more are colored diamonds a clear investment prospect given their extraordinary rarity."

Indeed, pink diamonds, since being launched onto the jewelry industry more than 30 years ago, have seen their value almost double every five years. High-profile purchases by celebrities of such diamonds has boosted demand further. These include the purchase by actor Ben Affleck in 2003 of a six-carat pink diamond ring worth a reported $1.2 million which he gave to then-fiancée Jennifer Lopez.

However, demand for pinks, in what might be described as the non-celebrity market, is generally in the range of 1 to 2 carats, while the deeper the saturation of color the higher the cost.

If pink diamonds are rare, then blue diamonds define an even greater degree of rarity, and thus have never seen a fall in value. Indeed, many of them have been sold a number of times, setting new records with every transaction. Among the most famous examples is the 35.5-carat Wittelsbach diamond for which Laurence Graff paid $24 million. He recut the diamond to remove imperfections, and then sold the Wittelsbach Graff for an undisclosed amount.

As with Graff's purchase of the Graff Pink diamond, and the record prices regularly being recorded at major auctions by Sotheby's, Christie's, and other auctioneers in the past several years, there does not appear to be a pricelist to work from. "At that level, it is about contacts," said a diamantaire. "If a high-level jeweler sees a diamond that he knows will fit the requirements of a certain client, then he has no problem in bidding up the price to extraordinary levels. The pink diamond that Graff bought was predicted to be sold for around $1 million per carat. Paying almost twice that amount means that the buyer presumably has a specific client in mind," he added.

Colored diamonds are bought as a long-term investment, meaning they are kept out of the market for lengthy periods. That in itself makes them even rarer, ensuring that the diamonds, when they are put up for sale – sometimes only once in 20 years – will command extraordinarily high prices. "We are talking about portable, wearable, fashionable, high-profile forms of wealth," said a dealer. "It's not like gold or cash that is under lock and key in a bank vault – although many diamonds are similarly locked away – they are worn for pleasure as well as being an investment."

That inevitably means that consumers who, nonetheless, are interested in acquiring colored diamonds need to start down the scale with brown and yellow diamonds.

The huge amounts paid for colored diamonds also points to another reason for their meteoric rise in price. Despite the advertising and promotional work done by diamond producers and other elements of the pipeline over the years to counter the claims by some that diamonds are a commodity, there is nonetheless a feeling that white diamonds are very similar and a mass market exists for them, said a dealer.

"You can buy a diamond ring or bracelet or necklace just about anywhere in the world where the diamond cuts are similar and the diamonds look alike. Compare that with colored diamonds which are so very rare. There is no way you could class them as a category. Bear in mind that the wealthy always want something that others do not have, and rare colored diamonds fit the bill.

"There are diamantaires who have gone into the niche market for colored diamonds because they see that they are able to distinguish their goods from the rest of the market. That makes good business sense, although it also means you have to have an exceptional understanding of the market. They can also offer items that fit in with a trend of recent years among consumers, along with the movement for environmentally conscious and fair trade goods, to acquire "natural" goods. "What can be more 'natural' than a colored diamond? A certain color diamond can fit in with consumers' personal favorites and play to their emotions."

One colored diamond expert described the market as being rather new, since yellow stones were not considered to be more valuable than Cape diamonds up to 10-15 years. "In recent years, their value has gone up, particularly due to their scarcity."

He says it is vital that a dealer in colored stones knows the sector inside out. "You have to know the business very well to be able to place a price on a stone," he explained. "A poor hue can reduce the price of a diamond by 50-70 percent. You need a well-trained eye to see the imperfections in the stone because if they are missed you can get it very wrong."

"The risk involved in colored diamonds is much higher than for white diamonds. A colored diamond can sell for $10,00 per carat or $1 million per carat. Is the stone going to turn brownish? What is written on the certificate? One prefers straight descriptions on the certificate, such as 'fancy pink', and not something like 'orangey-pink' since that can affect the price tremendously.

"If the rough stone is not a straight color, then you need an extremely experienced and trained eye to understand it and its potential." As for setting the price of the colored diamond, that is determined by the quality and scarcity of such goods, he said. "A pricelist has no relevance because there are not that many colored diamonds available. The price of pink and blue diamonds is set by auctions, while the price of yellow diamonds is according to the quality of the goods and what is available on the market," he added.

By our Israel correspondent Abraham Dayan