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Adding Diamonds to an Investor's Options

31 may 2012

Diamonds are valuable in part because they are rare, but it is difficult for investors to buy them at wholesale prices, says Sonia Kolesnikov-Jessop in an article posted by the New York Times on In July, however, that may change.

Plans are afoot to open the Singapore Diamond Exchange, a private platform that would facilitate investments in polished diamonds at wholesale prices, which are typically 30 percent to 50 percent lower than retail prices, said Shlomo Tidhar, chief executive of the exchange.

Max Kantelia, who heads McLaren Global Partners, a boutique firm that advises family offices on alternative investments, said diamonds could be attractive for ultrahigh-net-worth investors who were seeking to diversify their portfolios. Family offices are private companies that manage the trusts and investments of wealthy households.

In addition to the rarity value for diamonds, he said, the market for the gems tends to be rather stable — certainly compared with stocks.

“The volatility that we have seen in the market because of the European debt situation is not going to disappear anytime soon,” he said. “If you look at diamond prices, volatility has not been that strong. In fact, over a medium- to long-term period, overall price movements have been pretty low.”

The IDEX Online Polished Diamond index has risen about 40 percent from its inception in July 2004. By way of comparison, gold has increased more than 370 percent over the period, but the S.&P. 500 index has risen about 26 percent.

Prices for diamonds below three carats have increased 16.5 percent to 22.5 percent since 2004, according to Edahn Golan, editor in chief of IDEX Online, while those for bigger carat diamonds have increased 98 percent to 191 percent. In 2011, diamonds of all sizes appreciated 17.3 percent on average, Mr. Golan said.

Vehicles for investing in diamonds have proved bumpy. The first diamond investment trust, set up by Thomson McKinnon Securities in the 1980s, was wound up after a slump in the market. Diamond Circle Capital, the first publicly listed fund to invest in the polished diamond market, has seen its price slump more than 55 percent since it began trading in June 2008.

Yet there continue to be new hopefuls. Last May, Harry Winston Corp. signed a deal with Diamond Asset Advisors to set up an investment fund of $100 million, with an additional $150 million to be raised a year later. The diamonds are obtained by Harry Winston’s experts and consigned with the jewelry company.

Rapaport Group, which operates a diamond-pricing service, has also announced plans to start a diamond fund in the first half of this year for institutional investors. IndexIQ, a provider of exchange-traded funds, recently filed a request with the U.S. Securities and Exchange Commission to start IQ Physical Diamond Trust, which would be backed by diamonds stored in Antwerp, Belgium.

Diamond investments do present risks, Mr. Kantelia said. “I think some naïve investors might look at this type of investment and think diamonds are a commodity, which they’re not,” he said. “So they may look at them as a speculative trade, and that would be a mistake, because diamond prices show low volatility.” The other side of the coin, he added, is that “returns are not that high.”

Mr. Tidhar is hoping that the exchange will manage about $100 million of diamond portfolios in the next three to five years. Unlike a diamond investment fund, which is based on diamond prices, the Singapore exchange’s diamond portfolios will allow investors to take physical possession of the diamonds if they choose.

The diamond portfolios will be distributed either directly to individual investors by the exchange or through various financial institutions and family investment offices. The prices of some grades of diamonds are more volatile than others, so each portfolio will be tailored to the risk appetite of the investors, Mr. Tidhar said.

“While investors can start with only $250,000, we think that a $1 million portfolio makes sense; it’s easier and more efficiently managed,” Mr. Tidhar said, adding that for $250,000 one could buy nine or 10 one-carat diamonds rated D-flawless, which might sell in jewelry stores for around $35,000 per carat.

Mr. Tidhar, a diamond pricing specialist who has worked for Harry Winston and other jewelers, will be in charge of selecting the stones.

The Singapore Diamond Exchange was founded last summer by a group of professional investors and industry specialists. Mr. Tidhar came on board in February and has since been reaching out to wholesale polished diamond suppliers and talking to financial institutions.

The chairman and founder of the diamond exchange, Alain Vandenborre, is also the co-founder and a shareholder of Singapore Freeport, a high-security warehouse and free trade zone for collectibles, which opened in 2010.

Mr. Vandenborre said the diamond exchange would not be involved in handling the stones. A custodian company, Malca-Amit, which operates in the Freeport, will hold the diamonds in its safes. Custodian banks will handle payments.

“The money is protected from the buyer’s point of view and the stones are protected from the supplier’s point of view,” Mr. Vandenborre said.

The Singapore Diamond Exchange has a partnership with IDEX Online, which will establish and manage clients’ individual investment accounts and provide quarterly portfolio reports and valuations based on their IDEX Online indexes.

The diamond exchange also plans to hold quarterly private auctions of major diamonds from its suppliers, offered to investors by invitation. The next auction will be held at the end of July.