These precious gems have delivered impressive price gains in recent years. The focus on "real assets" continues to make diamonds a persuasive investment area.

With all the fears swirling of a possible “double-dip” recession, or conversely, a rise in inflation, it is no wonder that there has been rising interest in real assets such as gold and art. And somewhere in this category sit diamonds.

The market for the gems, while stretching back for centuries, has started to become more accessible to affluent private investors, with some of the quirks of this field no longer a significant barrier to a liquid market. One issue in the past has been that no two diamonds are exactly alike and as a result, it has not always been possible to come up with something like a simple price-per-weight measure that applies to gold and its dollar-per ounce denomination. But the diamond market is evolving; there are more vendors of price data and this in turn is helping liquidity and investor access.

Recent developments serve to keep it on investors’ radar. Saul Singer, principal at Fusion Alternatives, a specialist investment management business, recently spoke in a note about the continued “positive momentum” in the diamond sector. (Fusion is a business created by senior managers formerly working at the US-based diamond trading and service firm Rapaport).

“Investment diamond prices remained stable during August, which is traditionally the quietest month of the year. Since the beginning of the year prices have increased 17 per cent and dealers are now outwardly optimistic for robust trading and firm prices over the next couple of months,” Singer said. (Gold prices have risen by 16 per cent over the same period). As Fusion has previously noted, the investment diamond price surge started in January, sparked by a rebound in demand from major diamond consuming markets coupled with the severe reduction in diamond production that started in late 2008.

“A distinguishing difference between the respective rallies in gold and diamonds this year has been the higher volatility in gold price movements compared to diamonds. It is also becoming more apparent that the rally in gold is being driven by market speculation as to the overall health of the economy while the steady upward trend in diamond prices is more firmly grounded in demand and supply dynamics,” he said.

Other information bears out the positive price trend. For instance, the Diamond Pricing Trends Index, which tracks the average retail price per carat of loose diamonds from dealers has risen steadily in recent months. The Index stood at 213.9, as of 10 September, up from 134 in January 2006, a rise of almost 57 per cent.

In another example, the International Diamond Exchanges’s Diamond Index, last quoted at 117.94, rose from around 108 in October last year, although the index has generally moved sideways in a narrow range since around May of this year. On the other hand, compare the performance of the MSCI World Index of developed countries’ equities, which is down 1 per cent since January this year and over three years to mid-September, shows an annualised drop of 9.6 per cent.

For a long time, buying into diamonds as an investment has not always been straightforward, and much of the market has been dominated by specialist dealers (such as in London’s Hatton Garden district or in Amsterdam); purchases of rare gems at auctions such as Christie’s, or via the purchase of shares of mining firms that specialise in extracting gems and precious metals, such as Anglo-American. Firms such as Rapaport, as already mentioned, have taken big steps to drive the market in its size, liquidity and ease of access. Its price list is a closely-watched benchmark for prices of polished diamonds in the industry, with reported daily listings of more than 300,000 diamonds worth over $2.5 billion. 

Funds are developing, which offer another, relatively straightforward entry point for diamond enthusiasts who do not want the legwork of buying and selling individuals stones. Diapason Commodities Management, a Lausanne-headquartered firm, became reportedly the first firm to roll out a London-listed diamond fund, called Diamond Circle Capital. (The fund was listed in June 2008). Meanwhile, the alternative investment firm KPR Capital, advised by London-based Goldwinds Asset Management, has rolled out a diamond fund designed to capitalise on investors’ hunger for safe-haven assets. The KPR Diamond Fund offers investors access to physical diamonds, capitalising on the price appreciation of top-quality colourless stones. 

So the market is not just buoyant – it is becoming easier for wealth managers to find investment entry points for their clients who want to add such assets to their portfolios.

And as Fusion’s Singer points out, some of the issues that have bedevilled the industry in recent years – such as controversy about “blood diamonds” extracted from places such as Sierra Lione, have not disappeared entirely, but are less of a problem than they were. “It seems that the re-emergence of the ‘conflict diamond’ issue with supermodel Naomi Campbell testifying in the trial of former Liberian president Charles Taylor in the war-crimes court in The Hague last month is not causing any negative effects on diamond demand,” he said.

“Undoubtedly the ‘conflict diamond’ issue is the greatest risk facing the industry; however it appears that it is being managed accordingly. Evidence of this is the lack of mainstream media coverage of the second tranche of diamonds from the contentious Marange fields in Zimbabwe last week,” Singer continued.

Singer, of course, might be seen to have a vested interest in sounding an optimistic tone. Risks remain - diamond investing still requires investors and their advisors to study this often complex field. But the recent price performance, and economic climate, bode well for diamonds. The steady rise in diamond prices and the increased sophistication of this market – aided enormously by the wonders of the internet and the profusion of price data – means that these gems can more easily form a part, if only a small one, of a client portfolio. With real assets seen to be a key investment theme in the next few years, diamonds should continue to catch the eye.