It is therefore hardly surprising that wealthy men also like to buy diamonds for themselves. As an investment, these sparkling gemstones are particularly attractive: they are stable in value, virtually indestructible, and offer a decisive advantage over gold or silver. Because of their high value, they require far less storage space. A one-carat diamond—weighing just 0.2 grams—currently costs more than 20,000 euros. Even vast fortunes can be stored in the form of diamonds in a small bank safe, although from an aesthetic point of view it may seem a shame to hide such a stone away in a dark vault.
For well-heeled investors, however, such considerations rarely matter. What counts is the performance of their assets—and on that front, diamonds have recently delivered. Diamond prices fluctuate far less than those of gold or silver. This became particularly apparent last year, when gold lost almost 30 percent of its value.
Consistently Strong Demand
By contrast, diamond prices rose slightly in 2013. Since 2000, they have increased by an average of around eight percent per year. A recent study by consulting firm Bain & Company paints an even more optimistic picture for polished diamonds, suggesting that prices could potentially double by 2020.
The reasons are straightforward. “The last major diamond mine developments date back decades. No new mines are in sight, even though demand remains high,” says Arnim Kogge, head of Vertiva, a so-called family office specializing in wealth management for entrepreneurs and affluent families.
Diamonds, however, are not an investment reserved exclusively for the ultra-rich. With an investment of just a few thousand euros, ordinary investors can also benefit from the expected price increases—provided they turn to specialized dealers. One example is Stuttgart-based ID-Diamonds, which offers diamonds stored in a patented, high-security box measuring just three by ten centimeters, known as the ID-Knox. The box can hold up to ten high-quality diamonds.
Its distinctive feature is an integrated microchip with a data interface, allowing owners to monitor the value of their stones. When the box is connected to a computer, detailed information about the diamonds is displayed. The smallest version of the box is available from around 8,000 euros, while larger versions can cost up to 200,000 euros.
Of course, diamonds can also be purchased from a jeweler. However, jewelers typically charge a significant markup over the stone’s intrinsic material value for rings or necklaces. As a result, diamond jewelry is only of limited suitability as an investment.
Anyone acquiring physical diamonds should take particular care to ensure the stone’s authenticity. A certificate of authenticity is essential, issued either by the German Diamond Institute or by internationally recognized institutions such as the U.S.-based GIA.
What Matters Most
“Ethical considerations—such as the issue of blood diamonds—should also play a role,” says Jürgen Schneider, board member of Berlin-based asset manager Finum. “Investors should carefully examine the sources of the diamonds, meaning the countries and mines they come from.”
In addition, the quality and long-term value potential of a diamond are determined by the so-called “four Cs”: color, carat, clarity, and cut. “Only colorless, round-cut diamonds ranging from fine white (G) to exceptional white (D) should be considered,” Kogge specifies.
“Diamonds as an investment offer the prospect of sustained returns due to growing demand and increasing extraction costs,” says Sven Scherner of Honoris Treuhand in Berlin. As easily transportable stores of value, they represent a mobile tangible asset with inflation-protection characteristics. However, investors need patience. “Each stone is more than 900 million years old,” Scherner notes. “It should be held in a portfolio for at least five years.”
Differences in Taxation
Investors should also be aware that, unlike gold, diamonds are subject to value-added tax of 19 percent at the time of purchase. This tax must first be offset by price gains. VAT can be avoided by investing in diamonds via closed-end funds, which are typically available with minimum investments of around 10,000 euros.
However, closed-end funds carry their own risks. They are often opaque, and shares generally cannot be sold at short notice.
Whether purchased physically or via funds, investing in diamonds requires a clear understanding of the risks involved. Unlike gold or silver, diamond values are not determined daily, and there are no official market prices. “Diamonds are not an investment designed to reliably compensate for inflation, as price formation follows its own rules,” warns Uwe Günther of Berlin Portfolio Management. Dealers often add markups of up to 30 percent to their acquisition costs, Günther explains.
His conclusion is unequivocal: “Only top-quality diamonds are suitable as an investment—anything else is money wasted.”