Previous month:
December 2007
Next month:
March 2008

2 posts from February 2008

Round Diamond Price Increases

Diamond price changes vary greatly by carat weight, color and clarity.  This is especially true for the price increases we have seen in recent years.

The chart below (click chart for larger view) shows the total percentage increase from the start of 2005 to the start of 2008 for round diamonds with various color, clarity and carat weight combinations.  I have focused on colorless (D, E and F) diamonds but similar trends are true for G, H and I color diamonds.

Price_chart_carat

The following observations reflect the information in the chart.

1) Four and five carat diamonds have significantly increased in price more than lower carat weights. The one and two carat weight diamonds have increased relatively little over the three-year period and in some cases have exhibited no price increase.

2) The VVS2 clarity grade has experienced the highest price increase across almost every carat weight and color grade combination. 

3) Diamonds with SI1 and SI2 clarity have shown considerably lower price increases, especially for the three, four and five-carat weight diamonds.

4) Diamonds with Internally Flawless clarity have lower price increases than diamonds with VVS and VS clarity grades.

5) Diamonds with F color have experienced higher price increases than E color, which are higher than D color.

For consumers who have purchased colorless diamonds with VS2 or higher clarity in the past, the price increases indicated that the value of their diamonds has increased significantly.  As a result, they should consider getting their insurance appraisals updated to reflect the current values of their diamonds.

For consumers ready to purchase and wondering about the “investment value” of their purchase, the colorless, diamonds with VVS and VS2 clarity would appear to have the greatest opportunity for future appreciation, assuming that recent history is indicative of future performance.

As the number of affluent diamond buyers worldwide increases and the production of large diamonds (3 carats and above) decreases, the price of larger cart weight, high clarity diamonds is projected to explode.  This trend is especially true in the case where the diamond is unique in the marketplace and consumers are bidding up prices.  When cutters and wholesalers have waiting lists for particular types of diamonds, they can ask and get almost any price they want for the diamond when it comes on the market.


What Are Best Investment Diamonds?

In previous blog articles, I have noted that diamond prices are projected to go up due to worldwide production diminishing while worldwide demand increases.  The last several years have already seen diamond prices move upward, especially for larger diamonds. 

With the increase in prices, an increased number of questions come from consumers concerning purchasing diamonds as an investment.  My first response in answering the question about diamonds as investments is to note that, like the stock market, there are no guarantees that prices will continue up.  That is what industry experts foresee but like other investments that have potential high rewards, there are always high risks.

Like any other investment, several components come into play to determine if it is a good investment.

  • Can you purchase the investment with a low transaction fee?  In the case of buying diamonds, the transaction fee is the retailer’s margin.  A prudent stock investor would not think of paying a 50% transaction fee to purchase a stock, so the wise diamond buyer should seek a retailer with a very low price margin.
  • Will the investment go up in value?  While there is no guarantee, large diamonds are expected to go up in value the next 5 to 7 years based on current forecasts of diamond production and demand.  These market forces are already in play and prices have been going up.
  • Can you sell the investment when you need to and with a low transaction fee?  The typical consumer, who purchases a large diamond, must rely on a retailer to find a buyer for the diamond.  This is especially true if they are trying to get the maximum price for from the sale.  Finding another consumer willing to purchase the diamond, can take time and that is a risk if the seller needs the funds quickly.  Of course, the diamond can always be sold quickly to a wholesaler or retailer at a price lower than the market but that means a much greater transaction fee in terms of lost revenue potential.  If you pay a 25% fee to buy the diamond and a 25% fee to sell the diamond, the value of the diamond has to go up 50% to break even.

A common question we get is “what types of diamond makes the best investment”.  The answer to that question depends greatly on the amount the consumer wants to invest.  The potential price increases for diamonds varies with shape, carat weight, color and clarity (assuming similar cut, finish, fluorescence, and certification).  For the sake of argument, let us assume an unlimited investment amount and examine the type of diamond that has exhibited the greatest price increase in the last three years.

The following chart show the price increases for 3-carat, 4-carat, and 5-carat Round and Fancy Shaped diamonds with at least H color and VS2 clarity.  These categories have had the highest price increase from 2005 to 2008 (12/3/04 - 12/14/07).  It is a logical assumption that the types of diamonds that have shown the most increase the last three years will also be the types of diamonds going up in price in the next several years. Click chart to expand size of image.

Price_chart_2

Here are some of my observations based on information in the chart.

  • While many consumers might think the D color, Internally Flawless diamond would have the highest appreciation; the chart shows that it is often lower than other possible combinations of color and clarity.  Keep in mind we are talking about percentage increases and not absolute dollar increases.  The D IF diamonds are the highest priced per carat but that is of little significance to an investor.  A wise investor does not buy the stock with the highest price per share, but looks for the greatest potential percentage increase in value.
  • The chart indicates that VVS2 clarity is consistently the best performer regardless of shape, color and carat weight.
  • The top performing combination of color and clarity was the F color, VVS2 clarity for four and five-carat weight ranges.
  • Round diamonds have outperformed fancy shaped diamonds, but only by about 10% total over the three-year period.
  • Four and five-carat diamonds outperformed three-carat diamonds by roughly 20% total over the three-year period.
  • There was relatively little difference in price performance between the D, E, F, G and H color grades.  This is significant because there is a considerable price per carat difference due to color.  An investor with limited funds to invest would be better off getting at least four carats and target the VVS2 clarity with lower color than getting D color, IF clarity and a smaller carat weight for the same money.

In future articles, I will discuss the relative price performance for one, two, and three-carat diamonds, which are more representative of consumer purchases for engagements and anniversaries.  While these purchases tend to be gifts worn rather than buys for investment purposes, most buyers do have an interest in what past price increases might mean for the future.