Natural Resources

Diamonds are not your best friend

I must admit, I have never quite bought into the allure of diamonds. I’ve bought some now and again for celebratory purposes, but I’ll take gold over diamonds any day.

I remember walking into Harry Winston in New York nearly 20 years ago to look at diamond rings with my now ex-wife… and ex-diamond.

She picked out the stones she wanted, verified they were the right cut, carat, color and clarity. Then we got a price and hopped down to the diamond district, to a dealer recommended by a close friend, and bought the same stones in the same setting for less than half the price.

Experiences like that one have caused me to be wary of diamonds as an investment.

A couple of weeks ago, I was in South Africa, once the land of the most prolific diamond production on earth. I stopped in Kimberley – the location of the largest hand-dug hole in the world. It was here that men spent countless hours sifting through rocks by hand to find diamonds.

Today, the world is awash in diamonds from places like Russia, Botswana, Angola and Canada. South Africa is No. 5 on the list and not even close to Russia when it comes to gem-quality stones or cost of production.

Russia’s costs, when measured by total carats produced and the value of those carats, works out to just under $90 per carat, while South Africa comes in at more than $145 per carat.

Diamond prices at the retail level, however, are quite another story.

When it comes to buying diamonds, the buyer is often serenaded by a smooth-talking salesperson about how rare their diamond is. But the dizzying variations of color, clarity, cut, etc. make the pricing of diamonds feel more like an art than a science.

Diamond pricing just doesn’t make sense. The De Beers cartel founded by Cecil Rhodes once accounted for 90% of the world’s diamond supply and put South Africa on the map as the leading purveyor of stones. Diamonds certainly weren’t, and aren’t, scarce.

Much of their demand was and is created by the outstanding folks who run marketing companies who perpetuate the notion that they are scarce.

The world’s male population has been convinced that buying diamonds is one of the most important ways to show their significant others how much they care. So the diamond business continues to not only survive, but prosper handsomely, especially at the retail level.

But it won’t continue to do so for much longer, and there is a way to profit from this.

Let me explain…

While in Johannesburg, I visited a well-known diamond dealer, just to get the lay of the land. I priced a stone, K color, VS2 (very slight inclusions), 1.16 carats and a brilliant cut. It was an impressive-looking stone, to be sure.

With the naked eye, it was hard to tell it apart from the next grade up. The price: $6,525. I stopped at another shop and asked for a quote for the identical diamond. (It’s still funny to me how they had one considering how “rare” they are.) The price was $7,500.

I started to feel like I should have bought the first stone.

On my way out of Johannesburg, I stopped at the duty-free shops in the airport. (Warning: Never buy diamonds at duty-free shops.) They offered me the same diamond – accompanied by the words “these are 50% off” – for just over $12,000!

I wondered how many suckers bought diamonds at duty-free places… I’m guessing quite a few judging by the number of diamond shops on that concourse.

You must be thinking that I was really regretting not buying at the first store.

However, using my smartphone (the one that doesn’t blow up), I quickly scanned the prices for the exact same stone at Blue Nile (Nasdaq: NILE), the publicly traded diamond and jewelry dealer based in Seattle, before I left the first store. The price came in at $3,600 with free shipping and a better guarantee regarding the quality of the stone, and it had the same gemological institute rating.

Diamonds do have a place in the pantheon of assets on occasion – in hyperinflationary times or in countries that are suffering from political upheaval, they can be a good store of value… if you’re thinking it’s better to have 50% of the value of your money versus 0%. But those occasions are rare.

What isn’t rare is a situation where you walk into a jeweler and ask them to buy back the same diamond they just sold you, only to hear that you’ll get 50% less than what you just paid for it.

That doesn’t happen with gold.

My advice? Enjoy your diamond for what it is, but don’t buy it as an investment.

With companies like Blue Nile undercutting retailers at the source, you know the market is both rigged and unstable. That does not make for the beginnings of a good investment idea.

Good investing,

Karim Rahemtulla

Editors note:  If you enjoyed today’s issue, please check out The Non-Dollar Report to find similar insights from Karim Rahemtulla.

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