Are Diamonds, Gold and Jewelry A Good Investment ?

(I published this article several years ago, but its prevalence today still make it an important read. )

The uncertainty of current economic times has pushed many consumers and investors into purchasing hard assets such as fine jewelry, precious metals and gems. Many clients are asking me if this is a good idea. I have always been of the opinion that jewelry is wearable art and its primary purpose is to bring enjoyment to it’s owner with a secondary benefit of having long term value. I am sensitive to the fact that gold & gems have been objects of value for millennia. I want to present in this article some information regarding the jewelry market as a whole and let you, the reader, make your own decision about the investment component of jewelry, gems and precious metals.

Due to the impossible nature of predicting the future of any market, I turn to the past as my guide. What is happening in the precious metals market and potentially in the diamond and gem market is similar to the situation in the early 80’s. In Jan 1980 gold was up over $850oz. and diamonds were being touted as investment vehicles by newly formed diamond grading labs and investment companies. Weather or not it is a good idea for the individual investor to jump in now is a hotly contested subject. Looking at historic metal pricing yields some interesting trends. In Jan. 1979 gold was around $230 oz., after it’s run up to $850 it was down again to $390 in Jan. 1981. The 80’s continued to see ups and downs in the precious metal market never reaching its previous high. By 1990 stability set in, and for over a decade gold hovered between $300oz and $400oz. Now that gold is back up near record highs.  many people, including some financial advisors, feel it is still undervalued. Keep in mind that adjusted for inflation the $850 price in 1980 would be well over $2000 today. The counter argument would advise against buying high and risking a return to post run up pricing for an extended period of time making it impossible to recoup you losses even over the longer term.

Diamonds are a somewhat different story. Most of the rough diamonds are sold at sites by DeBeers Central Selling Organization. The supply side is effectively controlled to weather financial crisis and even out diamond pricing.  The historic appreciation rate of diamonds has on average just slightly outpaced inflation. In the early 80’s the diamond investing phenomena drove prices way up  for about a year. Diamonds were no longer just luxury items but investment vehicles for everyone. Unsustainable rapid price increases fueled demand. Within a year the bubble broke and diamonds were down to pre ’79 pricing. If this trend emerges again  I would approach it with caution and skepticism. This is not to say that in the long run diamonds can’t be good investments.

I believe, like any other investment, when and how you buy is a critical aspect that leads to ultimate profitability. Let’s say that you purchase three diamond rings all the same size and quality with similar certifications and documentation. One ring is from a well known local independent jeweler and the price is $50,000. The second ring is purchased from a very “In” designer with a price tag to match of $85,000. The final ring is purchased at a reputable auction house and the price paid is $30,000. Which one of these is the best investment? All of these rings will depreciate or appreciate at somewhat varying rates. The ring bought from the independent retailer is automatically depreciated as an asset because if you were to turn it back into cash by selling it on the secondary market you would realized a much smaller figure than the one you recently paid. The jewelers overhead and profit instantly eat at you investment. If you were to make the leap to financial parlance you could view the premium as a huge front end load. The designer piece with typically an even higher mark up and overhead may seem like the worst choice, however as long as that designer remains “In” then that ring may not deflate by such a large percentage initially because of demand and future appreciation could be brisk. The hard part is knowing who will remain in and who will be on the outs. I was in shock when I heard the recent news that Henry Dunay Design filed for chapter 11 in NY recently. How can such a venerable high end jeweler end up in that position. It is a sign of the times. Fortunately they may emerge from this crisis and even if they do not the effect for Dunay designs on the secondary market would be uncertain. It could boom or bust, it is speculative at best to predict.

The last example,  the ring purchased at auction, would typically be the option that allows the shortest amount of time in the red. In other words it would be like buying a small load or no load investment.  The nature of the auction means that if you purchased a piece that received a good amount of bids around the price you paid that it is reasonable to assume that you could recoup that money if you wanted to sell in a short period of time. The buyers premium of course does add to this timeframe. Unfortunately it is not so clear cut as simply waiting a prescribed period of time to recoup fees before you are in the black. If you bought the piece on a good day (from the auction house’s and seller’s perspective) and sell it on a bad day than obviously your investment has lost its luster. Of course the opposite could happen and you could be well into profit immediately after the purchase. The auction market is complex and equally as difficult to predict as the stock market, but like the stock market desirable items show strong and steady growth over the long term. Historic appreciation rates of diamonds on the retail as well as secondary markets will allow your investment’s secondary market value to surpass the original purchase price given enough time. The amount of time it takes varies on how the diamond is purchased as exemplified above, and also on the quality of the diamond.

Over the past twenty years diamonds of the highest color (D,E,F) and clarity (Flawless, VVS, VS) have appreciated at significantly higher rates that their more common cousins. Looking at auction results as well as wholesale and retail pricing will clearly show this. A current example is the lackluster performance at recent auction with regard to the more mainstream jewelry and gems. The bright spots, however, are to be found among the best of the best. The major auction houses have been breaking all records in recent years. The highest amount per carat as well as overall for high quality and fancy diamonds has recently been realized.

In summary, the jewelry metals and gem market is as hard to predict as any market, but it is good to bear in mind the common principals of buying right and pursuing quality. In many cases the yield on a piece of jewelry purchased at retail may be relatively small. Although if this piece is being worn then the dividends that the joy of ownership brings are not so easily measurable.