How Do Investment Diamonds Work?

Diamonds are often considered the ultimate safe-haven asset, mainly because they are not subject to taxation and are believed to maintain stable value over time, immune to market fluctuations and political or economic crises. But is this truly the case?

More broadly, what exactly are investment diamonds? How do they differ from commercial diamonds? Does investing in diamonds still make sense today? In this article, we will address these questions, exploring the characteristics a diamond must have to be considered an investment, as well as the pros and cons of investing in diamonds.

Investment Diamonds vs. Commercial Diamonds: What’s the Difference?

The key characteristic of investment diamonds is rarity: only 20% of diamonds mined are of jewelry-grade quality, and of those, only 2% can be considered investment-grade.

Like all diamonds, investment diamonds are evaluated according to the 4Cs: Carat, Color, Clarity, and Cut. Below are the essential characteristics that an investment diamond must have.

• Carat: Investment diamonds should have a carat weight of at least 0.50.
• Clarity: The clarity should be graded as IF (Internationally Flawless, meaning free of imperfections) or, at most, VVS2 (Very Very Small Inclusions, meaning tiny inclusions that are almost invisible under ten times magnification).
• Cut: The cut must be rated as "Very Good" or ideally "Excellent," meaning the proportions are perfectly or nearly perfectly balanced to maximize the diamond’s fire and brilliance.
• Color: For colorless diamonds, they should be completely colorless (graded D on the scale), meaning they are free of any whitish or yellowish tints.

While an investment diamond should ideally possess characteristics that make it nearly perfect, in practice, a flawless diamond isn’t always a better investment than one of slightly lower quality. It's important to remember that the ultimate purpose of a diamond, even an investment-grade one, is almost always jewelry, which has its own set of evaluation criteria.

For example, consider carat weight: a two-carat diamond is undeniably valuable, but it is also harder to handle and use, making it more difficult for commercial purposes. Similarly, a diamond with perfect clarity and color might be so expensive that it becomes nearly impossible to sell. The risk, therefore, is having a diamond of immeasurable value that, in reality, offers little more than its unmatched beauty.

Are Diamonds Truly a Reliable Investment?

As mentioned earlier, diamonds are often seen as the ultimate safe-haven investment, partly because they are believed to be immune to market fluctuations. However, this is a misconception, and recent price declines prove otherwise. While investment diamond prices rose by about 4.5% in 2021 during the pandemic, by the first half of 2023, they had dropped by 18% from the historic highs of the previous year.

Several factors have contributed to this rapid and ongoing depreciation, one of which is the pandemic itself. While lockdowns and uncertainty led people to invest in safe-haven assets, the end of restrictions prompted wealthier individuals to spend on other luxuries, such as travel.

Synthetic Diamonds: The Future of the Jewelry Market?

Another significant factor is the increasing popularity of synthetic diamonds. These lab-created stones are considerably more affordable than natural diamonds. They are also seen as more sustainable, not necessarily in terms of environmental impact (as the energy required to produce them is notably high), but from a human rights standpoint. This is especially pertinent in an era when the working conditions in diamond mines are frequently scrutinized.

The most common use for diamonds of 1 or 2 carats is engagement rings, where consumers are particularly price-conscious. It’s no surprise, then, that the synthetic diamond industry has focused on this category, rapidly becoming the preferred choice for a growing number of consumers. In January 2020, only 11.2% of loose diamonds sold were synthetic, while by February 2023, that number had surged to 46.6%.

From Investment to Loss

With the decline in demand and the drop in prices, selling investment-grade diamonds has become increasingly challenging and, above all, less profitable than originally expected. Finding a buyer willing to pay the initial purchase price is becoming more difficult. Moreover, if there's a need to quickly liquidate the diamond, one may be forced to sell at a loss, turning what was once considered an investment into a financial setback.

When is the Best Time to Sell Your Diamonds?

In 2022, a one-carat diamond of slightly above-average quality was valued at approximately $6,700. By February 2023, the price had dropped to $5,300, with further declines expected. While the myth of the diamond market’s stability has been debunked, there’s always a chance for future fluctuations that could drive prices back up. However, if you want to play it safe, the best move is to sell before prices fall any further, particularly in today’s environment of heightened economic, political, and environmental instability.

If you're looking to sell investment-grade diamonds, Auctentic, with its extensive network and connections to key market players, can help you secure the best possible price in record time, allowing you to swiftly convert your investment into cash.