Are Diamonds a Good Investment?

diamond cluster ring
Flickr-User: viren7

Are diamonds a good investment? Allow me to answer the question by asking you another: "Are cars a good investment?" For 99.999999999% of cars the answer is NO. Likewise for 99.999999999% of diamonds the answer is NO.

Unless you possess something in the caliber of the Hope Diamond, it is unlikely you will be able to get more for your stone than you paid.

Here is how it works for many, many jewelers: ignoring the setting for a moment, if the retail price for the stone alone is $1,000.00 then the jeweler paid anywhere from $333.00 to $500.00 for the diamond.

Twenty five years from now that same diamond might sell at retail for $2,000.00. However that means the merchant can buy that exact stone for less than $1,000 at wholesale. That does not mean you will then be able to sell that diamond for $1,000. The jewelry store owner gets many diamonds on memo which means he doesn't pay the wholesaler until he sells it, an option he does not have with you.

Since you want cash for your diamond, the jeweler will probably offer about 66% to 80% of the current wholesale value of your stone, although I have come across stores that offer as little as 10% of wholesale.

When a jeweler buys a diamond from a wholesaler, he knows the quality of the stone. If the grade or color or cut isn't exactly as promised he can return the stone and not lose any money. However when buying from the public, he has to under-estimate the quality of the stone to make sure he doesn't pay too much because he cannot call that customer back and ask for his money or a portion of it to be returned.

So a G-color, VS1 diamond that you bought years ago will usually be graded as an H-color, SI1 when you are ready to sell it. In this way, even if they make a mistake in grading, the jeweler will have some cushion against over-paying.

If you do the math, the stone that you buy today for $1,000 will have to sell at retail for about four or five thousand dollars in order for you to get more than a thousand back. However, this could take 40 to 50 years. Getting a little more than you paid after a few decades does not sound like a good investment does it?

If diamonds were a good investment, then jewelers would be willing to buy them back years later for more than you paid. The real ritzy jewelers never buy diamonds back as part of their store policy. Now there are some stores that advertise that they will offer to take your stone as a trade in for the original price you paid if you buy another stone at a higher price.

Let me explain how this razzle-dazzle works: let's say you bought a $1,000 diamond from X Jewelers in 1980. The stone back then might have been worth wholesale about $400.00 - more or less. Now they will sell you a $2,000 diamond (that costs them less than $800) but only if you give them $1,000 and your old diamond. The diamond you bought in 1980 for $1,000 is probably fetching about $600 today, so the store will, on a trade-in, make about an $800 profit instead of a $1200 profit.

Rather than insult you by saying that they can barely give you 60% of what you paid thirty years ago, they "give" you the full $1,000 as a trade-in. Actually it's not a bad gimmick to make you come in and help them make another over-priced sale.

But think about that. Thirty years later and all you can get is the same amount you paid but only if you buy a more expensive stone? Hardly sounds like a good investment to me.

I haven't even discussed shape as a factor in the pricing of diamonds. Years ago, heart shapes and marquise shapes were popular. Today, I can't give them away. A marquise diamond that sold for $5,000 thirty years I wouldn't buy for more than a thousand today unless I could find a customer for it first. So current fashion trends are also a major consideration for jewelers when they buy diamonds back from consumers.

As for size, small diamonds like those in the photo above, may have almost no value when you go to sell them. If the ring cannot be sold as an antique or estate piece, then it costs more for the jeweler to remove the stones from the setting than he will ever get back for their value.

Think of a diamond as you would your car. I drove my 1989 Honda Civic to the ground, see my article My Old Car Finally Died. It didn't bother me that it was worth practically nothing after all the years of use.

When you think about it, wearing a diamond ring for 20 or thirty years and getting back 20% or 30% of the original cost, although horrible as an investment, isn't really that bad of a thing.

There is one caveat with diamonds: if you buy a kilo of gold and you drop it, chip it, break it in half, it will retain almost 100% of its value. If you chip, fracture, or break your stone, it could become practically worthless.

Just before gold boomed in 1980, wholesale diamond prices collapsed where 1 carat diamonds that sold for $50,000 a year before fell to $10,000. If someone tells you that diamonds always increase in value, they do not know the diamond market.

Actually a very expensive antique car is a better investment than a diamond since they can no longer produce more of that particular vehicle make and model year. There is a limited number of previously manufactured cars while the rarity of diamonds, no matter what you are told, is artificially maintained.

It is entirely possible that diamonds one day could become almost as cheap as cubic zirconia.

So go, wear your diamond ring, take good care of it, check for loose prongs every few months, enjoy having it. Just don't go out and buy a diamond thinking it will ever bring you any decent return. Only those who sell diamonds for a living make money.

Disclaimer: I have been in the jewelry business for more than 34 years. Any jeweler that tells you a diamond is a good investment is a liar. Unless you are buying a small engagement ring, it is best to shop only diamonds that are GIA certified. In this way, you can compare similarly graded stones from different jewelers. Without GIA certification, it is unlikely that an untrained person would know whether a 3.2 carat diamond for three thousand dollars is a better value than a 1.1 carat diamond for ten thousand dollars. It also helps when selling the diamond. The jeweler won't have to under-estimate the quality, he will know exactly what the diamond is worth.

P.S. (added 15 Sep 2011): Having a GIA certified stone does not make it a good investment - it only helps getting a bit more when selling. It may help you get 10 or 20 percent more than otherwise. Neither certification nor anything else will help you get more then you paid for the diamond in constant dollars.

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