Why diamonds are not considered assets?

Throughout our life, we’ve seen everyone around us invest in gold and silver but ever wondered why we’ve not seen a single soul invest in diamonds? Now that we’ve got you curious, it’s time for us to feed your curiosity in simple, layman terms!

To give some context and provide a small backstory, we need to go back to 1866 when the modern diamond was first discovered in Kimberley, South Africa. Entrepreneur Cecil Rhodes established De Beers Consolidated Mines Limited 22 years later, in 1888, and by 1900, De Beers, through its mines in South Africa, controlled an estimated 90 percent of the world’s production of rough diamonds. In the late 1800’s diamonds used to be pretty rare but with the discovery of substantial diamond sources in the second half of the 20th century, diamonds became more and more abundant. But, this had no impact on the price of diamonds which remained at an all-time high throughout. This was mainly due to DeBeers’ majority stake in the diamond market which allowed them to control the price and supply of diamonds in the market. Although the monopoly ended in 2001, we’re still left with the aftermath.

So, let's get back on track and answer the question why does no one really invest in diamonds?

One of the main reasons, why no one invests in diamonds is because they don’t have a fair value as its price is mostly overvalued because the moment you are out of the shop, the value drops by 50 percent. Most stores won’t even buy back diamonds from consumers for the following two reasons:

The first is that since most retailers receive their diamonds from wholesalers they don’t need to pay for them until they’re sold. So there’s no point in risking capital on customers’ diamonds that may never be re-sold.

The second reason is that retailers don’t want to have to make an insulting offer to diamond consumers since that would undermine the notion that a diamond is a good investment. One industry expert estimates that a half-carat diamond ring, which might cost $2,000 at a retail jewelry store, could be sold back to a wholesaler for only $600.

If we think about gold and silver, the market for them is very liquid and fungible since you can store coins, sell them at any time or even trade them later on. During that time frame, they might even appreciate and provide a hedge against inflation. That’s not the case with diamonds though since the resale market is nearly illiquid.

“Remarkable. Diamonds, crystallized carbon. Every day, people go to the grocery store and come home with sacks full of carbon in the form of charcoal briquettes that they toss in their barbeques and set on fire. But just because you’ve got some carbon with the atoms stacked neatly, you expect me to plunk down thousands of dollars.” – Sheldon Cooper (The Big Bang Theory)

Another reason, why diamond is not considered an asset is because it can be produced artificially. In the last 10 years, there has been an increase in demand for synthetic diamonds in the market due to them being a cheaper alternative to diamonds even though they have a very similar physical appearance. Thus, real investors have lost confidence in diamonds as an asset and rather choose to invest in gold, silver, or even platinum where there are limited chances of being cheated. Thus, a diamond is a depreciating asset masquerading (pretending to be) as an investment.

By Mohammed Kaif