Sparklers for your portfolio

Model Adriana Lima shows off a diamond-studded bra worth $2 million at a New York fashion show. Photo Reuters

Jacquie Hayes

Diamonds have long been described as a girl’s best friend, but there may be reasons why cashed-up boys should be equally passionate about them. I came across this theme during the festive season while visiting family and friends at Albury, on the NSW-Victorian border.

Stays there generally involve lazy day trips through the north-east Victorian wine region, long meals of regional fare in city-grade restaurants and enjoyable discoveries in picturesque towns like Yackandandah, Bright and Beechworth.

Arriving at Beechworth, I was dismayed to find a jewellery shop that for years had been an essential part of my meandering itinerary had closed down. In its place, a pet accessory shop seemed to be doing a respectable trade selling rhinestone-studded collars, designer dog coats and nifty pet homewares.

Tremonti Fine Gems and Jewellery wasn’t the only local business to suffer the drag effect of more constrained financial times. But at least its Swiss owner, master goldsmith and jeweller Karin Tremonti, had kept her dream alive in an atelier and showroom in her home town of Albury.

I ran into her there at an annual Christmas Eve cocktail party at the home of mutual friends. With her was the supplier of most of the precious and semi-precious stones used in her jewellery, her husband, Mark. I had a close encounter with Mark 22 years ago when we were paired up as bridesmaid and groomsman at our hosts’ wedding. But we didn’t talk about that. Instead we talked diamonds, and why they might be worth considering as part of an investment portfolio.

Diamonds, he says, have become a new defensive play for well-to-do investors seeking alternatives to the more traditional growth assets that failed them so spectacularly recently.

“Everyone’s looking around for not just a flight to safety but also a flight to quality,” Mark says. “And real tangible assets are fitting the bill.”

Physical assets like land and property have long been favourites for Australian investors. But, as we’ve seen, demand can be unpredictable and prices can shift a lot.

Diamonds, says Mark, provide a safe way of holding value in a tradeable currency.

“And they’re small and portable, desirable and wearable, and they denote prestige, all aspects they will continue to hold.”

More significantly, he says, a seemingly insatiable appetite for diamonds from China, Asia and India – assisted by the advent of the internet – is driving prices higher with demand expected to outstrip supply by next year.

But if you want to get in on the upside here, you’ll need to operate at the high end where the stones are big and expensive. Entry level is considered to be around $50,000.

Diamonds, of course, are not without their risks. People will tell you whatever you want to hear about them, for a start, and it’s so easy to get overenthusiastic about beautiful things on a promise. For this reason, you really need to know your stuff, perhaps more so than with traditional investment asset classes.

Dealing with diamonds requires a high level of expertise because every diamond is different. The jewellery business is secretive anyway – no one’s ever prepared to say what anything costs. But pricing diamonds is particularly complex because it is based on such a wide set of variables: think colour, cut, clarity and carat.

Rapaport, a company which tracks global diamond prices, estimates that rough diamond prices rose as much as 35 per cent in the first half of last calendar year. However, its RapNet Diamond Index (RNDI), which prices certified polished diamonds, was flat to negative for the rest of the year as US demand came off.

To give a sense of rarity, the Gemological Institute of America (GIA), the most respected global authority on diamonds, says that for every 25,000 diamonds, 2.4 per cent will be fancy – of which only 4 per cent will be the stronger colours of pink, blue, green or orange.

Within those categories, Mark recommends sourcing diamonds with clarity as close to flawless as possible – so VVS, (Very Very Slightly Included; impurities are known as inclusions) or better – and graded colourless (D, E or F).

In terms of carats, start at 10 for white diamonds and five for yellow. Two carats will do as a start among the rare stronger colours.

Finally, beware of commissions, which can be extremely high ­– up to 30 per cent if you’re being taken advantage of. Twelve to 15 per cent would be a fair expectation at auction houses like Sotheby’s or Christie’s.

Stay out of diamonds unless you can afford to hold them for at least long enough to have them absorb the high front-end load – Mark says within one to five years.

Clearly this isn’t an investment you can buy today to flip tomorrow. But if all else fails, at least you’ve got a desirable diamond that can always be wrapped in platinum to make some lady very happy.

jacquie.hayes@me.com

The Australian Financial Review