This week we decided to answer a question we have been asked again and again over the last 40 years we have been in business - are diamonds a good financial investment. A lot of the time, this question arises when a client is determining the quality of diamond they are hoping to buy, believing that a higher quality diamond will hold a higher resale value. Does purchasing a diamond make good economic sense?
Absolutely, unequivocally, not. No. Nope. If you view the purchase of a diamond as anything more than an investment in a relationship (engagement ring) or an investment in your jewellery collection (treat yourself!) - you are making a very expensive mistake. Diamonds in no way retain their value, as a matter of fact they depreciate faster than a new car the moment it is driven from the lot.
(In 1947 marketing firm N.W. Ayer coined the phrase 'Diamonds are forever' which would become the enduring slogan for De Beers the following year.)
First consider the concept of intrinsic value versus market value. Intrinsic value can be thought of as the true value of an item whereas the market value can be thought of as the amount someone is willing to pay - very often these are two different things. Gold for example has an intrinsic value, it is a commodity that is traded on the global markets. Gold once it is made into jewellery, also has a market value that includes labour costs, retail mark-ups, and is priced to fit into what one may be willing to pay for it. It's market value as a finished product far exceeds its intrinsic value. If you were to decide to one day to sell that piece of jewellery, it will always be worth something - it's intrinsic value - based on the commodity prices. It will never be worth what you paid for it, but it will never be worth nothing.
A diamond is a different matter. They do not have an intrinsic value or commodity value the way gold does - there value is determined to a large extent by what the market is willing to pay for them. Contrary to what many of us believe, diamonds are not all that rare - there is certainly enough supply to meet our current demand.
This plays a very important role when it comes to reselling a diamond - most jewellers, us included, have several suppliers with diamonds only a phone call away. Why would we be interested in purchasing a stone from someone other than a supplier - that means you, diamond investor - unless it presented itself as being a fantastic-once-in-a-lifetime deal? In other words, cheap. If you are hoping to sell your diamond to an individual, they will still be looking to purchase something that is less than what is available retail - they will also expect rock-bottom prices. You as a seller are at a serious disadvantage - diamonds lack liquidity; the ability to sell at will.
Diamonds do not pay interest, nor will they earn you dividends.
There are many reasons why we purchase diamonds. They have been used for centuries as symbols of everlasting and enduring love. They dazzle us with a breathtaking sparkle. We purchase them for the enjoyment they bring ourselves and others. It is an emotional connection, not an economic one.
Have a question? Email them to us at service(at)18karat.ca with the subject line Ask a Jeweller. We will answer your questions here, every Thursday.