Square-cut or pear-shaped, these rocks don’t lose their shape, crooned Marilyn Monroe years ago. And while diamonds may be a woman’s best friend, we’re sure there are quite a few men who wouldn’t mind owning them, too. So, forget jewellery for a while and think of diamonds as an investment.

After all, they are precious and given their limited supply globally, you can even make a case for owning them as a ‘safe haven’, just like gold.

But before you are dazzled by visions of sparklies, you must take time to understand the idiosyncrasies of the gem market.

Pricing parameters For one, the price of a diamond, unlike that of a brick of gold or silver, is very specific to that gem. It depends on four factors — clarity, colour, cut and carat.

The price tag depends on where the diamond ranks on each of the four factors.

For instance, in clarity, the most perfect stone is rated as internally flawless (denoted as IF). It progresses lower based on the degree of flaws or ‘inclusions’.

Then, pristine white diamonds are most valuable while stones which are murkier are down in the pecking order of colour. Colour is rated on a scale from D to Z, D being the most valuable. The cut matters, too, with standard round brilliant diamonds being the most common. The list of cuts is long — pear, marquise, princess, heart, oval and cushion to name just a few. Size is the final deciding factor. Therefore, a diamond’s price is determined by mixing and matching all these factors. The number of possible combinations of the four factors can be bewildering.

So, a round-cut diamond of 1 to 1.2 carats, internally flawless and exclusive white (rated IF and D) can today cost around $31,436 or ₹19 lakh, according to Idex’s Diamond Retail Benchmark.

Keep everything else constant, but lower the clarity evaluation to slight inclusions (SI1) and the price drops to around $10,900. Maintain clarity at IF, but move to a slightly tinted colour (J), and the price stands at around $9,170, or ₹5.7 lakh. Drop weight to 0.3 to 0.4 carats with IF and D on clarity and colour, and the diamond would cost $5,704, or ₹3.51 lakh, at current prices.

But if all this makes the pricing of diamonds sound very scientific, think again. There is a big subjective element, too. The assessor’s judgement plays a big role in deciding where a stone falls on all parameters other than weight.

And unlike gold, the pricing methodology for a diamond is not transparent, with most rough and polished diamonds sold through private contracts. There is no single independent exchange or source which prices diamonds. Valuation of diamonds is highly subjective, depending on both the stone and the jeweller.

Have the desire and knowledge to make a sound purchase? Diamonds can be an investment with a long-term horizon. Loose diamonds can be bought from a trusted jeweller. If you have the connections, you could get better rates through wholesale auctions. The other route is to invest in shares of jewellery retailers or diamond miners. In international markets, there are a couple of investment routes for loose diamonds as an investment, such as the Pink Iguana fund, or the private Singapore Diamond Exchange.

The Indian factor DeBeers pegs the size of the Indian diamond jewellery market at 14 per cent of the global market by 2017, ahead of Japan and the European region. Since the economic crisis began, Indian demand for diamond jewellery gathered pace.

This was because the price differential between gold and diamond jewellery has narrowed. Jewellers also pushed low-carat jewellery at lower price points to attract more buyers.

But as with gold, diamond prices are also subject to the vagaries of the rupee. The Polished Prices index for overall global diamond prices was flat in 2013, after dropping 11 per cent in 2012.

But the rupee’s 11 per cent slide in 2013 made the gem costlier for Indians, since all the diamonds we buy are imported.

Global polished diamond prices had hit a peak in 2011, driven by the promise in Chinese and Indian markets, even as Europe and the gem’s largest market, the US, faltered. Furthermore, the Government slapped import duties of 2 per cent on polished diamonds. Growth in the Indian jewellery market also slowed along with the ebb in spending. Chinese demand, the other driver, also began to cool off in 2013. All these put pressure on the prices of polished diamonds.

The future But indications are that polished prices, which have been on a gentle decline for two years now, will recover. The US market, which is almost a third of the diamond jewellery market, is showing signs of life.

And let’s not forget that the diamond jewellery market moves in tandem with the luxury market; 2013 holiday season luxury sales have been reasonably good. The Americas region jewellery sales for Tiffany & Co, the world’s second-largest jewellery chain after Cartier, were up 7 per cent for the December quarter. US online jewellery sales were up 10 per cent for the holiday season as well. If the Indian and Chinese markets move back into healthy growth mode, over the long term their demand will shore up polished prices.

Meanwhile, prospects for rough diamonds look good, too, if you are a patient investor. The supply of rough diamonds is limited, with existing mines being depleted and no new major deposits discovered.

A Bain Capital report suggests that global supply of rough diamonds will decline from 2019 and forecasts that demand will outstrip supply between 2018 and 2023.

This is a strong positive for diamond prices in the long term. In any case, the heavy concentration in rough supply − the top five producers hold about 62 per cent of the market — will keep the lustre of polished diamonds undimmed over the long term.

Smaller gems rock

If you bought that pair of gorgeous Cartier eardrops in late 2012 or in 2013, you had your timing down pat. Growth in the Indian jewellery market also slowed along with the ebb in spending. Chinese demand, the other driver, also began to cool off in 2013. All this put pressure on polished diamond prices.

The mediocre 2012 holiday season, marked by discounts in the US, spooked prices, too. Though polished diamond prices are above the lows hit during the 2009 economic crisis, they are still 25 per cent below their 2011 highs, according to data for overall polished diamonds index from PolishedPrices.com. Diamonds of the best quality took a harder blow as demand cooled off. The index for top quality diamonds, compiled by Rapaport, has lost 28 per cent since its peak in 2011. In the past year, the index has lost 3 per cent. Interestingly, while top quality rocks lost value, diamonds of lower carat and clarity took centre-stage.

Flawless 0.3-carat diamonds are up 11 per cent in the past one year, going by Rapaport data. Similarly, 0.5-carat diamonds are up 2 per cent. Diamonds of these two carats were the standout gems last calendar.

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