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EXCERPTS FROM:
For Investors, the Brilliance of Diamonds Is All in Their Color
By PAUL SULLIVAN | DEC. 18, 2015

If there is a holiday gift almost guaranteed to make a recipient swoon with joy, it is a diamond. But while such stones remain appealing as jewelry, the value of certain colored diamonds has increased while traditional white diamonds have fallen.

Diamond dealers are talking about pink, blue and red diamonds as investments, citing a recent track record of double-digit returns. This new interest in such rare gemstones can make a holiday gift 10 to 20 times more expensive than a similar, high-quality white diamond.

“Fancy colored diamonds are the flavor of the year – they’re hot, they’re sexy, they’re great,” said Martin Rapaport, chairman of the Rapaport Group, which is considered a primary source of diamond pricing information.

Understanding the lust for colored diamonds begins with understanding the broader forces pushing and pulling diamond prices.

The white diamonds that adorn engagement rings and will dangle from ears and wrap around bracelets this holiday season have fallen in value over the last year. Prices for one-carat diamonds have dropped 7.15 percent as of Dec. 1, according to an index Mr. Rapaport developed.

Mr. Rapaport said demand for white diamonds has dropped globally because of a slowing Chinese economy, currency devaluation in Russia and low oil prices in the Middle East. Yet on the supply side, the cost of rough, white diamonds has stayed high, which has hurt the rest of the diamond trade’s ability to make a profit.

During the same time, colored diamonds have surged in value. Buyers have sought them out for their beauty, extreme rarity and investment potential.

The best-known pink diamonds, for example, are from the Argyle diamond mine in Western Australia. That mine, which supplies 90 to 95 percent of the world’s pink diamonds, will be exhausted by 2020, and the scarcity has driven up prices.

“Argyle pink diamonds outperform any other,” said L. Polnauer, a colored-diamond dealer. “They’re less and less available and more and more in demand. Fifteen years ago we bought Argyle pink diamonds for $10,000 a carat. Today it’s $150,000, $200,000, $250,000 a carat.”

Dealers say wealthy buyers in volatile economies view rare, colored diamonds as a hedge against economic uncertainty. A diamond can also be a discreet way to put a tremendous amount of money into something smaller than an aspirin tablet.

“You can buy a large house for $1 million, or 1/16 ounce — or less than half a carat — of a red diamond,” said Yaniv Marcus, founder of the Diamond Investment and Intelligence Center. “A one-carat red diamond could be valued at $2.5 million.”

At the highest end, colored diamond prices have reached a level that rival rare art works like Amedeo Modigliani’s “Nu Couché,” which sold for $170.4 million at the fall auctions.

“It’s all about rarity,” said Frank Everett, vice president and sales director in the jewelry department at Sotheby’s. “The best ones stand out like a great piece of art.”

In the last year, Sotheby’s has sold two well-known blue diamonds for record-setting prices. A 9.75-carat blue diamond that belonged to the socialite Bunny Mellon sold in November 2014 for $32.6 million – or $3.3 million a carat. Last month, the auction house sold the 12-carat Blue Moon for $48.5 million – or just over $4 million a carat.

Those prices far outstrip the 100-carat white diamond Sotheby’s sold in April for $22 million — or $2.2 million a carat.

More broadly, a one-carat fancy pink diamond in a cushion cut is 11.50 times more expensive than a one-carat cushion-cut white diamond that has been judged to be internally flawless and carries the highest color rating, said Eden Rachminov, head of the advisory board of the Fancy Color Resource Foundation. A blue diamond is 20.8 times more expensive than a similar white diamond.

Yet discerning the vividness of a colored diamond can be more art than science. If white diamonds are likened to stocks, colored diamonds are private equity investments, with all the risk and reward such forays entail.

Mr. Rachminov said the prices of yellows have been stable, tending to track the stock market, but the pinks and blues have soared in value, which has made some industry experts like Mr. Rapaport skeptical. (Red diamonds are at the top but they are exceedingly rare.) “There’s more interest from high-net-worth individuals, just like there’s more demand for art and wine and luxury items in general,” Mr. Rachminov said.

Colored-diamond dealers talk of the stones as a store of value, and they have shown to be over decades.

“The approach should be long term,” Mr. Marcus said. “It’s not a trading commodity first of all because of liquidity. The return is exponential over time.”

Yet that line between jewelry and investment can get blurred. Sam, who owns a medical business in New Jersey but asked that his last name be withheld for security concerns, has amassed a collection of dozens of colored diamonds. He bought his first pink diamond in a ring as a gift for his wife in 2005. Then he bought a green diamond and realized that the stones could be used to finance his children’s college education.

“I put some money into that green diamond and that started a collecting bug,” he said. “Then it became trying to find some of the best examples of different colors of vivid colored diamonds.”

Mr. Fine, who sold Sam many of his stones, said some of his pink diamonds had doubled in value in 10 years. But Sam said he also was aware that his timing was right.

In 2007, he bought a half-carat vivid pink diamond in the Argyle tender — an annual private auction of the best pink diamonds from the mine. But this year, he bid four times the price for a smaller pink diamond of lesser quality and lost.

Still, as with any thing of beauty, it can be a lot harder to look rationally at sparkling colored diamonds than a list of company names in a securities portfolio.

Sam said he had amassed a collection valued at $6 million of 41 colored diamonds in almost every different hue but can’t bear to sell them. “Now I keep them securely in a vault and I go down and look at them,” he said. “It’s a lot of concentrated wealth in a thing of great beauty.”

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