Investing in Diamonds

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Investing in Diamonds

Investing in Diamonds

Wouldn’t it be great to get rich in diamonds?

Investing in diamonds profitably takes a ton of education. Most of those who invest in diamonds have been in the industry with family ties for generations.

Opportunity abounds and fortunes are just waiting to be made investing in diamonds! The diamond business is divided into a few broad areas although there are companies that overlap these various categories and participate in several different areas simultaneously. As with all other industries, there are basically two avenues for investment. You can invest directly into a company that’s already in the industry or you can create a competitor and take all of the money for yourself. Here are some basic groupings in the diamond business and some thoughts on the investment potential.

Polished Diamonds

When people think of diamonds, this is usually what they mean. They see a finished product that is used as a component in jewelry. Customers have been told for decades that diamonds are an investment and, for the most part, this has simply not been true. There have been difficulties with both buying and selling. Properly evaluating an investment can only be done after it’s been sold and all the related fees have been paid. This means that all of the initial costs must be considered including purchase prices, taxes, shipping, appraisals, setting, and financing along with all of the selling costs like advertising, commissions, packaging, recertification, fraud, shipping and the like. There are also holding costs like insurance and security that need to be considered. Most consumers find that they make out rather badly when they finally do the accounting (if they ever do the accounting). All of this notwithstanding, there seems to be no shortage of sellers who are anxious to convince you that diamonds are a good place to stash your nest egg. I humbly disagree. Diamonds can be an investment in your relationship, they can be an heirloom for your family, they can be a status symbol or they can just be fun. These are all fine reasons to buy one but don’t go in with the illusion that you will ever see your money again.

Rough Diamonds

It’s well known that diamonds are plentiful in Africa; they can be sold for a fortune in America and Europe; and that this traffic is dominated by an evil empire called DeBeers Consolidated Mines. Well-known or not, this is flatly false. Diamond mining is hard damn work involving lots of people, expensive machinery, and business plans that are decades long. It requires a large investment and an extremely long-term vision for return on that investment. DeBeers is, indeed, the largest diamond mining company in the world but they have lots of competitors both large and small. The large ones, like DeBeers and BHP-Billiton, are public companies and their records are readily available. Those records are pretty clear. Big money goes in and the profits are tiny. Some years are better than others. Competition is fierce and the difficulties are numerous. There are traders in every country from Russia to Peru who will help you to buy rough diamonds and import them yourself into the country of your choice without the need to go through the big companies. At home, presumably, you can have them cut into polished diamonds and resell them for big profits on your local market. If you’ve got a market- like you own a jewelry store- this sometimes works out but otherwise forget it. Even then it’s a mixed bag and not for the faint of heart. Rough diamonds are a rough business beset with criminals and thieves. If you lost your life, you would not be the first and if you lost your money you wouldn’t even be unusual.

Investing in Diamonds

Mining Companies

If there’s no money in buying rough diamonds, how about the mining companies themselves? They must be making money. Not necessarily. As mentioned, DeBeers is not a particularly impressive stock, nor are any of the other mining companies. In 2015, for example, they had the dubious distinction of being the worst performing major stock in the UK (NGLOY).  They have had their good years and it’s definitely possible to make some money in the stock market with these guys, but this isn’t usually what investors are thinking. The typical plan is to get a mining claim in Africa somewhere and have a joint venture with a local group that will actually do all of the dirty work in exchange for a share of the diamonds. Sounds good. Never works. You should choose business partners with the same level of care that you use when choosing a spouse. This is especially true if you are relying on your partner to operate the company. In addition, the laws and business environment in Africa are very different than they are in the US and Europe. Entering into a contract in Congo simply does not mean the same thing that a similar contract means in the US does. For investors who are located in the same country as the potential mine and who have experience with the mining business and the partners, this kind of deal is worth considering, otherwise, you are pouring your money down a rathole.

Manufacturers

This is what jewelers call the cutting industry. These are the companies who convert rough diamonds into polished stones. It’s a very labor-intensive process that involves some pretty exotic skills and unusual equipment. Increasingly it’s being done in low-wage countries with very high-tech tools. They’re making some money here, but not much. Learning to cut yourself is not a very good proposition because you have to compete with everyone else who will do it cheaper and you will have problems with buying rough and with selling polished stones. It makes a pretty good hobby if you’ve got a bunch of time and money to burn, but don’t expect much in the way of return. For manufacturers to make it, they need to buy stones from low-cost providers and sell them quickly after completion in order to keep inventory costs down. Buying right is key and this means big money. As with the mining business, there are a few opportunities here. It’s best if you are a high-level government official in a very low wage country and you have a large bank account in a country with a stable currency. You need the money to buy the rough since the mining companies don’t extend credit and you are planning on hammering them so hard on the price that they won’t be willing to give the slightest additional concession. You need to be highly placed in the government so that you don’t get cheated out of your product at the end, since the low-wage countries tend to be the ones with the most corrupt officials. If it isn’t you, you can bet that you’ll be in the sights of whoever it is.

Diamantaire

These are the people who make a business from investing in diamonds. They buy in bulk and sell them at a profit in smaller quantities to other marketplaces. They are very popular in TV shows – usually crime dramas. It’s not that they have more than their share of criminals; they are generally very respectable people. They’re the victims. They get robbed, shot, burglarized and generally ripped off at an alarming rate. As with the above, there is some money to be made here but it’s not easy. The manufacturers are anxious to sell their stones quickly and for cash and consumers would like to be extremely selective about who thely buy from. This leaves some room for an entrepreneur who is willing to get in the middle. Everybody wins. If you want to get into this business, it’s essential that you personally become an expert. Most of your competitors grew up in the business and learned the details of the diamond trade at a very early age. Their whole family is in the business. You will need to make snap decisions about buying and selling and be prepared to commit serious money over a handshake deal. Be prepared to invest millions of dollars in inventory and learn all you can about alarm systems, firearms, and similar security procedures. Bankrolling a diamondtaire may be a possibility as well, if you happen to know one well enough to make what amounts to an unsecured million dollar loan.

Arbitragers

I love that word. They are guys who buy something in one market where something is undervalued and sell it in another market where it’s worth more. Sort of like buying Manhattan for $28 worth of beads. As with all of the above, there’s some money to be had here and, as with the above, it isn’t easy. Buying in Belgium and selling in the US seems to be a popular version. For some reason, people seem to think that Belgian traders who have accumulated millions of dollars in diamonds would rather sell them cheaply in Antwerp than to go through the trouble of flying to the US and selling them there. Maybe they can’t afford the ticket or they’re not getting along with their brother-in-law who lives there. There are similar versions about buying in New York City and taking them to the Midwest for big profits because, presumably, those guys on 47th street can’t figure out how to sell their stones in Colorado or that jewelers in Kansas haven’t heard of the internet. It’s all nonsense. A FedEx Pak from Belgium to Denver costs $35 and takes 2 days. Sure, there’s a saving to be had here, and if you buy enough stones you will even save up enough to buy a trip to Belgium, but this isn’t the key to your retirement.

Pickers

This is the end of the food chain in the diamond business. These are people who go to pawn shops, flea markets, garage sales, craigslist and similar markets and look for good deals. Occasionally they can make out pretty well if the seller doesn’t know what they have or they are otherwise in a pinch. The first requirement here is to learn how to spot a treasure when you see one through a dirty glass showcase and to do this without tipping your hand about what you count as interesting. Learn to work fast because you’ve got lots and lots of competition and make deals that leave everybody happy so that you can come back to the same store next week and have them happy to see you. Don’t get greedy. The second requirement is to have a sales outlet. If you don’t own a jewelry store, pawn shop, website or some other avenue that’s pretty good at moving your treasures, then you’re a collector, not a merchant. There’s nothing wrong with that, but the subject here is how to make money in the diamond business and building up a personal collection hardly qualifies.