Diversifying the portfolio with investment diamonds

The polished investment diamonds industry is constantly evolving with increased transparency, amongst the steady growth of wealth in emerging markets.

Investment diamonds are considered a precious commodity, and can easily be regarded as a hedge against inflation and act as a valued store.

Furthermore, the value of diamonds, as a rare commodity, make it the ideal investment and a valuable addition to any portfolio.

Diamonds as an asset class

Firstly, let’s understand what an asset class is. An asset class is typically defined as a group of securities or assets that behave similarly in the marketplace, and is usually governed by the same set of regulations. There are 3 types of assets to take into consideration: equities, bonds and cash equivalents. However, once we move away from these three types and move to the world of alternative investments, definitions can become unclear. This is why it is sometimes wiser to define an asset as a group that behaves separately from other groups and therefore performs differently in terms of risk and returns in any given market.

This is when investment diamonds come into place and can fairly be considered as an asset when added to an already diversified portfolio of assets. As a result it yields further diversification benefits thereupon improving risk-adjusted returns.

Diversification benefits of investment diamonds

In earlier academic research dated 2012, both Renneboog and Spaenjers found that in the period ranging from 2003 to 2010, the annual returns for white diamonds were of 10%, while they were 5.5% for coloured diamonds and 6.8% for other gems. The authors also found that the returns for both white and coloured investment diamonds, had outperformed the stock market over that same time frame. Diamond returns also co-varied positively, with stock market returns that led the authors to conclude that this result is a further confirmation of previous gathered evidence on the importance of the effect of wealth on the demand for luxury goods.

Cost of carry

Cost of carry is the cost associated with storing a physical commodity or holding a financial instrument over a specific period of time. Carrying charges usually include the following: insurance, storage costs, interest charges on borrowed funds, and other related costs. Nevertheless, careful consideration should be given to these costs when thinking of the suitability of an investment and evaluating investment alternatives, as these costs could eventually consume the overall return on an investment. More specifically, the cost of carry for investment diamonds is actually a fraction (as a percentage of value) of that for traditional commodities such as oil or metals due to their pocketable size and easy handling process. Diamonds are usually stored at high-end logistic companies, within vaulted facilities which are insured, throughout the world and mainly in free trade zones.

The team at BAUNAT Diamonds is specialised in advising on investment diamonds. They would be happy to guide you professionally towards a diversified investment portfolio. 

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Author: Naomi Howard

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