TAKING STOCK: Diamonds an investor's worst enemy

Dear Mr. Berko:

I'm a 35-year-old physician, and I'm finally getting married. A jeweler in Chicago has shown me a nearly flawless, $58,000, 5-carat diamond for my fiance. It's a wonder to look at and seems like it could be a good investment. When I asked the jeweler how much this stone could be worth in 10 years, he couldn't answer me. So I'm putting this question to you.

WS, Chicago

Dear WS:

I've always wondered how jewelers can advertise and sell a 1.7-carat diamond for $1,995 that they claim was just marked down from $5,995 and still make a profit. However, I clearly recall an angry 2006 letter from a couple in Cincinnati who bought a 3.4-carat engagement ring in 1993 for $32,000. When they tried to sell the diamond ring in early 2006, there wasn't a single jeweler in the Chili City who would give them more than $11,000. So 10 years hence, you might be able to sell that rock for $18,000 to $20,000.

Diamonds are not rare - at least not in the economic sense - because their supply has always exceeded their demand. The DeBeers cartel, which controls 70 percent of the world's supply, purposely maintains an artificial scarcity. The DeBeers folks stockpile their mined diamonds, and then they sell them in small amounts to a select group of carefully screened diamond merchants at various times during the year.

These stones are only carbon atoms, but DeBeers Chairman Nicholas Oppenheimer said it best: "Diamonds are intrinsically worthless except for the deep psychological need they fill." So consider what's perhaps the cleverest advertising campaign of all time: "A diamond is forever." And I'm not referring to the James Bond movie staring Jill St. John!

Unless you purchase a diamond that's rare in size, cut and color, you'll probably never be able to sell it for what it cost you. When you buy a diamond, you buy it at retail, and when you sell the diamond, you sell it wholesale - and the retail mark-up can be three to four times the dealer's cost.

In short, diamonds really are lousy investments. There's no active after-market for them as there is for coins, homes, stamps or cars. Meanwhile, it's estimated that the public (in North America, Japan, Europe, Asia, the Middle East, etc.) owns about 600 million carats of gem-quality diamonds. So if just 20 percent of these folks needed to sell their stones, the market price would collapse.

But again, DeBeers is brilliant in its marketing. The diamond industry spends millions of advertising dollars declaring diamonds to be "heirloom properties" that should be passed down from generation to generation. This has kept prices artificially high.

Therefore, I've come to the conclusion that the only reason a 5-carat, nearly flawless diamond is "a wonder to look at" is the realization of how much some silly fool is willing to pay for it. I will prove this point. Give the jeweler a deposit to hold the stone for a few hours, and tell him you'd like to personally show it to your fiance in a private venue. Instead, take this 5-carat stone to any well-known jeweler in Chicago and ask him what he will pay you for the diamond. You might take a cardiologist friend with you just in case.

Rather than spend that kind of money on billions of tetrahedral, bonded carbon atoms that are basically useless, I suggest that you take your $58,000 and use it as a down payment on a home or a condominium. There are some bargains in the Chicago area, and they may even increase in value over the next decade. If you already own a home, then purchase a vacation home in Florida. Failing that, give her a $58,000 portfolio of growth and income issues.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Fri, Jan 6, 2012