Diamonds Aren't an Investor's Best Friend

De Beers Corp. more or less operated a near monopoly in the diamond market from 1934 to 2000, and it still controls roughly 40% of the market. When it dominated the market, the company could set prices and sold only as many diamonds as current market prices could bear -- lots of diamonds if demand was high enough to keep prices high, and only a few if the price support wasn't in place that year. De Beers marketed diamonds as a symbol of love. It discouraged jewelers from dealing in secondhand diamonds by agreeing to buy back stones for its own inventory, further controlling supply.

Price and Quantity Problem

South Africa is the traditional home of diamonds, but Russia, Canada, Australia, and India all have viable mines. Many yield low-quality stones, but improvements in laser technology make it easier to improve their color and clarity. Diamond companies take raw stones, cut them into shapes that enhance their natural beauty, and then use lasers to lighten and even eliminate cloudy spots and flaws. As lasers improve, a greater number of natural diamonds meet jewelry-industry standards. That's why shopping malls flaunt $99 diamond pendants at holiday time.

De Beers lost its monopoly when it could no longer control the supply. As mining and laser technologies improved, De Beers watched independent miners and manufacturers put stones on the market. By 2000, it said it would stop managing the diamond market and start marketing diamonds under the De Beers name.

To stand above the cheap diamonds sold to high-school lovebirds, diamond companies trademarked their cut patterns and used lasers to etch serial numbers or brand names on the stone. Prospective grooms now have to decide what shows love the most: a diamond ring in a blue box from Tiffany; an inscribed Millennium diamond with a loupe included; or a microscopic polar bear to prove that the diamond came from conflict-free Canada, unlike diamonds from parts of Africa where sales revenue may have been used to pay for civil conflicts.

Stores of value generally maintain their price. Investment goods like stocks and bonds are expected to increase in value, and consumption goods like cars, clothing, and furniture in most cases go down in price.

Now, if you're still convinced that diamonds are a good investment, your best bet is to buy exposure to them through stock in a jeweler. Or, go to the jeweler and buy a diamond for someone you love and not as an investment.