Diamonds continue to sparkle despite downturn

WITH only a week to go before Valentine's Day, anyone considering a generous romantic gesture should take heart from the fact that diamonds have proved to be a strong hedge against the falling pound over the past year, and prices are now rising.

As the world went into recession in 2008, diamond prices began to fall. Roughly half of the world's diamonds and diamond jewellery are bought by Americans, so as US consumers retrenched, demand began to slip. Now, as confidence grows Stateside, prices are firming and are expected to creep up further as the recovery gains pace.

However, the position is different for UK purchasers. Diamonds are priced in dollars, and as a result they kept their value as the pound fell by a third against the dollar. Scottish romantics buying this week in pounds will have to dig much deeper into their pockets than a couple of years ago.

Light, portable and easily traded anywhere in the world, diamonds were historically bought as a safe investment in troubled times. In the UK today, however, virtually all gems are bought for romantic reasons, according to Stephen Turner of wholesale and retail diamond dealers Macintyres of Edinburgh.

But the investment market still thrives in other parts of the world. Investors are more likely to shop for uncut stones in one of the diamond markets in Antwerp, Tel Aviv, Mumbai or New York.

You need to look for a seriously large stone to have any hope of it achieving investment status, which could involve laying out tens or hundreds of thousands of pounds.

In some regions, such as the Middle East, diamonds are prized for being untraceable, especially by those involved in illegal money-laundering.

Even if all you want is a modest ring for your loved one, expect some deep financial pain. A typical engagement ring might incorporate a half or one-carat diamond, with a one-carat gem coming in somewhere around 7,000, before the cost of the setting is added.

Turner says: "The idea that men buy the ring themselves and then get down on one knee and pop the question is a myth. We find most men are too practical to spend this sort of money on a whim.

"They want to think about it very carefully and weigh up the options. In most cases they don't take the decision at all, but leave it to their loved one."

The price of a stone will depend on many factors, such as colour, cut and flaws. Each diamond is unique. But when it comes to buying a ring or piece of jewellery, the diamond is not the only consideration. The precious metal in which it is set also has a value.

Turner explains: "We recently had a sharp rise in the price of platinum, which has fallen back a bit. But, for a short while, this pushed up the price of rings quite a lot."

In truth, jewellery shouldn't be considered a serious investment at all. Fashion jewellery, in particular, has a resale value that is a fraction of its purchase price.

Like buying a new car, a jewelled ring will depreciate the minute you put it on your, or your loved one's, finger. Over time, though, it can hold its worth. Gems passed from generation to generation can prove a good hedge against inflation and currency swings.

As with paintings or fine wines, the finer the stone, the better the prospects for investment return. Keep in mind four things when shopping for a diamond: cut, colour, clarity and carat (a unit of weight equivalent to 200mg).

Stones are most often cut 58 times (facets in industry jargon). Round and princess (square) settings are the most common choice for engagement rings. The colours of diamonds are graded from D to Z, with the most valuable colourless stones graded D. Good stones, though, come with a D to H endorsement, moderate are I, J and K, and bad stones onwards to Z.

How much a diamond sparkles will depend on its clarity, as this determines how light passes through it. A "flawless" diamond will be classified IF, which stands for internally flawless. Thereafter come a further 12 gradings down to Inclusions Three.

Watch for terms such as "clarity enhanced", as this means the diamond has been artificially altered, not given an extra polish.

The final trap when shopping for a gem is avoiding "blood" or "conflict" diamonds, the proceeds from which may have been used to fund civil wars, by ensuring it has proper documentation to prove it has been bought from a legitimate source.

The Kimberley Process Certification Scheme was established for this purpose after rebel armies, particularly in Africa, used the proceeds of diamond activities to wreak havoc and suffering, not least through the callous exploitation of child soldiers.

There are still concerns about various states, with Zimbabwe currently among the countries whose diamonds are considered undesirable.

Turner says: "Any reputable UK dealer would be horrified to think they ever came even close to a stone even tainted by suspicion of being a conflict diamond.

"All our stones are verified, and we work in a small world. If anyone was ever suspected of trying to pass any conflict diamonds off as something else they would be finished in business."