Carat and stick approach to diamond investment

They last for ever, they come in different shapes and sizes, they range from moderately to astronomically expensive, you can wear them, especially if you are a glamorous woman, and men these days wear them too, especially in signet rings. The very word diamonds conjures up dazzling images of shimmering facets, great wealth and glamorous women.

A diamond may be a girl's best friend, it fits all the standard investment criteria, but is it something the shrewd investor could buy and sell at a profit? The answer is, however, not straightforward, because the world diamond market is controlled by the Central Selling Organisation which is managed by De Beers. Mention the word investment at De Beers' London headquarters and the response is immediate and emphatic: "Diamonds are not an investment. They are the ultimate gift and a store of wealth."

The aim of the CSO is to balance supply and demand to prevent wild fluctuations in the market price of the stones. As such the CSO sells diamonds, but it does not buy them back. Because of De Beers' financial strength, the company can hold buffer stocks of diamonds not currently in demand, releasing them on to the market in an orderly flow when demand increases.

Last month Russia announced it was closing its Committee for Gemstones and Precious Metals, which controlled, amongst other things, the sale of diamonds mined in Siberia. It renewed fears that Russia would no longer sell its diamonds through the CSO but independently on the open market. If this happened, the price of diamonds could have plummeted. However, although the Russians desperately need hard currency, they are hardly likely to shoot themselves in the foot.

The rough diamonds from the big producing nations that belong to the CSO go to its London offices. There they are sorted into over 5,000 categories of number of shape, quality, colour and size. Even if obtainable, such a vast number of categories is a good reason for not even contemplating buying uncut stones.

Once sorted, the diamonds are blended into a "selling mixture" in preparation for the 10 annual "sights" in London, at which the rough stones are sold to some 160 clients of the CSO. The mixtures are offered at a non-negotiable price. Bargaining is only allowed for individual stones in excess of 10 carats.

Rough diamonds may not be an investment, but, how does one go about getting value for money on cut stones? The question may appear straightforward, but the answer is complex. As De Beers states in its excellent leaflet, Quality and Value, which is available from all good jewellers or direct from the CSO, "There's more to diamonds than meets the eye."

The characteristics that determine the quality of a diamond are known as the 4C's: colour, clarity, cut and carat, which is the stone's weight. The most sought-after colour for a diamond is one where there is no colour at all.

Clarity relates to the impurities in a diamond. The more impurities, the lower its price per carat. An internally flawless stone is known as "IF", whereas those with only very slight inclusions, which can only be seen with difficulty from the back of the stone using a 10x magnifying glass, are known as VVS1 and VVS2. Minor inclusions, which are still difficult to see with the untrained eye, are referred to as VS1 and VS2; noticeable inclusions which are easy or very easy to see with a 10x lens are S11 and S12, whereas those with obvious inclusions are 11, 12 and 13.

The precision and delicacy of the cut dictates the maximum amount of light that will be reflected through the diamond. When the stone is cut to good proportions, light is reflected from one facet to another and dispersed through the top of the stone. If a diamond is cut too deep or too shallow, light escapes through the bottom of the stone.

Finally there is size - 95 per cent of all cut diamonds weigh less than a carat. However, it is the inter-relationship of the 4C's that determines a diamond's value. A flawless, colourless one carat stone of good cut will be worth more than one which is twice the size but is near colourless with very minor inclusions.

If you want to buy a single diamond, the jeweller is still the best bet. It is a well-known fact that the mark-up of high street jewellers is one of the highest of retailers. But there are good reasons for this, the main one being the high value of stocks they have to hold to give their customers a choice. So, would it not be better to buy a cut stone and have a ring made? While perfectly possible, Andy Bone at De Beers admits that it is difficult for the public to buy an unmounted stone in Hatton Garden.

Although the supply and demand of rough diamonds is controlled, the price to the consumer is not. As one jewellery dealer, who wishes to remain anonymous, told me, "The differential between the buying and selling price of stones in Hatton Garden, London's diamond centre, is enormous - 100 per cent."

However, there is another way forward. In April, Sotheby's held its first auction of unmounted brilliant-cut diamonds in London, with most of the gems selling in the pounds 700-pounds 2,000 range. Each piece was sold with a laboratory certificate giving the classification of the stone. The buyers obviously included dealers, but also private buyers wishing to have pairs of earrings or a solitaire ring made.

A working jeweller will charge around pounds 300-pounds 350 plus VAT to have set a one carat diamond mounted in a handmade ring. A high street jeweller could well add a 100 per cent mark-up for arranging to have the work undertaken. Given that one carat near colourless stones were selling at around pounds 2,000 at Sotheby's in April, even a DIY approach does not come cheap.

However, at the end of the day, one will have a jewel that will mean far more to both the giver and the wearer than a similar piece just selected from a jeweller's stock. Nevertheless, for those with the time to search for what they want, the purchase of any item of jewellery on the secondary market - either from a jeweller or at auction - still represents the best value for money. Typically a solitaire ring which will retail new in a high street jewellers at pounds 4,000 will sell for half that sum on the secondary market.

FACT FILE

For copies of De Beers' leaflets on diamonds telephone 0171-404 4444

Details of Sotheby's new sale of unmounted cut diamonds telephone 0171- 493 8080