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. . . and what about diamond investing?

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With gold breaking back from its 9-year runup — as this is written, New York spot is $1372 or about $180 less than it was just a couple weeks ago — investors are wondering what other things there are (aside from mutual funds) they could put their money in.

What about diamonds, for example?

For starters, the last few years have been the only time in a century when it didn’t matter that diamonds (and gold, too) don’t earn interest. Neither does cash in the bank nowadays.

On  the other hand, a graph that shows a steady rise in diamond prices over half a century can be misleading.

A graph of Hawaii housing prices over the 50 years from 1955-2005 would look similar, but as Paul Brewbaker, the well-known local economist used to remind us, the rate of increase was only about the same as for a passbook savings account. (This situation has changed since the crash of 2008; today passbook savings accounts don’t grow, and housing prices went over a cliff.)
Anyhow, the point is, you have to watch out for money illusion and always remember the power of compound interest. $500,000 sounds like a lot more than $50,000, but $50,000 compounded at 4% gives you $500,000 in half a century. We should all live so long.
Here at Kamaaina Loan, a big move in the world price of gold brings in more business. Why?
Different strokes for different folks. The gold optimists think the price is unusually favorable and want to buy more. The gold pessimists have decided the gold bull market is over and want to cash out and get into something else. Should it be diamonds?
Here are some things to think about diamonds.
Diamonds are rated by the  “5 Cs” — cut, color, clarity and size (carat) and cost.
Cost is not an inherent character of a stone. It varies. And the other 4 Cs are subjective.
There are different diamond grading services because people have different opinions. This is not true for gold. A .9999 gold bullion coin is the same whether it comes from Australia or Austria (ignoring the very slight premium paid for especially popular coins).
Let’s consider a one-carat, internally flawless, round cut diamond of good (d) color. Rapaport, the leading price service and a big buyer and seller of  diamonds, reported the asking price for such a stone was $27,000 in April 2011. In August 2012 it was $28,00o. The latest report has the asking price as $28,400.
Not a lot of change over two years.
Now let’s look at gold. It was selling at $1556 in April 2011, and a report of the time said the recent changes “had the look of past silver and gold price peaks.”
Wrong!
In August 2011, gold was up to $1861 and it briefly passed $1900 a few weeks later (though only on intraday trades; gold has never closed over $1900).
Today, gold is $1372.
So, would you rather have put your money in gold or diamonds?
Inflation has been low over the past two years, and diamonds have just about kept up. Gold was way ahead of inflation for a while, now it’s way behind.
So, if you think you were so smart you would have realized gold was peaking last autumn and would have sold, you should have bought gold.
There’s more to consider if you want to try diamonds. Besides the 5 Cs, there are other factors, like scintillation, that strongly affect the value of a stone. Unless you are an expert yourself, you need to have a GIA-certified gemologist along with you. And while you may see some dealers pushing stones that have ratings from other sources (like EGL), know that GIA is the (ahem) gold standard of diamond grading.
So if you are considering selling your gold and getting into diamonds, or selling your diamonds and getting into cheap gold, or if you just need cash, we stand ready to buy and sell.
Know this. Kamaaina Loan has a graduate gemologist on staff and is GIA-certified.

Stories about diamonds

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Perhaps you have seen one of Kamaaina Loan’s ads that offers

to buy diamonds, “especially wanted, 1 carat and higher.”

However, as an episode a few days ago reveals, not all big stones

are good stones.

A customer wanted a loan on a whopper of a diamond, 3 carats.

But, in the words of Jimi, the broker who examined it, the stone

was, in technical jargon, “one level above frozen spit.”

Diamonds are valued according to size, color, clarity and cut.

This particular diamond was very poor in the clarity department,

with several inclusions and flaws that cut down on its sparkle.

Its maximum loan value was only a couple hundred bucks, very

low for such a big stone.

Diamonds are examined with a 10-power loupe.

Cut also matters. The standard or round brilliant cut has been

determined both mathematically and by experience to produce

the most sparkle and glitter. But not every stone is suited to

the standard treatment.

As an example, a couple weeks ago we were shown a largish

stone with a weird cut, not quite exactly like any of the usual

categories, such as emerald, rose etc.

What would induce a cutter to choose such a method?

We couldn’t ask the cutter, but it may have been that given

 the flaws in the stone, the bizarre cut was judged the best way

to get the most fire and light out of the stone.

Kevin recalled an example some years ago (not at Kamaaina ‘

Loan), where a customer had a cracked 2-carat stone. (Yes,

diamonds, hard as they are, can crack and chip.) Another

jeweler had recommended tossing out the stone, but Kevin

suggested sending it out to be recut.

It worked. The cutter managed to rescue one and a half carats

of good stone from the wreck.

Sometimes, it seems, the true skill of a good cutter is better

displayed on a poor stone than on a good one.

In any event, with diamonds size matters but not more than ‘

color, cut or clarity.