Once a school friend of mine posted something on the group chat that took me by surprise. He said that every wedding anniversary, he gifts a diamond ring to his wife. He has been married for more than two decades, so I presume his wife must have at least 15 diamond rings by now. 

Diamonds are increasingly gifted in engagements, birthdays and anniversaries. While gifting is a personal choice, it should not be confused as an investment (which my friend did). 

There are reasons why diamonds don’t qualify as a good investment.

Falling Prices

There is a growing glut of rough diamonds that has put pressure on its prices. Rough diamond prices have been falling globally since 2011. In the past five years, Diamond index is down by 11%, according to International Diamond Exchange (IDEX). 

faling prices

Also at the retail end, diamonds prices have fallen in the last decade. However, it has differed widely depending upon its grades. Diamond grading is done on the parameters of 4Cs – Colour, Clarity, Cut and Carat weight. Clarity refer to quality of stone and are classified as IF (Internally Flawless), VVS (Very Very Small Inclusion), VS (Very Small Inclusion), SI (Small Inclusion) and I (Included) and in that order of diminishing clarity.  
VVS1 grade of diamonds were down by 47 percent in dollar terms (See chart). However, thanks to depreciation of rupee, it fell by 21 percent in rupees, during the same period. VS1 grade of diamonds were also down 37% (-7 percent in rupees), while SI1 and I1 were down by 32% (1 percent in rupees) and 33% respectively (-1 percent in rupees). For the analysis, prices have been considered for the ‘round’ diamonds of 1/4th carat in weight and for the near colourless ‘H’ variety.
While rupee depreciation provided cushioning to Indian prices, it is likely that Indian manufacturers would have factored such forex losses (from imports) in the form of higher mark-ups.

falling prices

In short, investing in diamond would have eroded your wealth in the past decade. Gold in comparison did relatively better – it was up 84% during the same period, while equities (Sensex) gave a return of 141 percent. Equities gave an inflation-beating CAGR of 9-10% for its investors. 

Unlike gold or silver, which has a very liquid secondary market, it is not easy to sell diamonds. Except for some large retailers, there are no transparent mechanisms of pricing or a system of buy-backs. A precious metal like gold is fungible and liquid. It could be stored and sold anytime in the market. However, that couldn’t be said about diamonds. 

Huge Mark-up
When you buy diamond jewellery, you don’t get diamonds for its entire value. For instance, on purchasing a diamond worth Rs 50,000, about 17 percent goes towards gold charges (as part of jewellery), another 8 per cent towards making charges and another 3 percent as GST. So, effectively, only 72% of the purchase value is allocated towards buying diamonds.

huge mark up

Making charges are a form of mark-ups and over the years it has supposedly increased to help support diamond rates in the market. So, when you sell diamond jewellery, you will get value only for diamond and gold (mostly at a discount to current rates), while foregoing making charges and government taxes. This will further dent diamond’s price performance. 
Poor Secondary Market
Unlike gold or silver, which has a very liquid secondary market, it is not easy to sell diamonds. Except for some large retailers, there are no transparent mechanisms of pricing or a system of buy-backs. A precious metal like gold is fungible and liquid. It could be stored and sold anytime in the market. However, that couldn’t be said about diamonds. 
Bigger is Better
A one carat solitaire (single diamond piece) ring is more expensive than a 25-stone cluster ring. That’s because larger stones are rarer than smaller stones of the same quality. Moreover, if you are in the habit of buying many diamond rings – probably you stand to lose. Diamond prices usually rise in proportion to their size. Some experts in fact advise buying diamonds upwards of a carat. However, that might not suit everyone’s pocket. 
In a Nutshell
Diamonds might be a girl’s best friends. However, its poor price performance and an illiquid secondary market make it a poor investment candidate. So, buy diamonds only for once-in-a-lifetime gifting and nothing more. Adopt equities or other financial asset classes for meeting your investment goals.