4 ways to grade a diamond...

Highlights in this issue:

*** Diamonds: The greatest marketing stunt of all time...?
*** What do I know about diamonds?
*** Profit from diamonds without ever owning one... and more...

From Gary Booysen on the top floor...

Dear Investment Academy Reader,

We are feeling the upswing. Despite all predictions, hopes and fears, the world’s pulling itself steadily out of recession. The JSE closed at 25,071 points on Friday! Now if you follow the adage “the trend is your friend”, you couldn’t go wrong with diamonds. As the recovery takes hold, income will increase and the luxury sector will once again boom!

The diamond invention – the creation of the idea that diamonds are rare and valuable, and are essential signs of esteem – is a relatively recent development in the history of the diamond trade. Until the late 19th century, diamonds were found only in a few riverbeds in India and in the jungles of Brazil. In fact, the entire world production of gem diamonds amounted to a few pounds a year.

That was until South Africa entered the equation where diamonds were soon being scooped out by the ton. Suddenly, the market was deluged with diamonds. The British financiers who organised the South African mines quickly realised their investment was endangered; diamonds had little intrinsic value – and their price depended almost entirely on their scarcity. The financiers feared that when new mines were developed in South Africa, diamonds would become, at best, only semiprecious gems.

While South African miners quickly set up a cartel to limit supply they realised they’d need to control demand as well. In September of 1938, Harry Oppenheimer, son of the founder of De Beers and then 29, travelled from Johannesburg to New York City, to meet with Gerold M Lauck, the president of N W Ayer, a leading advertising agency in the United States. They soon hit on the idea of associating diamonds with “romance”, the idea of diamonds being “forever” exploded. The resale market for diamonds disappeared as engagement rings across the world began to bear this little stone. As diamonds became the symbol of love, De Beers limited the resale of stones – truly creating “wealth” out of nothing.

If want to hold physical diamonds you need the 4 Cs of diamond dealing

Bill Mason, master jewel thief, points out the four ways to grade diamonds.

Carats – This is a measure of weight. It’s a very old term derived from “carob”, a seed that doesn’t vary much in weight and was used as a unit of weight in Ancient Greece. It’s the most reliable test of value. When a diamond increases in size, the value increases exponentially. Don’t confuse a “Carat” with a “Karat”, another jeweller’s term that refers to the purity of gold.

Clarity – Every diamond has minute impurities called “inclusions”. These are usually caused by traces of minerals. A “flawless” diamond has almost no inclusions and, as with weight, the fewer the inclusions, the exponentially more valuable the stone.

Cut – This is how the diamond is shaped. Different shapes allow different amounts of light to escape from the top of the gem. A classically cut diamond is shaped like a spinning top. The light reflects around the inside of the stone and them escapes out the top. The more light that shoots out the top, the more brilliant the stone. The classic cut is the “ideal” cut and makes for the brightest jewel. If the cut is too squat, light leaks out the side. Whereas, if it’s too tall, light will escape through the bottom. There are a number of “fancy” cuts oval, marquise, pear and emerald.

Colour – The facets of the diamond naturally break up the light just as a prism would. This results in the “fire” or sparkle of the stone. If a stone has a colour, then it's like looking at it through tinted sunglasses. Any colour in the stone will reduce the “fire”. The value associated with colour is a matter of taste, and comes and goes as fashions change. If the colour is extremely strong, it can add value. But traditionally, a white diamond holds its value through the ages.

A one carat flawless white diamond with an ideal cut will set you back around R40,000. If you’re looking to sink less capital into the luxury sector it might be an idea to diversify your portfolio with one of South Africa’s diamond mining companies...

But you have to buy diamonds to make money in diamonds

Trans Hex (JSE:TSX) is a possible winner when it comes to diamond shares. This great South African company has been through the wars and is now emerging with a sparkling future. The company mines and markets rough diamonds in South Africa, Namibia and Brazil. It’s trading at 390c with a PE of -0.67 and that’s incredibly cheap! You won’t be looking at any dividend profit, but the capital gains could be fantastic. CEO, Llewellyn Delport recent dipped his toe in the water, accumulating a couple a thousand shares for himself. Maybe you should do the same.

Until next time – keep learning!

Gary Booysen
For the Investment Academy