Fancy Color Diamonds And Their Investment Potential

Harvey Harris is a leading color diamond expert. His book 'Fancy Color Diamonds' provides excellent insights into the origin and nomenclature of color diamonds + the colorful characters in the industry. It's educational, instructive and entertaining. A must read. The following is an excerpt from the book.

(via Fancy Color Diamonds, 1994) Harvey Harris writes:

It takes a different breed of investor to buy fancy colors, just as it takes a different breed of dealer to specialize in them. Indeed, a fine fancy color diamond can’t be thought of as an investment commodity in the same way as gold bullion is. Rather, it is collector’s acquisition (like painting or piece of sculpture) and is inseparable from connoisseurship. In the 1980s, connoisseurship reached new heights with the full emergence of the Pacific Basin as an industrial colossus and the unbridled creation of wealth during the takeover and leveraged buyout binges that highlighted Ronald Regan’s presidency. Although connoisseur money was attracted to spectacularly large and somewhat rare coloreless diamonds, the magnestism of ever rarer fine fancy color diamonds in all sizes proved stronger. Believe it or not, this author’s experience has shown that when it comes to fancy color diamonds, it is easier to sell a $2 to $3 million stone, than one that costs $20000 to $30000!

With the exception of very large stones, white diamonds do not lend themselves to connoisseurship. Their rarity is relative, constantly undermined or at least disproved by the need for cartel control to preserve their value. The rarity of fancy color diamonds, on the other hand, is absolute. These gems do not benefit from or need the De Beers monopoly to attain or maintain value. Dealers and connoisseurs alike know that most of these stones are already above ground in places often as hard to find as a kimberlite pipe (the site where most rough diamonds are found).

As a result, the fancy color diamond dealer must build a network of contacts in far-flung realms of the gem world if he or she is to be ensured of even the meagerest inventory. That nexus of contacts of course includes the De Beers monopoly which occasionally mines or buys important colored diamond rough. But it just as often extends into the open market where rough appears from countries that are nonaligned, or only partially aligned, with the cartel.

If the fancy color diamond specialist could rely on De Beers and the open market for supply, there would probably be far more specialists—and not just because supplies would be adequate enough to support more traders. Dealers used to what is essentially a monolithic one-stream market would be spared the constant search for goods that characterizes the fancy color diamond dealer’s life. The best possibility to secure fine specimens of rare colors is to know specialists in fancy colors, who have access to all markets, including goods coming out of large, important estates throughout the world. Trustees for these estates, often representing royalty or celebrities, sometimes wish to dispose of magnificent pieces. While nowadays, increasingly many of these stones are offered to auction houses, they often come through dealer intermediaries acting on behalf of owners who require anonymity.

Recently, I was approached directly by a Belgian diamond cutter versed in fancy colors, who was a friend of the owner of a 1.27 carat beautiful green diamond that he had polished, and that had been locked away for 28 years. Of the second of the two near identifical colors, and nearly equal weight stones cut from thte same piece of rough, the first had sold for $500 per carat in 1962! Now its twin, kept all these years as a curiosity, was up for sale at a strong six-figure price, and well worth it.

If the thought of paying several hundred thousand dollars for a stone that would have cost less than $500 three decades before tempts a double-take or if you dismiss such appreciation in value as simple evidence of modern day hyperspeculation, the fancy color diamond business is probably not for you. Specialists in these gems learn fairly quickly not to look back in time because remembrance of past prices invariably induces paralysis in the present. As I have been heard to say in these last five or six years, ‘the crazy prices of today—are the sane prices of tomorrow!’

Since the 1970s, prices for the finest fancy color diamonds have nearly always seemed outrageous in the context of the moment—and every fancy color diamond specialist can tell you of at least one lost opportunity to purchase a truly magnificent stone because he or she initially balked at its cost. Such failures of nerve seem, in retrospect, rites of passage into the world of fancy color diamonds. I had my initiation in late 1975 when I passed up a chance to buy a 12.01 carat, magnificent pink round stone, of fine clarity, that was as notable for its size as its color after the stone’s owner (Harry Winston) asked what seemed an unreasonably strong price of $600,000 ($50000 per carat) for it. Today, Winston’s heirs could ask $400,000 per carat for the same stone in its American or European jewelry salons and find eager, willing buyers!

In hindsight, it seems obvious why fancy color diamond dealers must learn the hard way about price/reality! Almost all start out as specialists in colorless diamonds. In that sector of the market, the general rule is to stand on principle and let goods go, no matter how much one needs or wants them, once their asking price exceeds the bidder’s daily definition of what is fair or rational. Dealers frequently boast that they have the self-discipline to refrain from buying stones if their owners don’t show a certain flexibility regarding price.

But self-discipline in the fancy color diamond world often involves taking leaps of faith; not refusing to budge. After all, the dealer in colorlress diamonds can indulge in the notion that something very similar to, or nearly identical with, the stone he refuses, will shortly come his or her way. The fancy color diamond dealer cannot entertain such a sentiment. Therefore, one of the first lessons to learn is to think in a manner that very often runs contrary to that in white diamond world. That’s not easy because it means transcending a certain mental conditioning that prizes obstinancy over derring-do—perseverance over risk. This mindset pervades the diamond world.

According to this mindset, when prices for fine colorless diamonds rise with any kind of velocity, it is viewed as speculation. Given the abundance of these goods, and the hoarding of them in the trade that has invariably accompanied every steep climb in prices since the 1940s (when dealers stockpiled melee because of wartime shortages), the term is apt. But the term is not apt for the steady acceleration of fancy color diamond prices since the mid 1970s because these goods are too rare and expensive to lend themselves to dealer hoarding or manipulation.

In April 1989, when 16 pink diamonds from Australia were sold at Christie’s in New York, trade dabblers in fancy colors were alarmed and even angry at the above market prices paid for small, often highly-included stones. Only later, when they learned that 10 of the diamonds had been bought by persons of the general public, did they realize that those prices, which had seemed a little irrational from a dealer-to-dealer standpoint, were perfectly rational from a private buyer’s perspective. That Christie’s sale signaled the fancy color diamond’s emergence as a full-fledged connoisseur item. In a time of soaring art and antiquities connoisseurship, when Andy Warhol lithographs that sold for $400 in the mid 1960s captured $40000 or more at auction 25 years later, or Swatch watches bought for $35 in 1983 brought $15000 at watch auctions 8 years later, prices paid at auction for far rarer sub 1 carat pink diamonds began to make sense. But to dealers trying to evaluate such prices from the narrow niche of their own wholesale market experience, there seemed to be no justification. But, here again, dealers were simply the products of the diamond market’s culture—and their thinking reflected the function of auctions experienced until that time.

For more than a decade, diamond dealers had used auctions mainly as a way to buy white and Cape diamonds consigned from the public at below market prices. Suddenly they were confronted with a type of diamond—namely, fancy colors—that consistently sold for above market prices! What’s more, many of these diamonds came from dealers who knew their goods would receive far higher amounts in the highly competitive auction milieu than in the more controlled and restrictive confines of an office. When it came to fairly common colorless and Cape diamonds, auctions were usually buyer-friendly events. But when it came to extremely rare fancy colors, auctions were usually seller-friendly!

It is no coincidence that the Australian pinks sold by Christie’s were consigned by Argyle Sales, the marketers of the best goods from Australia’s mammoth Kimberley diamond mines. For the first time in history, a diamond mining company had sold directly to the public. While this precedent frightened many in the trade, Argyle shareholders applauded the move. And no wonder. It is estimated that Argyle netted 10 – 20 percent more for the 16 diamonds it sold directly to collectors than would have been realized if sold to dealers. It was a profitable experiment. The ploy however, would only have worked with rarities such as pink diamonds. Until Australia’s Kimberley region diamond mine came on stream in 1985, producing around 30 million carats of mostly industrial quality diamonds, pinks were among the rarest of all diamond colors, found mostly in very tiny quantities in India centuries ago and later in Brazil and South Africa. Of these pre-Australian pinks, the vast majority were so pale that gemologists classified them either as ‘faint’ or ‘light’ in terms of saturation, tints more than hues. The few gems that possessed sufficient body color to be considered colored stones almost never earned the stand alone designation of ‘fancy’. Usually, they were judged ‘fancy light pink’.

Australia became the first producer of pink diamonds with hues so saturate that they routinely merited the designation of fancy—without any qualifiers. Here, however, it is important to stress the momentous impact these diamonds had on the world market.

From its onset, Argyle Diamond Sales Limited understood and exploited the unique psychology of the fancy color diamond market. Although the vast majority of the mine’s stones are sold out to the De Beers cartel, Argyle is allowed to keep the very best and biggest of its pinks. Nothing over 2.79 carats (rough) went to De Beers. Although this is now changed, (by agreement in 1991) Argyle is able to retain all that it desires of its pinks. Since 1985 it has cut the top 6000 carats of its production at its own cutting factory in Perth. This includes white, yellow, brown, as well as pink stones. Of this material (around 60 carats per year) so far never more than 83 stones, have been true, fine fancy pinks!

To ensure that it received the highest prices possible for these gems, Argyle reserved them for company-run annual sealed-bid auctions, which is called ‘tenders’, inaugurated in 1986—the first occurred in Antwerp, Belgium, and subsequent ones in Geneva, Switzerland. ‘The list of attendees at these invitation only sales reads like a ‘Who’s Who’ of world’s leading fancy color diamond dealers’ wrote gem journalist David Federman in his essay for Christie’s catalog devoted to Argyle’s 16 pink diamonds sold in April 1989. He continued, ‘Pitting these specialists against one another has resulted in rather breathtaking prices for both Argyle’s ‘tender’ stones in particular and its pinks in general.’

But even so, it was a London jeweler, Laurence Graff, who captured the two main spoils of that 1989 sale—a 7.05 carat pear-shaped fancy blue, and 3.14 carat fancy purplish-pink cushion-cut that went for $2.09 and $1.26 million, respectively. By paying prices many of its colleagues in the audience thought far too high, Graff was forced to make a ‘leap of faith’ that is uncommon among conventional diamond dealers, but all too common among the few in the trade who share his passion for fancy color diamonds.