Diamonds The Size of Small Houses

I met a woman recently with a diamond the size of a small house on her finger. It must have weighed a good five carats - the average engagement ring comes in well under one - and it sparkled like the lobby of a Las Vegas hotel. A year ago I would have dismissed her extraordinary rock as both a complete waste of money and impossibly vulgar. Today I can only claim the latter. Just a few decades ago the diamond price was in freefall: demand was low and in most of Africa it seemed you couldn't take a step without stubbing your toe on a flawless diamond. DeBeers was stuck with a stock pile of unwanted stones worth a good $1bn and was being forced to mop up overproduction from mines in Botswana and Sierra Leone to prevent them dumping diamonds on the open market and pushing prices down further. The company's sales fell over 40% in 1981. Indeed even a few years ago there were many more diamonds around than there were fingers willing to take them: if you must buy a diamond, a dealer told me over a drink in a bar in Bangkok in 1996, buy a badly flawed one, they at least are quite rare.

Today that dealer probably hasn't got time for sitting around in hotel bars telling punters jokes about the shocking state of his business. He'll be too busy working. Over the last few years demand for diamonds has started to rise across the globe up 2% in 2002, 5% in 2003 and around 8% in 2004. Chinese demand alone grew 2% in 2003. And given that the status conscious middle class is growing fast all over Asia and will continue to do so even if GDP growth slows, that's a trend that is going to continue: rubies and sapphires may look classy but to most people nothing suggests status more than the bling of a nice diamond.

But as is the case with most commodities these days the supply of sparklers isn't there to meet demand. The De Beers stock pile is all but gone and the last decade has seen very little in the way of new discoveries. The result? Prices are rising fast De Beers (which still controls a good 60% of the market) has just forced through a 13% rise in the price of rough diamonds and the hunt is on for new mines.

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But that hunt is not going to change things in a hurry. De Beers has announced that it intends to spend $2bn looking for and developing new mines in Canada, BHP Billiton has already spent $1bn there and smaller firms are prospecting all over Africa, but it takes at least five years to get a mine from discovery to commercial production. That means that as long as demand stays high so, for the time being, will the price of diamonds.

Investing in diamonds via the stock market is simple. There are several small listed diamond companies including Firestone Diamonds and Brazilian Diamonds, both of which are very well managed. The other route in of course is to buy the gems themselves. This is fraught with danger given that each diamond is different and that the market is pretty opaque to the amateur as a result, so careful research is necessary. However one thing I can say with confidence that you shouldn't do, ever, is to buy new jewellery retail. The mark ups are insane - assuming he bought her ring new, which I suspect he did, the husband of the woman I mention above will never get his money back however long he waits. Instead think about buying vintage jewellery at auction or at a good second hand shop. That way you will get not just the gem at a price approximating to its real value but the added bonus of the beauty of a piece of jewellery made back in the days when a craftman's time came cheap.

By Merryn Somerset Webb, as first published in the Sunday Times