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Diamonds are worth a punt

Diamonds are hardly the first investment you'd consider in a recession. But while demand may have dried up, supply is getting ever tighter. So here's one stock for the adventurous investor to consider.

Diamonds are hardly the first investment you'd consider in a recession. About half of all diamonds sold end up adorning US consumers, and they're not spending right now.

But that shouldn't necessarily put you off. As Garry White notes in The Telegraph, while demand may have dropped off, supply is tight and getting tighter. "There have been no major diamond discoveries since the 1990s," he notes. What's more, it's getting progressively harder to dig diamonds out of existing mines in short, the easiest gems have already been snaffled up.

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Then there's China. The country is still growing at around 8% a year if the numbers are to be believed and that means swathes of Chinese people are getting wealthier and will continue to do so. And they want our food, cars and luxuries. As a result, Rio Tinto has quietly started to resurrect plans to expand mines in Australia and Canada before demand picks up strongly and leaves the firm short of stones. It's not alone in seeing opportunities. De Beers' mines in Botswana are operating at around 80% of potential, chief executive Sheila Karma tells the FT.

The market is not without risks. Alrosa, the firm that accounts for 97% of Russian production, could flood the market with existing stocks to raise cash. And a double dip recession would see consumers all over the world snap their wallets and purses shut.

However, says White, "prices are near a bottom" for flat cut diamonds while rough diamond prices are starting a tentative recovery. So a firm such as Petra Diamonds (Aim: PDL) which recently dug up one of the world's largest diamonds in South Africa, could be worth tucking away. Just don't sell all the family silver to fund the purchase short-term volatility for this type of stock can be very high.

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