Water &Diamonds8CRIPPSLIFEBorn in Kirkcaldy Fife in 1723, Scottish socialphilosopher and pioneer of political economyAdam Smith identified the paradox of waterand diamonds as the corner stone of his freemarket theory:-"According to the diamond water paradox, wateris needed to sustain human life, yet it has novalue compared with diamonds even whendiamonds have no such specific use except tobe used as jewellery or in industrial machinery.The supply of water is in such a large quantitythat its most urgent use, drinking to remainalive, is easily fulfilled. Any additional unit ofwater can be applied to less urgent usesresulting in less worth due to a greater supply.Comparatively, the supply of diamonds is so lowthat the usefulness of one diamond is greaterthan a glass of water and people are willing topay a greater amount for a diamond thanwater."What was true in 1760 remains true today, withdemand for diamonds on the internationalinvestment market continuing to fuel increasingprices. According to the April 2011 sector guideproduced by Investment Managers CharlesStanley, the diamond market has begun 2011with unabated enthusiasm with the roughdiamond market in the first quarter seeing pricerises up to 25%. There is a similar picture in thepolished market with prices being markedlyhigher.Passion investments and the sophisticated investor
One of the key factors behind the priceincreases is the demand in the retail market. DeBeers calculated that Chinese demand grew by25% in 2010 and this was supported by a 31%increase from India. The US market also beatexpectations with a full year growth of 7%. Charles Stanley's view is that "both the roughand polished diamond markets should continueto enjoy stable rising prices over the medium tolong term." This underpins their long termpositive view on both the commodity and thecompanies that offer investors exposure to thisasset class, offering an alternative orcomplementary investment to equities.The strength of the price of diamonds as acommodity has also had its effect in the auctionroom. James Nicholson is the international headof the jewellery and precious stones division ofauctioneers, and Cripps Harries Hallclient,Dreweatts. James explains that "so far 2011 hasseen a huge demand for good quality antiqueand period jewellery. Antique jewelleryrepresents an alternative home for cash in arecession when cash deposits yield next tonothing. Jewellery and diamonds in particularrepresent 'portable wealth' in a world-widecurrency."According to Dreweatts, there is a particularlystrong market for 18th and 19th century jewelleryas well as Edwardian and Art Deco examples.Dreweatts report that sale room prices for suchitems are up over 10% in the last 18 months onthe basis of supply and demand.Modern jewellery on the other hand has notfared so well. James explains, "retailers, to coverBond Street overheads of running anestablishment, will mark up prices by four to fivetimes what might be achieved in the auctionroom. It is a bit like buying a brand new BMWsports car from a dealer and then taking it backtwo months later when you will be lucky to gettwo thirds of the price paid."Investment in a commodity like diamonds is forthe 'sophisticated investor', says Cripps' privateclient partner Chris Wilkinson "increasingly indiversified total return portfolios, depending onthe client's appetite for risk, a modestproportion of the portfolio may be investedthrough a special purpose investment vehiclemore directly in commodities than in the past.However, direct investment in commodities byindividuals is not for the faint hearted, witnessthe dramatic rise and fall in the value of silverover the last 18 months."'Portable wealth', as described by JamesNicholson, in the form of diamond basedjewellery has its attractions in recessionarytimes, representing an alternative to cashdeposits and being a 'worldwide currency'. Italso benefits from favorable UK tax rules. "Forcapital gains tax," says Roger Holman senior taxmanager at Cripps, "investing in individual itemsof 'portable wealth' can be attractive in so far asany gain made on an item sold for less than£6,000 is exempt from tax and any gain on anitem sold for less than £15,000 will attract areduced rate of capital gains tax."However, there are risks and James Nicholson'sadvice is that the reason for purchase shouldprimarily be for the joy of owning and wearing abeautiful item. They are what is known as'passion investments' and what better exampleof that could there be than the illustrateddiamond and emerald locket given by the Dukeof Wellington to Lady Salisbury which wasrecently sold at Dreweatts auction atDonnington Priory.the diamondmarket hasbegun 2011withunabatedenthusiasmwith theroughdiamondmarket inthe firstquarterseeing pricerises up to 25%CRIPPSLIFE9FIND OUT MOREFor more informationon any points raisedin this article pleasecontact:Chris WilkinsonPartnerT:01892 506 184E:email@example.comAn emerald and diamond heart locket pendant, dated 1851, agift from Arthur Duke of Wellington to his lifelong friend MaryCatherine Stanley, Countess of Derby, Marchioness of Salisbury,Estimate £3,000 - 5,000.