They're not an investor's best friend, but diamonds have appeal

In school lunchrooms, kids swap green M&M candies for yellows. On West 47th Street in Manhattan, people seem to swap diamonds almost as casually. On a recent visit, a bearded Orthodox Jew in dark suit and hat squeezed through the sidewalk throng clasping half-a-dozen tiny manila envelopes commonly used to hold pricey carbon crystals.

But folks in the diamond industry are much more circumspect when it comes to talking about diamonds as a pure financial investment. In fact, most shun the concept.

Is it a good time to buy diamonds? ``If you're getting engaged, of course,'' says Lloyd Jaffe, a 47th Street dealer and chairman of the American Diamond Industry Association (ADIA). After some coaxing he ventures: ``Diamonds should not be used as an alternative to a money market fund or the stock market. It's an emotional investment.''

Not much to go on. Why the reticence?

In the late '70s, diamonds suddenly came into vogue. Wholesale prices for the one-carat D-flawless diamond (a sort of benchmark stone) shot from $6,000 in 1976 to a high of about $64,000 in 1980 as investors clamored for any and all inflation hedges. Unscrupulous boiler- room operators moved in, defrauding novice investors.

Then, in 1981, the bottom dropped out of the market. Today the benchmark diamond sells, at wholesale, for $10,000 to $13,500. And it appears to have reached a bottom; prices are now moving up.

But the industry worries that a return to that investment mentality would bring back the wild and woolly price fluctuations that sent some dealers into bankruptcy and hurt the industry's reputation.

Also, the industry discourages amateur investors. Diamond investing tends to be a specialist's domain. There is no central exchange. Diamonds are not as standardized as most commodities are. An ounce of gold is an ounce of gold, but no two experts will agree on the quality and price of a one-carat diamond. There are 5,000 categories of diamonds and the rating system is highly subjective, Mr. Jaffe points out. (See accompanying box on the ``four C's.'')

OK. But suppose someone walks into a dealer's office on 47th Street and insists on buying some diamonds as a long-term investment. He has stocks, bonds, real estate, and gold. He has excess cash he wants to park in a portable hedge against political or economic upheaval.

This investor understands that (as with any other collectible) he'll be sacrificing some liquidity as well as interest and dividend payments. He knows it's a volatile market and is aware that selling the gem may cost him 10 to 50 percent of any profit, since auction houses and brokers charge a sales fee.

He is prepared to take those risks. How should he invest in diamonds?

``First, I'd try to talk him out of it,'' comes the relentlessly standard response from Avi Abramhoff, vice-president of Balance Trading Group, a gem importer and wholesaler. But failing that, Mr. Abramhoff suggests that an investor put no more than 10 percent of his liquid assets into a gem or gems.

Benjamin Zucker, president of Precious Stones Company, is a bit more bullish. He recommends putting 5 to 10 percent of one's total assets in diamonds, rubies, sapphires, and emeralds.

Both Zucker and Abramhoff advise that the investor pick something aesthetically pleasing to himself or his family. ``If they find a major vein under Manhattan tomorrow and your stone suddenly has no value as a commodity, at least you can enjoy it as jewelry,'' Abramhoff says.

Next, he suggests buying a high-quality diamond, graded by the Gemological Institute of America in New York and Los Angeles. A GIA report is not only worthwhile for insurance purposes, it could be useful if you decide to sell the gem later.

For a $129 fee (on a one-carat gem), the GIA will issue one of its widely recognized laboratory reports on the size and what two or three gemologists agree are the quality of color, clarity, and cut of the stone. It is not a price appraisal. The lab cost varies by gem size, and only loose stones are evaluated. The GIA requests that appointments be made.

When pressed, Lloyd Jaffe of the ADIA allows that ``if'' he were an investor, the higher-quality diamonds would be the best choice. For himself, Jaffe would buy larger than one-carat diamonds. At present the supply of better-grade two- and three-carat stones is down; thus prices are rising.

``Something's happening. The market for large stones is very strong now -- for the first time in five years,'' says Zucker.

Abramhoff concurs: ``Demand in general is up; I'm really busy.'' One indicator of good brisk sales can be seen in South Africa's De Beers Consolidated Mines, which markets 80 percent of the world diamond trade. It has raised prices on rough-gem diamonds for the first time in three years. The 7.5 percent average increase went into effect last month; since February, the wholesale price of the top-quality one-carat diamond has risen 10 to 15 percent.

Diamond demand in the United States is up because of the relative rise in disposable income over the last few years as the economy has hummed ahead. ``People are making more money, so they can afford more jewelry,'' Abramhoff says.

The average carat size is rising, and wholesale demand is greatest for the (G- and H-rated) moderate- to low-quality diamond used in most retail jewelry. He says demand for higher-quality (D, E, and F grades) stones has been very strong in Japan.

Because the dollar has fallen against the yen, top-quality gems that are cut here are less expensive in Japan. The result, says Mr. Abramhoff, is that ``prices are stable and moving up steadily in all four colors [diamonds, rubies, sapphires, emeralds].''

Some diamond experts advise buying loose finished stones. If you're buying a large number, then you can go through a wholesaler. Also, diamonds in a setting must often be removed to be judged, and a setting may become outdated which could reduce the resale value.

But Mr. Zucker of Precious Stones contends that a setting enhances marketability and that having a GIA report precludes the need for taking the gem out of the setting.

Zucker admits to being ``an elitist,'' in that he tells investors to buy from well-known retail jewelers. ``You don't have to come to the district here in New York. In each major town there are one or two old-line third-generational stores -- such as Tiffany, Neiman-Marcus, or Shreve, Crump & Low.'' He warns against unknown ``so-called wholesalers'' offering special deals.

To help gauge diamond prices, there are several newsletters that publish wholesale price ranges. That wasn't always the case. Martin Rapaport raised hackles in the industry half a dozen years ago by selling a public list. Now his list appears on the CompuServe computer data base.

And Joseph Schlussel's monthly Diamond Registry newsletter carries a $90 annual subscription price. (For a $15 single-issue trial write to 30 West 47th Street, New York, N.Y. 10036.)

But these are just rough guides. Each dealer values a diamond slightly differently. And retail price markups vary from store to store depending on overhead and business strategy. The `four C's' of diamond pricing

Carat: The diamond's weight is a prime determiner of price. One carat (derived from the weight of carob tree seeds) is about one-fifth of a gram, or 1/2500th of a pound. The carat is the only objective gem measurement. Each of the other ``C's'' is subject to a degree of individual interpretation.

Color: The hues of a diamond range from the rarest and most expensive blue-white to the least expensive deep yellows. The Gemological Institute of America uses D as the grade for a perfectly white diamond. An E color would be slightly less white, but not to the untrained eye. The other extreme, J, is the most yellow and quite visible to the naked eye.

Clarity: This rates a stone by internal flaws, fractures, carbon spots, etc., that may block or alter the passage of light. If a gem is flawless under 10-power magnification, it earns the GIA's rare ``flawless'' grade.

A VVS 1-2 (very, very slightly included) rating means the stone has tiny inclusions (foreign particles) that are difficult even for the trained eye to see under 10-power magnification. A VS (very slightly included) stone has flaws that cannot be seen with the unaided eye. An SI stone has flaws that may be seen from the back of the diamond but not from the top. An Imperfect grade means the diamond has visible flaws that may affect durability.

Cut: Shapes vary, but round is most common. A fully cut diamond has 58 mathematically proportioned facets that should maximize the brilliance of the stone. Sometimes brilliance or a ``good cut'' is sacrificed to keep the weight from dropping too much, which is seen to diminish the value.

Source: American Diamond Industry Association; ``How to Buy and Sell Gems,'' by Benjamin Zucker (Times Books, New York, 1979).