Rock solid?

By SALLY HAMILTON
Updated: 19:00 EST, 27 October 2002

ANY investor looking for a solid investment could do worse than choose the ultimate rock - a diamond.

Not just any diamond, however, but a coloured one. These are far rarer and more collectable than transparent ones, and have earned investors steady returns for years.

Some colours are scarcer than others, with the most sought-after being red and violet, followed by orange, green, blue, pink, brown and then clear.

They are also graded by colour intensity, with the most intense attracting the highest prices. The weight, in carats - a carat is 200 milligrams - is also important, as is the way a stone has been cut to enhance the colour.

The best prices achieved at auctions in the past ten years have been for coloured diamonds, with a 1.92-carat 'fancy red' selling for more than £1m in New York last year.

According to dealer Pastor-Geneve, based in Geneva and Antwerp, fine coloured diamonds have risen in value by ten to 15% a year since the early Seventies, with the odd boom and bust along the way. For example, a one-carat 'fancy vivid yellow' that sold for about £650 to £1,500 in 1970 grew in value to nearer £26,000 by 2000. Pastor-Geneve believes eight to ten% annual returns are a more reasonable prediction.

'A small difference in colour can mean a large difference in value,' says gemologist Stephen Hofer, an international expert who advises auction houses and dealers and has developed technology to measure colour. To be valuable, the diamonds have to be polished to bring out the best colour without too much weight loss.'

Starting prices for coloured diamondsare about £3,000 to £5,000 for a small 'fancy intense yellow'. Browns, often known as ' champagne' or 'cognac', can cost as little as a few hundred pounds.

Higher up the scale, collectors might pay £8,000 to £9,000 for a one-carat top-class 'fancy intense yellow'. A 0.5-carat top-quality 'fancy intense pink' might cost from £40,000.

A hunt around junk shops and markets is one way to uncover a hidden gem at low cost. Jewellery containing coloured diamonds could be resold at a profit. However, advisers warn that, like any alternative investment, there are pitfalls with buying into diamonds.

Jonathan Grant, associate director of independent adviser Savills Private Finance in London, warns that investors should know their subject before taking the plunge. He says: 'When it comes to selling diamonds, you will have to find someone willing to pay the price you want for it. If you bought the stone through a retail source, as most people will, then you will have to make up for what you paid for the seller's profit and VAT before you can hope to make a profit.

'With a blue-chip share, it is much easier to find a buyer. You can also see clearly what the price is and what the profit margins are. Investors with a lot of money will be able to pay for expert advice to check that their diamond is genuine. The smaller investor is unlikely to be able to do that.'

Investors also need to consider the costs involved, such as insurance and storage. And diamonds do not generate income. Essentially, as with all alternative investments, anyone investing in diamonds should buy for enjoyment. Grant says: 'Any profit should be seen as a bonus.'