Demand for colored diamonds is surging and prices are rapidly following the upward trend. According to Leibish Polnauer, President of Leibish & Co, a five carat yellow diamond is currently selling in the range of $75,000-$100,000, and notes that this is a 40 percent increase over last year’s prices. Gem Diamonds (LON:GEMD), whose Ellendale mine supplies Tiffany & Co. with yellow diamonds, announced that in the first quarter of 2011, it sold the jeweler these stones for an average of $3,379 per carat compared to $2, 545 per carat during the first quarter of 2010.

Interest in colored diamond prices and the profit potential of the stones is extending beyond producers and industry consumers to an expanding number of individual diamond investors. Leibish & Co maintains a special inventory of investment grade colored diamonds and confirms an increase of profit-focused clientele. Shawn Dunn, Vice President of J.R. Dunn, reported a similar trend. Tight supply and growing demand, especially in emerging countries, are increasing prices throughout the diamond industry.

However, colored diamonds are much rarer than white stones, therefore a surge in interest is difficult to accommodate. High-end US consumers have come back to the market, said Dunn. “But demand in Asia is simply outstripping supply,” he adds. “Our inventory often sells faster to international clients. Some fly in willing to pay prices above retail. They take the diamonds overseas and sell them for even more.” Both India and Hong Kong are considered hot markets for colored diamond activity.

Before investing

Predictions for growth and longevity in the colored diamond market are highly optimistic. However, there are a number of things to consider before getting into this game. Foremost, is the forewarning that these investments are not for everyone.

Leibish says colored diamond investing is for people with liquidity and a long term view. According to Dunn, demand allows some people who bought diamonds in 2010 to sell them for decent returns now, something that hasn’t always been done. By his own account Polnauer says, Leibish sold an intense 4 carat yellow diamond about a year ago. The jeweler offered to buy it back at a 20 percent premium and the client refused. It’s all about the stone a person possesses, which is why Polnauer says an investor must study this market.

Dunn further stresses that investing in colored diamonds is a gamble. He also highlights the fact that some stones definitely offer a much higher probability of attractive returns, but, there is never a guarantee. “Generally, smaller stones (a carat or less) are harder to capitalize on. But there are exceptions.” Australian pinks are considered extremely rare and blues also tend to be placed in the rare and desirable categories. These stones may warrant investment at smaller sizes. Another thing, says Dunn, is that investors should avoid stones with undesirable characteristics.

Individuals who want to avoid venturing unguided into this market may want to consider the Novel Diamond Fund. The first of its kind, the newly launched fund specializes almost exclusively in the investment of colored stones. In an interview with Bloomberg, Alan Landau, CEO of Novel Asset Management, explained that the fund will focus on diamonds valued at $1 million or more. Investors will, therefore, be able to enjoy the historically high returns in this type of investment which have thus far been enjoyed mostly by those in the industry.

Instead of the buy and hold strategy common among funds of other types, Landau said this fund is going to exploit a spread created by buying at wholesale prices and selling at retail. Although open to new investors now, the fund is scheduled to close in October. Landau told Bloomberg he expects major institutions to catch on to the diamond investing trend and move into this market. Polnauer told Diamond Investing News, he expects colored diamonds to be like gold… experiencing drastic price increases over the span of a few years.