While diamonds do some things better than gold and silver, there are also limitations. Here are two traditional problems with diamonds—that fortunately can now be overcome.

1. The diamond market is built for jewelry buyers, not investors.

Unlike gold and silver bullions which can be purchased on efficient markets suitable for investors, diamonds are traditionally sold through physical jewelry stores or (these days) online etailers. These sources include significant markups above wholesale cost.

Even worse, the traditional market has no efficient mechanism for liquidation of diamond assets.

Between the two, it means a diamond “investor” might lose 50% or more of value, simply between buying and selling. By contrast, a real estate investor might lose 5% – 7% on a broker fee, which is higher than gold, but still acceptable. Buy/sell spreads of 50% or more are unacceptable to most investment buyers.

2. Diamonds can suffer from inconsistent quality and grading practices.

Unlike ounces of gold, diamonds are generally all different. This is one reason there is so much inefficiency in the buy/sell process.

Many have heard of the “Four C’s” of diamond grading (color, clarity, carat-weight, and cut-quality). And reputable grading labs such as the Gemological Institute of America have made significant progress turning diamonds into something more like a commodity.

But diamonds aren’t there yet. Non-expert buyers (and few investors are diamond experts) will find a minefield of issues with respect to diamond quality grading. Here’s the short version: the grading labs’ level of quality control and consistency is arguably good enough for jewelry buyers, but investors should have zero tolerance for inaccuracy, and even the GIA is not always accurate.

Equally concerning, there are factors that affect the value of a diamond (obscure things like “graining”) that aren’t even accounted for, in the four C’s. This is why it’s an axiom in the diamond industry that a diamond can “read well” in terms of the four C’s, but look awful in reality. That will hurt re-sale value.

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