One of the proofsthat I often like to cite as to the fact that diamonds are not at all aninvestment-worthy commodity, but rather a retail product, is the system bywhich they are priced.
For all diamonds,there are a few basic universal rules. First of all, diamonds are allpriced per carat. So, lets say a 0.50 carat diamond has aprice of $1400 per carat (that would be around a G/H SI1/SI2 atwholesale). So that diamond’s price for the stone would be $1400 * 0.50,or $700. Secondly, diamond prices per carat increase as youjump up to higher weight categories. Therefore, diamondprices increase exponentially with weight, since their prices increase both dueto the increased weight and due to the higher price per carat for the increasedweight category. I stress categories, because you might mistakenlybelieve that prices per carat increase smoothly as weight is increased, butthis is not the case. Since diamonds are a retail product driven more byemotion than reason, a 0.99ct diamond is worth only about 1% more than asimilar diamond weighing 0.98ct. But a 1.00ct diamond is worth about 20%more than a similar 0.99ct diamond. Why is that? Maybe because nowyou can say it’s a “one carat diamond,” or maybe because now it’s three fulldigits. Who knows. But with diamonds, it’s all about feelings. This little quirk about the business is the sole reason there are so manypoorly cut diamonds out there. You could imagine very easily that ifthere’s a 20% price jump from a 0.99ct diamond to a 1.00ct diamond, the cutterwho looses that 0.01ct trying to make a prettier stone will lose his job. Perhaps with the nicer cut it will only be worth 15% less instead of 20%, buteither way, it’s a big loss.
This kind of pricemanipulation by maintaining weight categories has been taken to an extreme bymany of the world’s largest diamond companies. They will take roughdiamonds with diameters that really should have only been used to make a0.75ct-0.85ct diamond (with the proper cut to maximize brilliance), but insteadwill keep them over 0.96ct to sell them as 1ct diamonds to the major jewelrychains like Kay or Zales. Even though they will have to sell thesediamonds at steep discounts compared to well cut 1ct diamonds, they are stillsold at a significant premium to well made 3/4ct diamonds.
See the charts below for a graphical representation of this price jumping phenomenon.
In terms of pricing, there are two basic categories of diamonds — those priced off of the Rapaport diamond price list and those that aren’t.
What is theRapaport Price List?
Accordingto Wikipedia, Martin Rapaport “began his work in diamonds as a cleaver andrough sorter in Antwerp, Belgium.He began brokering rough and polished diamonds in New York City in 1975.
In 1978, he created theRapaport Prices List, which some say is not reflective of true prices. He hassince created many businesses relating to the diamond industry, eponymouslybearing his name, including an electronic trading network for traders RapNetand INDEX, and diamond-related news in print and web formats.”
The Rapaport DiamondReport price list (“Rap List”) is released weekly on Fridays, however it doesnot necessarily change every week. It is used as a baseline for pricingfor basically all loose diamonds sold as single individual stones (as opposedto diamonds sold in parcels) generall SI3 or better in clarity and K or betterin color (although the price list does offer prices for L and lower colors andI1 and lower clarities, they are rarely used in the industry). Rarelywill you see a diamond with an I1 clarity grade sold with a certificate. As I discussed in the Truth about Clarity article, it is no small matter that JamesAllen has decided to sell GIA certified I1 diamonds online. There arevery few places that do this. Intelligent companies in the industry neversell GIA certified I1 diamonds because they know they can sell them for morewithout the the certificate (and therefore without using the Rapaport diamondprice list as the baseline). Whenever they receive an I1 clarity gradefor a diamond which they had intended to receive an SI2, we will simply throwout the certificate and pretend it didn’t exist.
If you click on theimage of a sample “Rap List,” you will see four separate grids. Each oneis for a different size category. The four categories shown on thissample are 0.90-0.99, 1.00-1.49, 1.50-1.99, and 2.00-2.99. Each grid is amatrix of color against clarity. To find the “Rap Price” for a givendiamond, you need three pieces of information: the size category, the color,and the clarity. Prices listed are always in hundreds. Lets say,for example, that you have a 1.55ct H color SI1 clarity diamond. So the“Rap Price” for that diamond would be $7,600 per carat.
But finding the RapPrice for your diamond is only the beginning of pricing a diamond. Thereal art of diamond pricing is figuring out the discount or premiumto the Rap Price. In the vast majority of situations, diamonds trade at adiscount to the Rap Price. It is this figure that two diamond dealerswill haggle over. Lets stick with our 1.55 H color SI1 clarity diamondexample. Those three qualities (color, clarity, and weight) only bringyou to the baseline. Now things become much more subjective. Factors that might come into play in determining the discount off of the RapPrice might include: Fluoresence, Cut, Inclusion quality, Luster of the diamondmaterial, and Color Quality. So if that diamond were an excellent cut andthe SI1 was a beautiful SI1 that was way off on the side of the diamond andbarely visible and the H color really looked like a G, and there was nofluoresence, then the diamond might trade at -20% or even -15% less than theRap Price (in diamond jargon, this would be called “20 back” or “20below”). This is the figure that is argued over. So while a sellermight try to sell this diamond at “15 back,” a buyer might only wish to buy itfor “20 below.” To calculate the actual price, you need to reduce thatpercentage from the Rap Price. So in our example, “20 below” $7,600 percarat is $7,600 * (100%-20%), or $7,600 * 0.80, which comes to$6,080. Then you need to multiply that price by the weight to arrive atthe final per diamond price ($6080 * 1.55 = $9,424).
Now, take anotherlook at the sample “Rap Sheet” from before. Take a close look. Noticeanything odd? The differences between adjacent prices in each matrix arevery far from being uniform. For example, the difference between a 1ct Gcolor VS2 clarity diamond and a 1ct H color VS2 clarity diamond is a full$1000. But the difference between the same G VS2 and a 1 ct F VS2 is only$500! Don’t ask my why this is. The diamond business is rarelybuilt on rhyme or reason. A skilled diamond dealer, though, can help younavigate these inconsistencies to find the sweet spots of value within thispricing grid. In our case, for example, it’s clearly not worth it toupgrade from an H color VS2 clarity to a G color VS2 clarity since it costs sounreasonably much to make that upgrade. And anyway, as I mentioned in theTruth about Color article, color upgrades are rarely worth the money.
One interestingoutcome of the entire business being based on the Rap List is that far too muchweight is given to color and clarity in determining price. Objectivelyspeaking, and G color SI1 clarity that is an ideal cut with a pleasently laidout inclusion will be a prettier diamond than a G color VS2 clarity with anaverage cut. If we continue with this case, lets say for a 1 ct diamond,a G SI1 that was an ideal cut (and everything else was fine), the price wouldbe approximately “25 back,” or $6100*0.75 = $4575 per carat. But aG VS2 with an average cut might go for “35 back,” or $7200*0.65 = $4680. By all accounts, the “25 back” SI1 is a much much prettier diamond than a “35back” VS2, yet the VS2 is still more expensive. This is why it is socrucial to have someone helping you along the way specifically regarding how tovalue the different factors that go into pricing a diamond. If someoneknows what they are doing, they can really find tremendous value out there.
What about diamondspriced without the Rapaport Price List?
Just about all otherdiamonds that are not certified, and therefore not sold as single diamonds, aresold according to a “parcel price.” This is a price per carat for theweight of diamonds purchased, irrespective of the number of diamondsselected. Since there is no list dictating baseline prices, understandingthese prices is far more nuanced and therefore requires years of experience totruly understand a parcel’s value. In fact, at Leo Schachter, there wereno employees who were experts in all shapes and sizes. Parcel diamondpricing is so complex and demanding of experience, that the company was brokenup by size and shape to allow managers to become experts in their limitedfield. There was a manager for princess and emerald cuts, round cuts0.90ct and above, round cuts below 0.90ct, and other fancy shapes.
This is not sorelevant for most of you, since you are better off buying a certifieddiamond unless you have someone you can trust completely who can sell you anuncertified diamond.