The coloured diamonds scam

If you get cold-called about coloured diamonds, watch out: it could be a scam!

You should always worry if an investment salesperson calls you out of the blue. The chances are 99.9% certain you'll end up deeply in the red – both at the bank and on your face from embarrassment if and when your family and friends find out you've been ripped off. And you'll be purple with rage at your own stupidity. To stay in the pink, read on.

As soon as an unknown from an unknown firm calls you – remember legitimate UK investment firms are banned from this practice – slam the phone down. The guy (so rarely a woman) at the other end works on the premise that you are too yellow to do other than listen and obey,  and that you are green in investment matters so he can play on your inexperience and your unwillingness to admit it.

So here's this week's cold call that gets my very blackest mark.  It was from Leonard who was pushing “coloured diamonds”, which explains all my laboured attempts to hit the rainbow as much as I could into the first few paragraphs.

The idea behind coloured diamonds

But before looking at what this is all about, it is fair to say Len is a very desperate man. On some days – including Saturday and Sunday – he called at least three times, refusing to take no for an answer.

Like all high pressure sales, the idea behind coloured diamonds sounds more than just plausible – it appears compelling so you wonder how you managed to live without them all your life. The concept is that coloured diamonds are rare and must only increase in value. You are also told that investing in these stones will enable you to “hedge” your portfolio stocks and shares – presumably, you'll make more on the diamond than you'll lose on equities.

Now it is true that most diamonds are white – only a few are pink, straw- coloured, red, green, orange or blue.  Yes, they are rare. Some might look good in jewellery – it's all according to your taste.

Len promised me a brochure. It soon arrived bearing a Swiss address but posted in Florida. It told me that coloured diamond prices had been strong over the past 30 years – with investment grade coloured diamonds increasing by 15 to 25% each year. If that says what it appears to say – potentially 25% a year for 30 years, it would mean someone investing £10,000 in 1981 would now be worth £10million. 

This appears unlikely.

In any case, it is difficult to check. All diamonds are different – in size, colour, clarity and cut to name just some facets of the precious stone valuation trade. Unlike gold with its per ounce price in dollars for a standardised lump of metal, there is no regular trading or index of coloured diamond prices.

Some are sold at auction and yes, they may reach a high price. But while you'll be told this, you don't know what the seller paid for the stone in the first place.  That hammer price might represent a loss.

The market for coloured diamonds

Now my friends in the jewellery business tell me that – providing a stone is genuine and conforms to its description – you would be lucky to get a third of what you had just paid if you decided to sell it the day after purchase.  This is on the basis that the selling price is fair.  But how do you know when there is no market in the gems and each one is different in any case? There have been coloured diamonds costing £5,000 in the past and valued by independent jewellers at under £100.

However, assuming the purchase price is reasonable, it has to go up a long way just for you to break even providing you can find a buyer.

There are plenty of instances where this proves impossible. These stones are easy to buy but difficult to sell.

With many coloured diamond sellers, you are offered the choice of having the gem at home or leaving it in an offshore bank. If you go for the first option, you'll have to pay 20% VAT on top of the purchase price, money which you can't recover on a subsequent sale. Go for the offshore choice and you may never see your expensive purchase as it will be buried in a bank vault somewhere.

If I owned something which could grow by as much each year as the sellers claim, I would not sell it to someone else – I would borrow against it and watch my fortune grow. 

But Len is so eager to sell that he bombards me with calls. When someone else at home answers the phone, he demands to know where I am and when I shall return. Perhaps he gets a good slice of the £10,000 to £20,000 he thinks I might invest. Or perhaps, he has been brainwashed to believe in the coloured diamonds story.

Don’t fall for it yourself.

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