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The James Bond Investor: Diamonds Are Forever

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In Diamonds Are Forever, James Bond is pitted against the evil Blofeld. The MacGuffin this time around is diamonds. Why? Blofeld wanted a cozy retirement. No, no, I'm kidding. He needed diamonds to focus a satellite-based Destructo-beam at various targets he sought to obliterate.

Fortunately, investors need not concoct as elaborate a scheme to benefit from owning diamonds. Crushed carbon is a go-to holding for me in bad (and good) economic times because it's a hard asset – something that tends to retain its value over the long term. A diversified portfolio should always have some hard asset exposure, and for me this includes actual gold bullion held by the Central Fund of Canada (NYSE: CEF  ) . It also includes oil companies Chevron (NYSE: CVX  ) and ExxonMobil (NYAE: XOM), a more or less direct way to play black gold.

So how does one actually get hold of diamonds, short of signing on as one of Blofeld's henchmen? My suggestion is buying Harry Winston Diamond (NYSE: HWD  ) . The company is interesting because it has two different components – a retail side and a mining side.

Dig deep
The mining side is the hedge for bad times. The company owns 31% of the Diavik Diamond mine in Canada. The mine is believed to have at least 10 years' worth of diamonds in it, produced at 8 million carats annually. So short of Bond dumping a nuke down the shaft and wiping it out, those diamonds are going to be there, in bad times and good.

And while the value of diamonds will fluctuate somewhat over time, history has shown they will always retain some value -- value that makes them as good as or perhaps better than greenbacks. If you own Harry Winston, you own diamonds. And while it is possible that the value of diamonds could completely crater one day, my own opinion is that just ain't gonna happen. Almost every girl wants one on her finger and trust me, like Bond, I've been around enough of them to know.

That means that Harry Winston will always have a tangible book value backed by a hard asset.

That one is purty!
On to the retail side. You should know that Tiffany (NYSE: TIF  ) has a deal to purchase $50 million worth of diamonds each year from Harry Winston. That's right, that little blue box you just got your girl may have a Harry Winston in it.

The company is also doing a really smart thing by selling its own diamond jewelry with the Harry Winston name, in an attempt to bolster the brand, and is devoting more money toward this goal. Diamonds are indeed valuable but they are also a commodity -- there's no inherent difference between the ones sold by Zale (NYSE: ZLC  ) , DeBeers, Tiffany, or even the ones in the cases at Costco (Nasdaq: COST  ) -- although the ones at that last one won't be as expensive. This means that if Harry Winston's brand-building can further distinguish its name from everyone else's, its retail side may pick up.

The takeaway is that Harry Winston Diamond is a buy for me. Now, because the company is not a pure hard-asset play, it isn't advisable to just buy the stock at any price. I would rather grab the stock during bad times. I missed the low of $2 back in March 2009, but the stock is still well off its high of $43 in late 2007. So we are closer to a low than a high, and I think we are certainly closer to a low in the retail sales cycle than a high.

I'd rather buy when improvement lies ahead, rather than buying in boom times with retail sales about to decline. The balance sheet is in decent shape with $125 million in cash and $231 million in debt, and sales roared up 62% in the most recently reported quarter, so I feel the company is in good shape.

That's my two carats, anyway. Check with the white cat on your lap for another opinion.

Matthew Brown owns shares of Chevron, ExxonMobil, Harry Winston Diamond, and Central Fund of Canada. Costco is a Motley Fool Inside Value pick. Costco is a Motley Fool Stock Advisor recommendation. Chevron is a Motley Fool Income Investor selection. The Fool owns shares of Costco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 05, 2010, at 8:10 PM, lewellen180 wrote:

    Would you invest in aluminum as a hard asset that holds up well in bad times? No? Well, before we figured out how to refine it in mass quantities, metallic aluminum was rarer - and more valuable - than gold. Its value came from its scarcity *in a particular chemical form*, rather than at all.

    I have two very serious problems with the thesis of investing in diamonds or diamond producers.

    1. Diamonds are made of a very common chemical element - carbon - plus assorted trace elements and crystal defects.

    2. We already know how to make diamonds, and the processes are improving.

    While in principle you can, say, make gold from other elements, in practice doing so requires a nuclear reactor and therefore has some issues with going to mass production.

    In contrast, with diamonds, in principle all you're doing is rearranging atoms, not transmuting them from one kind to another. In practice there are multiple ways of doing it ... none of which require an NRC license.

    There will probably always be people who want natural diamonds, just as there are people who want, oh, hand-made fountain pens. But for most people these days, saying "will you marry me" with an aluminum engagement ring wouldn't go over well, even if it were hand-made. I expect diamonds will at some point wind up in the same category.

  • Report this Comment On November 05, 2010, at 8:43 PM, MaxTheTerrible wrote:

    I'd think hard and long before investing in this "hard asset".

    Consider that:

    1) techniques for making synthetic gem-quality diamonds are getting better and better, e.g. vapor deposition (you practically can't distinguish these synthetics apart from the natural stones without a very expensive piece of machinery, not surprisingly developed by DeBeers);

    2) there is no shortage of natural diamonds and, as far as I can tell, the prices are propped up by artificially limited supplies.

    Just a thought...

  • Report this Comment On November 08, 2010, at 12:18 PM, djp928 wrote:

    Diamonds are a horrible asset! The retail price of diamonds is fixed by a cartel headed by the DeBeers company. If they were allowed to find their true open market price, they would be worth less than most other gem stones. Diamonds do NOT hold their value at all--in fact, if you've ever tried to resell a diamond, you'd know that no jeweler will give you anywhere close to what you paid for a diamond. That is because DeBeers doesn't want a thriving secondary market for diamonds--they want people to pay full retail price, because they get to set that price.

    You might as well try to convince me that brand new Ford Escorts are a great investment because they are a hard asset. Sure, they're a material asset, but they lose a ton of value the second you buy them--just like diamonds.

    Blofeld had it right, at least. Diamonds have many industrial applications. But they're so common the industrial price for diamonds isn't anywhere near the "gem" price--and the difference has very little to do with the rarity of the "gem quality" stones and a whole lot to do with the DeBeers cartel artificially limiting supplies.

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