Diamond prices have surged this year, at a significantly faster pace than gold prices, partly due to a rise in consumer demand in India and China, who are experiencing a growing middle class, and by worldwide diamond reserves being at an all-time low. China is now the second-biggest buyer of diamonds in the world behind the U.S., and both China and India saw exceptional market share growth in 2010 and are expected to surpass US marekt share by 2015.

The prices of polished diamonds rose a record 5.5 percent in June, and have increased by almost twenty percent during the past six months, with demand being strongest for polished stones smaller than one carat. Harry Winston stock has also risen by 42 per cent this year.

"The recent rally in gold and silver prices has forced many new customers to look closely at diamond jewelry… and we have noticed an appreciable shift of consumers from yellow metal to diamonds,” said Kaushik Mehta, chairman of Naqshi Jewelry, a prominent Indian jeweler.

According to Bloomberg, three new precious stone funds will be made available for investors this year. The Harry Winston Diamond Corporation $250 million diamond fund, and two London-based funds offered by Diamond Capital Ltd. and Fusion Alternatives (Fusion is planning a fund backed by polished stones). The Diamond Capital fund will differentiate itself from its forerunners by both trading diamonds, holding them, and lending them to jewelry retailers.

"People like myself will have access to huge stock which wouldn't normally be available," said London jeweler Dominic Carr. "The main thing is having an inventory of $20 million of diamonds within 48 hours."

The new funds are expected to garner a lot of interest by institutional investors, despite the plunging shares and poor record of Diamond Circle Capital Plc, the first publicly listed fund to invest in diamonds. Also, diamonds are still not considered to be a hedge against inflation the way gold is and large-scale diamond investment strategies usually rely on excess demand.

"I'm conscious of the need to balance out my investment risk," said Clive Cowdery, the founder of Resolution Ltd. "Something that is as non-correlated with financial-market movements as this fund was attractive."

According to industry analysts, more and more buyers are embracing diamond jewelry as an investment in itself and choosing it over gold. According to DeBeers, demand for rough diamonds is expected to surpass output for at least five years.

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