FORTUNE — Gold has lost its luster — at least as an investment. Since hitting $1,900 an ounce in the summer of 2011, the price of the shiny metal has plunged some 30%. That fall has prompted an exodus from gold-backed ETFs. But now investors are setting their sights on another precious material: diamonds.
Excitement has been building in recent months around the potential of diamonds to become a veritable asset class for the first time. Unlike gold, the gems currently have no spot price or conventional market besides jewelers and pawn shops. The renowned emerging markets investor Mark Mobius recently told MarketWatch that he has visited pawn resellers to get a firsthand view of the market for diamonds, which he believes are on the cusp of a boom, and which may eventually be available to investors via funds.
Indeed, Bain & Company and other institutions have been tracking investors’ interest in diamonds and pondering whether the jewel, in investment terms, could become the next gold or platinum. In March 2013, a group of hedge fund traders launched the Los Angeles-based Investment Diamond Exchange, where investors can buy physical diamonds (with no intention of making them into jewelry). And in September, a Chicago company called GemShares announced a partnership with the Nasdaq OMX Group (NDAQ) to develop the GemShares Global Investment Grade Standard Diamond Basket Index, which could be used to create an exchange traded fund backed entirely by real diamonds.
One surprising factor that’s driving demand is the relatively new but exploding appetite in China for diamond engagement rings. Prospective grooms splurging on a diamond is, of course, a standard part of the American engagement process. But it was largely a foreign concept to the Chinese until just a few years ago, says Rick de los Reyes, portfolio manager for T. Rowe Price’s Global Metals and Mining Strategy. As wealth in China has increased and the country’s one-child policy has left the country with a smaller ratio of females to males, however, those women have discovered a new best friend, so to speak. “If you’re a woman in China and you want a diamond ring, you can certainly find a man to get you one,” says de los Reyes. “You’re pretty much in the driver’s seat.”
Diamond demand has increased in the U.S., too, thanks to the strengthening economy. The U.S. imported nearly $23 billion of polished diamonds in 2013, up more than 16% from 2012, according to the Rapaport Group, a market research firm that maintains its own index for diamond prices. According to that index, the average price of diamonds increased almost 14% to $1,855 per carat last year.
Still, some analysts remain skeptical about the feasibility of making investing in diamonds as simple as buying gold or other precious metals. After all, while gold is priced per ounce, diamonds are graded based not only on their size, but on their cut, clarity, and color — and to a certain extent, the eye of the beholder. According to a recent report by Bain, there are up to 16,000 combinations of those four factors that influence the price of each stone, plus a degree of subjectivity, as value appraisals can differ by as much as 30%.
Michael Haynes, the CEO of the precious metals exchange APMEX, which sells physical assets like gold and platinum bars, isn’t sure his clients would even be interested in diamonds. While Haynes has experience authenticating and grading diamonds — he even owns some himself — he says the varying quality of diamonds makes them a different breed of asset than bullion, and attracts investors with a different philosophy. “I’m sure we have bullion buyers who like to buy oil and gas and Boeing stock, but I don’t see a large overlap with diamond buyers,” he says.
Further complicating the diamond market, says de los Reyes, is that consumers’ tastes can be fickle. Chocolate diamonds, for example, are popular right now. But a previous trend of pink diamonds eventually ran its course, forcing the market to adjust when demand dropped off. “How do you price that when a lot of it’s just based on fashion?” de los Reyes says.
While he’s intrigued by the possibility of diamond ETFs in the future, for now, de los Reyes is sticking with mining stocks, like the British company Petra Diamonds (which trades in London under the ticker PDL), of which T. Rowe is one of the largest shareholders.