Yellow, pink and blue diamonds are catching the eye of investors around the world, according to dealers and industry insiders.

Natural coloured diamonds make up only 1 percent of global production, which gives them unquestionable value, said Bruno Scarselli, who represents the third generation of U.S.-based coloured diamond specialist Scarselli Diamonds.

There is a tremendous demand for yellow diamonds, but also blue and pink, Scarselli told Reuters at the Baselworld watch and jewellery show.

There are not enough diamonds to satisfy one-tenth of the new billionaires that every month are created in China, he said as he handled a $9 million ring featuring a 12-carat internally flawless blue diamond and two smaller pink stones.

Scarselli said he expects financial institutions to be increasingly attracted to the diamond industry, which has traditionally been in the hands of family businesses.

This is associated with the fact that currency is losing its value, government bonds are a risk, and nations are losing wealth.

Coloured diamonds are piquing investors' interest because they are more difficult to find in nature than white diamonds, industry spokesmen said.

Simon Zion, whose father founded Hong Kong-based diamond company Dehres Ltd, said blue diamonds are coveted not because they are the rarest but because there are not many left after a boom in demand.

Investors' relationship with diamonds has been rocky.

The first diamond investment trust, set up by investment firm Thomson McKinnon in the 1980s, was wound up after a slump in the market.

The first publicly traded fund to invest in diamonds, Diamond Circle Capital Plc , has lost more than half of its value since it started trading in 2008.

At the beginning of 2011, investors seeking shelter from a weakening dollar were drawn back to the diamond market, expecting diamonds to go the same way as gold, said Martin Rapaport, whose diamond indexes are used as a reference by the diamond industry.

In fact, the dollar went up and the store-of-value investment argument became weaker, he said.

Excess liquidity in India, one of the biggest diamond players, pushed up the price of diamonds in the first half of 2011, triggering a wave a panic among Chinese buyers who stocked up on diamonds fearing the price would keep rising.

Then when credit became tighter in India, the thing that was fuelling the fire settled down, said Rapaport.

He expects the diamond market to be stable for the first half of 2012 as overstocking works itself out, before starting to rise in the second half.

Frédéric de Narp, president and chief executive of U.S. diamond miner and jeweller Harry Winston , said he will increase prices as he anticipates diamonds will go up again.

A Chinese love affair with diamonds has fuelled a growing trend for watchmakers to decorate their timepieces with the gems.

Diamonds of all shapes and colours sparkled in the crystal windows of the Basel fair, mainly aimed at buyers from China, the Middle East and the United States.

Swiss jeweller Shawish unveiled a 150-carat ring entirely made of diamond for an indicated 70 million Swiss francs.

A diamond-encrusted gun - even the bullets carried their fair share of carats - sparkled at Diasqua, a privately-owned Indian company based in Hong Kong.

(Additional reporting by Caroline Copley; editing by John Wallace)