In the history of mankind no metal has been valued as much as gold. For centuries people sought to possess gold as a sign of wealth or because of uncertainties with paper currencies.
The main reasons to invest in gold are that it is considered an inflation hedge, a currency hedge, and that it provides safety when markets drop. Research has shown that despite the widely held belief that gold is an inflation hedge, historically it has performed poorly against higher prices in the short run. Gold has proved to be a good inflation hedge, but only over very long periods of time (close to a century), which is usually too long for investors.
As for the argument that gold is a currency hedge, the change in the real price of gold appears to be largely independent of the change in currency values. While gold may actually act as a hedge against some volatility in paper currencies, its price fluctuates on its own, therefore you are incurring similar risks when investing in the gold market.
The recent financial crisis also demonstrates that gold prices are extremely volatile, and that they fluctuate with stock prices. Thus, attempts at using gold against the risks of financial drops seem unsuccessful.
Gold is still a good way to diversify one’s investments because it is priced near its average cost of production and below its margin cost. About forty percent of the gold market is dominated by investors, while less than five percent of polished diamonds are used for speculative/investment purposes.
In order to choose the most appropriate investment you should know the similarities and differences between diamond and gold investments.
SIMILARITIES BETWEEN DIAMOND AND GOLD INVESTMENT
There are few similarities between these two precious natural resources. Diamonds and gold both have high aesthetic value and are relatively easy to transport, although in relation to gold, diamonds are much more portable. Diamonds are actually the most concentrated way to store wealth. A high quality diamond with a mass of 2-3 grams can have the same value as 100 kilograms of gold.
Another similarity between diamonds and gold is that both are limited resources, but here as well scarcity is relative. It is said that if you mold all the gold in the world into a cube, it would be about 68-feet per side, it will fit in the middle of a baseball field, and it will be worth about $10 trillion. Diamonds are much more scarce and natural colored diamonds are the scarcest among diamonds. Out of more than 120 million carats that are mined every year, only less than a quarter of them will be of gem quality. Out of gem quality diamonds, only one in a few hundreds of thousands possesses enough color to be classified as a natural fancy color diamond.
There are many differences between diamonds and gold. Diamonds are not homogeneous, while gold is. The prices of two stones of the same size can vary tremendously, depending on color, clarity and quality of the cut. There are thousands of categories a diamond can fit into. On the other hand, the value of gold changes only according to weight. An ounce of gold is an ounce of gold, but each diamond is unique. Thus, gold investors don’t need any additional knowledge in order to invest, while investing in diamonds requires additional knowledge about categories, a professional opinion, proper evaluation and certification.
When the goal of an investment is making quick cash, it is important to look at liquidity. Gold investment has a well-established system of liquidation. It is possible to sell gold to pawn shops, stores that specialize in gold and other investors based on current market conditions. Better liquidity and a higher demand for gold makes it the best way to make money fast.
Diamonds on the other hand, are characterized as having low liquidity and lack fungibility. An asset’s level of fungibility is determined by its ability to be interchanged with other assets of the same type, making the trading and exchange process quicker and easier. Since all diamonds are unique, it’s hard to exchange one for another.
Diamonds shouldn’t be regarded as a short-term investment; it is very difficult to “flip” diamonds to gain a return. Diamond investment is appropriate for those investors who are able to keep the invested diamonds until the prices “mature” and it is beneficial to sell them. Nowadays diamonds can be sold through different diamond trading platforms, and in the case of exceptional stones, they can be auctioned off. Auctions prove to be an effective way to sell high-end stones.
Investment mechanisms for both precious natural resources are also different. Gold allows investors to directly and independently purchase stock, coins, jewelry and bullion. When investing in diamonds one should consider obtaining expert guidance and ensure it comes with certification before making a final decision to buy. Without the expert guidance, it is easy to end up buying a stone of poor quality.
Should a potential investor choose to invest not just in any diamond, but a large, high quality diamond, diamonds would actually be a better inflation hedge, since the diamond industry proves to be very independent and does not always correlate with the financial markets. Even if diamonds were to just maintain constant value in paper dollar terms, they would be a good investment, because they would serve as wealth preservation. The laws of geology guarantee the scarcity of natural diamonds and the laws of politics guarantee a continuing blizzard of paper currency.