DIAMONDS VS GOLD Investment

When it comes to investing, the options can seem endless. Two popular choices are gold and diamonds, but which is the better investment?

While both have advantages, the decision ultimately depends on your goals and circumstances. This article will explore the pros and cons of investing in gold and diamonds, so you can make an informed decision.

GOLD INVESTMENT

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.

DIFFERENCES

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.

Pros And Cons Of Investing In Gold

Pros

Stable value: One of the most significant advantages of investing in gold is its stability. Gold has maintained its value over time and has even increased in value during economic uncertainty. This makes it a popular choice for investors looking to protect their wealth.
Hedge against inflation: Another advantage of investing in gold is that it is an excellent hedge against inflation. As the value of currency decreases, gold tends to increase. This means that gold can help protect your purchasing power and maintain your standard of living.
Easy to buy and sell: Investing in gold is also relatively easy. You can buy gold through coins, bars, or exchange-traded funds (ETFs). Additionally, gold is a liquid asset, meaning it is easy to sell when you need to liquidate your holdings.

Cons

Low dividend yields: One of the main drawbacks of investing in gold is that it does not generate any income. Gold investment generates no cash flow, unlike stocks, which can pay dividends. This means that you are relying solely on the increase in the value of gold over time to generate a return on your investment.
Limited industrial use: Another disadvantage of investing in gold is its limited industrial use. Unlike other metals, such as copper or aluminium, used in various industries, gold is primarily used for jewellery and investment.
Vulnerability to market volatility: Gold investment can be risky, as its value is vulnerable to market volatility. Gold prices can fluctuate significantly due to global economic conditions, geopolitical events, or investor sentiment changes.

Pros And Cons Of Investing In Diamonds

Diamonds have been a coveted luxury item for centuries but are also a potential investment option. The value of diamonds has traditionally been determined by their scarcity, colour, clarity, and cut, but the investment potential of diamonds is more complex than that. Here, we will explore the pros and cons of investing in diamonds.

Pros

Rarity: The scarcity of diamonds is a significant advantage in investment. Unlike gold, which can be mined in large quantities, the supply of diamonds is limited, making them a valuable commodity.
Long-term value: The long-term value of diamonds has been proven over time, with historical data indicating that diamonds tend to increase in value over the long term.
Aesthetic appeal: The aesthetic appeal of diamonds is a significant advantage in investment. Diamonds are also seen as beautiful items, unlike other commodities, such as gold or silver.

Cons

Illiquid: Diamonds can be challenging to sell as they are not traded on an exchange, and their value can be subjective. Finding a buyer for a high-value diamond can be a long and complicated process, making them less attractive to short-term investors.
Lack of transparency: The diamond market is not transparent, and diamond prices are not standardised. This means that investors may not be able to determine the true value of a diamond easily and may be at risk of overpaying for a precious stone.
Risk of fraud: The diamond market has a history of fraud, including diamond treatments, misrepresentation of quality, and synthetic diamonds. Investors need to be cautious when buying diamonds and seek the advice of a reputable expert.

It is estimated that mined rough diamond demand will recover, staying flat or growing up to 3% annually through 2030. This was lower than gold's average annual return of 5.7% over the same period but higher than other alternative investments like wine, art, and coins.

Factors To Consider When Choosing Between Gold And Diamonds

When it comes to investing in precious metals, both gold and diamonds are popular choices. While both assets have unique advantages and disadvantages, several factors should be considered when deciding which is a good investment.

Investment Goals

The first factor to consider is your investment goals. Are you looking for a long-term store of value, or are you looking to make short-term gains? If you're looking for long-term value appreciation, gold may be a better choice as it has a proven track record of retaining its value over time. However, diamonds may be a better choice if you're looking for short-term gains as they can have higher volatility and potentially generate higher returns.

Market Volatility

Another factor to consider is market volatility. Both gold and diamonds can be affected by market fluctuations, but they may not always move in the same direction. Gold tends to be a safe-haven asset that investors turn to during economic uncertainty. On the other hand, diamonds are more susceptible to market volatility and can be affected by changes in consumer demand.

Liquidity

Liquidity refers to how easily an asset can be bought or sold. Gold is a highly liquid asset that can be bought or sold easily through various channels, including exchanges, dealers, and online platforms. Diamonds, however, are less liquid than gold, and finding a buyer for a high-value diamond can be a lengthy and complicated process.

Costs

Finally, the costs of investing in gold and diamonds should be considered. The cost of gold is determined by the weight and purity of the metal, while the cost of diamonds is determined by their carat weight, cut, colour, and clarity. The cost of diamonds can be significantly higher than gold, making them less accessible to some investors.

FAQs

Which investment option is better in terms of profit in the long run: gold or diamonds?

Both gold and diamonds have the potential to be profitable investments in the long run, but their returns may differ depending on various factors. Gold is considered a safe-haven asset that has retained its value over time, while diamonds can offer higher returns due to their scarcity and uniqueness.

How do I ensure that the gold or diamonds I buy are authentic?

To ensure that the gold or diamonds you buy are authentic, it is important to purchase from a reputable dealer who provides certification and guarantees the authenticity of their products. For gold, look for products with a hallmark or certification from reputable organisations like the World Gold Council. For diamonds, seek certification from organisations like the Gemological Institute of America (GIA) or the American Gem Society (AGS).

How can I invest in gold or diamonds?

Investing in gold or diamonds can be done through various channels. You can invest in physical gold or diamond jewellery, exchange-traded funds (ETFs) that track the price of gold or diamonds, or in mining companies that specialise in extracting these precious metals or gems.