Diamonds Outshining Gold as an Investment: The Eastern Explanation

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The once steadfast and reliable commodity of gold is on the downslope for the first time in a long time.  Since 2011, when gold hit an all time high of $1,900 an ounce, it has plummeted down by 30% (to $1,330/ounce), a profound low.  This could possibly coincide with the fact that another precious material is seeing one of its first significant boosts in an equally lengthy period.  That security is diamonds.

There are several concrete factors that could be drawing investors towards the sparkling assets, but a few intangibles as well.  One of these being the fact that diamonds have never really had a “spot price” (a current price a commodity can be bought or sold at a specific time or place) or a rigid market; they are a more fluid and erratic commodity, with the only sure annual demand stemming from jewelers.  The elastic nature of the diamond market can thus cause demand to fluctuate in an unpredictable manner.

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The very essence of diamond is what makes it so hard to quantify in financial terms as well.  While gold can be melted down into a uniform, pure configuration, diamonds simply can not.  Each diamond is unique, with the properties that make it up dictating its value.  The fact that every diamond needs to be graded in order for a price to be derived has historically made it more of a consumer specific product; this makes physical diamonds difficult to obtain on a larger scale for investment purposes.

So the question remains, what specifically has been driving the diamond market up recently?  The most obvious answer, in terms of most financial questions, relates to the largest, emerging markets.  As everyone knows, Asia (China, specifically) has seen an exponential boom over the last decade, and had been steadily climbing prior to that.  An Asian demand for any product means a surefire international increase in that product’s value – and that demand has increased due to a cultural shift.  The economic behemoths of China, and India as well, have adapted a custom that was primarily Western until recent years: that of exchanging an engagement ring.  As engagement rings typically utilize the largest carat diamonds of diamond jewelry, this clearly has had a dramatic effect on the diamond trade.  As East meets West, one factor influences the other.  Since China has instituted its single child only policy, a lopsided amount of males outnumber females.  This, in tandem with the fact that general wealth has increased in the country, has created the perfect scenario for women being able to find a mate who can provide them with a diamond ring upon proposing.

A slight bump in the U.S. economy over the last two years has translated to a significant one for diamonds too.  Diamond importation rose 16% from 2012 to 2013.  The obvious explanation here is that since America’s steady motto is “bigger is better,” any improvement in personal finances will result in a higher demand for larger, superior quality luxury items.

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One of the first official “meeting of the money minds” on the topic of diamonds as a substantive investment commodity took place back in March of 2013.  A collection of hedge fund traders met with the sole intention of creating a forum for utilizing diamonds for investment purposes only (not for resale as jewelry).  The end result of this was the formation of the Investment Diamond Exchange.  This L.A. based group is not the only one.  This past September another diamond trade conglomeration emerged; Chicago GemShares forged a partnership with Nasdaq OMX Group and the GemShares Global Investment Grade Standard Diamond Basket Index was born.

However, there are natural skeptics out there.  Apprehensive investors cite the fact that since the diamond market can be so capricious, diamonds are not necessarily as sound as analysts have stated.  Since styles can change on a seeming whim (fancy pink diamonds are in vogue right now, but who knows how long that will last / if the synthetic diamond market continues to produce larger and larger gems, what effect will this have on the mined diamond trade?), they claim that this makes diamond investments just too risky to sink massive capital into.   Only time will tell if diamonds will continue to see the unpredicted surge they have enjoyed over the last few years.

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-Joe Leone

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