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Why gold is a better investment than diamonds

Why gold is a better investment than diamonds

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India, simply put, is infatuated with gold and diamonds. Diamonds are thought to have been first recognised and mined in India around 6000 years ago as precious gemstones, and, needless to say, we have a long standing history with the radiant mineral.

As far as gold is concerned, let's just say that it would be difficult to decide whether India's love affair is higher with cricket or gold. Gold, as the adage goes, is 'truly timeless'.

However, we have reached a period of time in history where amazingly, due to clever marketing and brilliant advertising, it has become difficult to answer questions as:

Is it better to invest in diamonds or in gold?

What are the benefits associated with diamonds and gold?

How do I compare the true, intrinsic value of diamonds versus the value of gold?

Gold has stood the test of time for thousands of years and continues to make for an excellent investment today. The same, however, cannot be said for diamonds, which have been artificially marketed and advertised to lure the public into believing that they make for good investments.

Gold stands the test of time

Gold is not just a precious metal to India, but a part of its culture. As a metal that transcends intrinsic values and investment opportunities, gold might be the sole item that permeates every strata and class of our society. It is equally sought by a wealthy urban businessman or a poor farmer in a village. It permeates our religious, cultural and day-to-day lives in numerous ways, which perhaps best explains why India is the world's largest consumer and importer of gold.

In 2012, India consumed 800 tonnes and imported 951 tonnes of gold. India buys 25 per cent of the world's gold. To put that in perspective, India consumes almost 6 times the amount of gold than the United States.

With that being said, there is also a perfectly logical reason as to why India clamors towards investing in gold: the yellow metal has stood the test of time as one of the safest and wisest investment options. There are many reasons that make acquiring gold such an enticing and smart investment decision.

Gold has appreciated 501 per cent from 2001-2012, which comes out to an annualised return of almost 18 per cent.

Let's take a look at few figures which show the yearly appreciation in gold prices (in US dollars):

Year Close Yearly appreciation Total appreciation
2001 $276.50    
2002 $342.75 23.96% 23.96%
2003 $417.25 21.74% 50.90%
2004 $435.60 4.40% 57.54%
2005 $513 17.77% 85.53%
2006 $635.70 23.92% 129.91%
2007 $836.50 31.59% 202.53%
2008 $869.75 3.97% 214.56%
2009 $1,087.50 25.04 293.31%
2010 $1,420.25 30.60% 413.65%
2011 $1,531 7.80% 453.71%
2012 $1,664 8.68% 453.71%
Annualised rate of return: 18% approx.

 

Gold is an excellent hedge against economic, political, currency crises, and overall market declines.

When markets are in a recessionary period, gold is often sold to offset losses. Due to the fact that gold is the most popular precious metal that cannot be synthetically produced - unlike diamonds - there is transparency when one buys gold in the open market. In contrast, the history of diamond pricing can only be defined as murky at best.

For the better part of the past 100 years, prices have been largely under the control of cartels and syndicates that have managed to, through some of the most brilliant advertising and marketing practices, lead consumers to believing that diamonds have the same type of intrinsic value that gold, silver, and other precious metals do. We will get to these details later in the article.

Another benefit to investing in gold is that the market for gold is generally fairly liquid. More importantly, however, the fact remains that gold is fungible, which means you can trade one large piece of gold for a hundred small ones like you can a five hundred rupee note for a hundred five rupee notes. These characteristics make it a feasible potential investment.

Finally, unlike diamonds, whose popularity has only risen considerably in the recent past, gold has always been synonymous with rarity, wealth, trust, and value since the earliest of times, dating back to thousands of years ago.

One could simply not go wrong with gold.

More to diamonds than meets the eye?

While gold, for thousands of years, has stood the test of time with its value appreciating due to its natural appeal and the fact that it cannot be synthesized artificially, the same cannot be said about diamonds.

A diamond, simply put, is not an investment. Much like how one purchases a car for its consumption value and usage, one should look to purchase diamonds for its visual appeal and aesthetic qualities. You're probably not making a wise decision if you're looking to purchase diamonds for making an investment.

A diamond, by default, is a depreciating asset over time. The market for diamonds is not liquid. Also, diamonds are not fungible. Unlike gold, which is perfectly fungible - diamonds have varying cuts, colors, grades, and sizes. Therefore, it makes it hard to find similar diamonds with these characteristics. Unlike precious metals like gold and silver, which cannot be artificially produced, and thus have held value for thousands of years, diamonds can be synthesized artificially. In fact, it is virtually impossible to differentiate synthetic diamonds from natural diamonds thanks to modern technology. Diamonds can be synthetically produced of any desired chemistry to accommodate any of the '4 Cs', which are: color, cut, clarity and carat.

We have reached a point in time where synthetic diamonds can be made, for all practical purposes, more perfect than their naturally occurring counterparts. Furthermore, when purchasing a diamond there is no way to tell for sure whether it is man-made or natural.

What makes the investment allure of diamonds so weak is that it is much cheaper to produce diamonds artificially than to mine them naturally. Therefore, the cost of diamonds is purely a function of how many diamonds are synthesized. This underscores the natural laws of demand and supply, and the process for how a product should be priced. When the supply of a product is entirely dependent on its manufacturer, the price, as a result, is also entirely dependent on the manufacturer. This is no different to how automobile manufacturers control the price of their products by controlling the number of cars manufactured.

Because gold is a rare precious metal in limited supply and will always remain so, one who invests in gold has a certain trust that it will appreciate over time.

So you might be wondering, despite the differences between diamonds and gold, how much have diamonds appreciated over time? Sadly, the truth is that it's impossible to know.

The problem with investing in diamonds is that due to the fact that there are the '4 Cs', it becomes very difficult to determine the actual value of a diamond when purchasing it. Since there is no common, universal marketplace for diamonds, you cannot compare two diamonds the same way you can compare two gold products.

Moreover, the biggest problem with diamond investments is that it is not easy to resell diamonds and actually earn a profit. It is not unusual for a retail jeweler to mark up the price of a diamond to 200 per cent, especially if you are dealing with a high-end brand. Since the jewelers frequently mark up the values to such an extent, they prefer to not purchase diamonds back from customers in order to save the insult for the customer and also to maintain the false notion that the diamond has gone up in value. Furthermore, jewelers purchase their diamonds from wholesale jewelers on consignment, meaning they receive stocks of diamonds from the whole-seller at a discounted price but do not need to pay back the whole-seller for a diamond until a diamond is sold. Therefore, the jeweler does not have much of an incentive to sell to the customer.

The result is that the customer finds himself in a difficult situation where he is unable to find a buyer to re-purchase his diamond at a good price. This is a common occurrence among diamond buyers. There have been stories of individuals who, because of the steep markup on diamonds, bought a half carat ring for 1 lakh at a retail jewelry store but were only able to sell it for Rs. 30,000.

Many a time, you hear customers claiming that their diamond has appreciated by a certain amount. Let's say 30 per cent in 5 years. Now that is a terrific investment. The problem with that statement is that the customer is purely looking at the buying price and not the selling price.

Let's look at the same example once again. Let's say the half-carat ring had appreciated to 1.3 lakh in 5 years. But if the customer is actually looking to sell the ring, there has to be some really good luck involved. Due to the fact that diamonds are not fungible and cannot be easily exchanged with each other, it is difficult to resell them to somebody other than the jeweler that the customer purchased them diamond from. Due to the '4 Cs' and the complexity of these 4 dimensions, it is hard to make apples-to-apples comparison between diamonds.

The most-worrying aspect about investing in diamonds is that it wasn't until 1938 that diamonds became synonymous with luxurious, expensive jewelry that compared with precious metals like gold. Unlike precious metals, diamonds are not rare. The supply of diamonds far exceeds its demand, and, in addition to that, diamonds can be made artificially.

In 1938, famous diamond company De Beers started a massive advertising and marketing campaign in the United States. There were lectures delivered to high school children that diamonds are linked to romance. At the same time, De Beers started working with Hollywood film stars and asked them to wear diamonds.

This brilliant advertising led to the notion of women saying 'I want what she has'. Finally, the company consulted men to decide for themselves what ring they should purchase for their fiances. Therefore, the idea of the 'surprise engagement ring' was born. Within a decade, diamond prices surged and suddenly and diamonds became a jewelry item that men were expected to buy for their spouses.

Conclusion

The difference between gold and diamonds becomes a lot clearer now. Gold is rare, but diamonds are not. Gold has stood the test of time for thousands of years, while diamonds only became a serious jewelry item in the last 75 years. The natural laws of supply and demand dictate gold prices but do not apply to diamonds. Invest wisely, making sure that your investment goes past what meets the eye.

Raghu Kumar is the co-founder of RKSV, a broking company. The opinions expressed here are the personal opinions of the author. NDTV is not responsible for the accuracy, completeness, suitability or validity of any information given here. All information is provided on an as-is basis. The information, facts or opinions appearing on the blog do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.

Story first published on: October 12, 2013 11:26 (IST)

Tags: Gold, Commodities, Diamond, Investing, Economics, Raghu Kumar, RKSV

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