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Are Diamond's An Investor's Best Friend?

26/4/2012 01:36:22

Are Diamond's An Investor's Best Friend?

The past decade has been a nearly unqualified success for gold investors. The metal went for roughly $250 an ounce in 2001 and trades at around $1,650 an ounce today. The rise of gold is a complicated and controversial topic, but part of the reason for its rise is undoubtedly the shaky global economy and investors waning confidence in the ability of democratic governments to stave off inflation. Gold may not pay you a dividend, but it’s got a good track record of maintaining value over the long run. In times of extreme uncertainty, such investments have their appeal.

The boom in gold may also be partly attributed to the ease with which ordinary investors can now get in on the action, thanks to the rise of gold exchange traded funds (ETFs). These vehicles allow investors to share in the appreciation (or decline) of the metal without going through all the trouble of digging it up, transferring it, and keeping it safe.

And now there’s talk of extending that same convenience factor to another precious quasi-commodity that can be worn as jewellery. According to reports, the Securities and Exchange Commission is reviewing a proposal to create the first diamond-backed ETF, which has some speculating that diamonds could follow in gold’s rapidly-appreciating footsteps. After all, gold and diamonds share certain characteristics: beauty, universal appeal, and freedom from inflationary policies of governments.

In addition, countries like China and India have growing populations of the upwardly-mobile, who are likely to soon be demanding formerly out-of-reach luxuries like diamonds in large quantities. Diamond-industry analyst Oliver Chen told CNBC that such dynamics will cause prices to increase 6% a year for the next decade.

But for all the similarities between diamonds and gold, there are a few key differences. According to The New York Times, the biggest distinction is the lack of uniform pricing in the diamond industry. The value of a diamond is subjective, and:

“Unlike gold, which is sold for essentially the same price in financial markets around the world, diamonds have been sold mostly through bazaar-like areas like the Manhattan district and the Antwerp Diamond Bourse, which advertises that a ‘binding handclasp fixes price, delivery and conditions.’”

The other drawback of diamond investing is the reputation the industry has for market manipulation and monopolistic behaviour. For years, the industry was dominated by one player, DeBeers, which controlled the supply of the precious mineral in order to keep prices stable. Though the industry has reformed itself somewhat in recent years, it is still controlled by a few large players, which are less than open about their operations. While gold is extremely scarce, the true supply of high-quality diamonds is shrouded in secrecy.

So even if these diamond funds do get off the ground, the average investor might be better off sticking with the traditional investment use of a diamond: as a down payment on matrimony. Given the current default rates on marriages in America, this may not be such a wise investment, either. But let’s save our cynicism for the marketplace, shall we?

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