Tuesday, May 22, 2012

Advantages of Investing in Gold vs Diamonds

Diamonds have always been a special case in the world of precious gems, stones and metals. Whether it is the perception the public has of this good or the complex dynamics of its extracting industry and its distribution chain, the truth is that nothing seems normal about the process of obtaining, treating, selling and buying diamonds.

In fact it is not, because the forces in the market, represented by the main actors of the industry, have taken good care in building barriers that influence the transactions of this mineral. On one hand, the marketing campaigns developed during the years make it so that diamonds have now a greater perceived value than the real one for the final consumer, especially if its price is compared to the relative levels of potentially available supply of other minerals and gems.

The almost exclusive domination by De Beers and other members of the diamond syndicate and extracting companies in the market of diamonds has certainly not helped in making these precious minerals accessible, making it so that its price is not subject to the fluctuations of the free market. Diamonds are therefore not, like gold, subject to quotations based on a market price, rather its value at any given time is determined by the producers depending on available quantities and demand levels. This means that there is no universal price for the mineral and that retailers and distributors of diamonds must follow market guides like The Diamond Registry.

This means that diamonds are more stable than other luxury goods that do follow the trends of the market, especially if one considers its seemingly unbreakable halo of exclusivity, but the truth is that when compared against other minerals and precious metals, diamonds are not necessarily the best investment in these times of financial crisis.

First of all, diamonds are not fungible and do not allow for great liquidity, which means that even if its value remains stable they are difficult to trade. Gold for example can be re used, melted and re sold in various forms which adds to the already robust position of this metal in the financial markets. Though subject to market fluctuations, gold is still the most reliable secure good. Diamonds on the contrary do not always have intrinsic value linked to its substance since a significant amount of its value actually depends on the cut.

Structural changes in the market have not contributed to diamonds maintaining a stable price and value during the last years. With resource quantity not being limited to natural disposal but by the decisions made by companies like De Beers, and with a growing number of suppliers having been able to synthesized diamonds that are actually of higher value than natural ones, the power of the old players has diminished.

The reduction in demand levels registered from the start of the crisis has also forced suppliers to reduce diamond prices, sales having decreased as much as 20% during 2010 in a country like the United States which accounts for half of the world's diamonds demand.

Diamonds are therefore a valuable mineral that may maintain its value relatively stable if compared with other goods of the luxury market, but is not necessarily the best choice if you are thinking about investing in precious metals and stones to secure your capital. To do that, gold is probably your safest bet.

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