As an active precious metals investor and market analyst, I am often asked whether gold or diamonds make for the smarter investment. There are compelling cases to be made for both of these scarce resources that hold intrinsic value. However, upon closer inspection, gold stands out as the clear winner when it comes to long-term investment returns, liquidity, and risk mitigation.
The Allure and Value of Gold
Gold has captivated humankind for centuries. Early civilizations gravitated to its unique physical properties – alluring color, luster, malleability and resistance to tarnish. Gold became synonymous with money and power. It backed currencies, preserved wealth and served as a marker of social status.
But why has gold maintained such an elevated status through modern times? As a precious metals investor, I believe gold‘s investment value stems from three key attributes:
Scarcity – The amount of gold in existence is finite and production levels limited. Annual worldwide gold production from mining has hovered around 3,200 tons in recent years. To put this into perspective, all the gold ever mined could fit into a cube with sides of just 68 feet, according to the World Gold Council. With supply constraints, gold prices rise in the face of increasing demand.
Desirability – From jewelry to coinage, electronics to medical devices, gold has desirable properties across a range of applications and remains an eternal symbol of luxury. This drives steady demand that supports prices over time.
Stability – Gold prices often move independently from other asset classes like stocks and bonds. This makes it effective as a portfolio diversifier and hedge against systemic economic risks. During times of volatility, investors flock to gold for stability.
Gold prices have outperformed stocks and bonds over the past 50 years – Source: Business Insider
Investors aim to buy assets low and sell high. As the chart above demonstrates, gold has delivered positive returns over long time horizons. In fact, gold prices increased 4,233% between 1971 and 2021!
The Diamond Dilemma – Beauty vs. Investment Value
Diamonds seduce with their scintillating beauty and air of luxury. For generations they have been synonymous with engagement rings and other fine jewelry. But does their aesthetic appeal translate into investment value? The track record is lackluster.
Controlled supply: The diamond industry carefully limits supply releases through cartels like DeBeers. This artificial constraint aims to inflate prices. However, analysts have argued this distorts diamond‘s fundamental investment value.
Minimal utility: Aside from adornment, diamonds have little practical utility compared to gold. This limits broad-based demand required to drive prices higher.
Opaque pricing: Diamond transactions happen in opaque, closed networks. This makes it exceedingly difficult to assess true fair value.
High retail markups: Jewelry retailers mark up diamonds on average 100% to 200% above wholesale procurement costs. This gap erodes potential resale value.
Narrow secondary market: Diamonds have a much smaller secondary resale market. This lack of liquidity hampers price discovery and exits.
Diamonds have lagged far behind gold, stocks, bonds and real estate over the past several decades. Source: Sprott Money
The numbers paint a concerning picture for diamond investors. According to a Bain & Company analysis, larger wholesale diamonds returned -1% a year between 1999 to 2020. The wider diamond jewelry market fared even worse, with an average annual loss of 3% to 4%.
This pales in comparison to gold, which rose 9.5% annually over the same timeframe.
Gold in Your Portfolio – 5 Investing Tips
Clearly, gold has historical clout as an asset class that can preserve and grow wealth. Here are 5 tips for investing in gold:
Buy coins and bars – These provide direct exposure to gold prices without intermediary risks. Stick to well-known sovereign mint products like American Eagle coins.
Allocate 10% to 15% to gold – Most financial advisors recommend this as a minor portfolio component for stability and diversification.
Avoid excessive premiums – Only pay 5% to 10% over the prevailing gold spot price. Higher dealer margins chip away at returns.
Select established dealers – Trusted names like APMEX, JM Bullion and Kitco have expertise and transparent pricing.
Take physical possession – Avoid "paper" gold like ETFs, futures and mining stock. Physical possession eliminates counterparty risks.
Economic Outlook Favors Gold over Diamonds
Current financial conditions point to gold as the smarter play:
Inflation hedge – Gold prices historically rise when inflation jumps. With inflation at 40-year highs, gold becomes more attractive.
Market volatility – Equities and bonds have wavered in 2022. Gold provides an offset for wavering confidence.
Global uncertainties – Geopolitics, oil prices, interest rate hikes all signal potential instability. This benefits gold.
Dollar moves – A strong dollar dampens commodity prices, but weakening would boost gold‘s appeal.
Demand drivers – Electronics, central bank purchases and ETF inflows bolster gold demand. Indian jewelry appetite remains strong.
Meanwhile, the diamond industry faces headwinds:
Luxury slowdown – A weakening global economy crimps demand for high-end jewelry sales.
Oversupply conditions – Years of excess diamond production could pressure prices lower.
Weakened marketing allure – Younger generations are more skeptical of the diamond value proposition.
Competition from labs – Synthetic manufactured diamonds now compromise 20% of the gem-quality market.
All things considered, I firmly believe gold deserves a place in investor portfolios as a tactical asset allocation. Diamonds may dazzle, but gold still shines brightest as a stable store of wealth.