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Tuesday 29 April 2014

Diamonds v/s Stock Markets

Diamonds have always drawn our eyes to them as symbols of eternal love and fealty. The reality of the world economy now though is that with market fluctuations ruling the roost and many countries still struggling with the impact of the worldwide recession, people’s faith in the stock market is seen to be failing. People around the world are looking at newer avenues for investment and without a doubt, traditional safe havens like gold, property and other tangible assets are prized more than stocks these days.

According to a paper by economists Scott and Yelowitz, diamonds are appreciated not only because of the (conspicuous) consumption utility they provide, but also because they are a store of value. After the recent auction sale of a pink diamond for the record price of 45.75 million USD, a jewelry expert commented that, ‘‘nobody knows what they are buying with stocks, but here they are buying something solid and tangible.’’

Recent surveys by Capgemini (2010)and Barclays (2012)confirm that, in times of
crisis, high-net-worth individuals are drawn to real assets that are perceived to have high intrinsic value. Nearly one third of the owners of precious jewelry interviewed by Barclays indicated to own the asset to provide security should other investments fail.

The above examples are unanimous on one simple fact: People have lost their faith in the stock markets post the global economic meltdown. In this sort of an environment, many investors are looking back to more traditional kinds of investments, that in their eyes for whatever reasons will not fail.

Let’s take an analytical look at the major difference between diamonds and stocks as investments:

Are perceived as storehouses of value.
Have an inherent value which can fluctuate given market conditions
Are rare and therefore are more expensive to purchase
Are a lot more affordable, can be bought by anyone
Their rarity ensures that people who invest in them recover their investment and make a clean, tidy profit on their sale as well
Stocks make a sound investment if the market conditions are favourable, people can make a good profit off them, but again any slight change in market fortunes could derail one’s investment
Are tangible, and can be worn and therefore are an endowment that can be transferred in the form of gifts and heirlooms
Are intangible and in some cases non-transferable, do not make gifts and in the current economic condition are not safe bets
Along with gold and property, diamonds are looked at as stable investments which could easily be vaulted and banked on for a rainy
Were looked at as a way to make a decent amount of money before cashing in. These days though, they aren’t considered all that lucrative. Could be a passing phase though
Are always contemporary or relevant, whatever the prevalent ‘economic’ environment
In the current economic scene are looked at with cynicism and great caution by people in the know about investments

The current trend of investing in safe havens can be traced back to the early to mid seventies as is seen in the following excerpt from Renneboog and Spaenjaers, Financial Letters (2012):

“The uncertain economic climate of the late 1970s and the early 1980s, there was increased
demand from investors for tangible but easily storable assets, such as gold (Ibbotson and Brinson,1993), stamps (Dimson and Spaenjers, 2011), and gemstones. Diamond investor manuals (Sutton,1979; Dohrmann, 1981) elaborated extensively on the advantages of investing in diamonds, claiming that diamonds have a track record of centuries of steady price appreciation.”

This quote makes it apparent that the mistrust of the stock market may not be just a passing phase but to many investors has been around for quite a while. 

Wednesday 16 April 2014

Can diamonds be an investor’s best friend?

The allure of the diamond is a hard thing to resist. Ask James Bond, or Marilyn Monroe and two answers you may get are ‘Diamonds are forever’, and ‘Diamonds are a girl’s best friend’. What about as investments though? While many investors think that diamonds are a bit of a ‘sure thing’, like precious metals, fact of the matter is that investing in diamonds is more a tricky business, that needs skilled planning and due diligence, lest an investor see his investment go belly up!

Why are diamonds so tricky as an investment?

The very fact that every diamond is as unique as the possessor of the stone, proves to be a rather difficult problem. Says trade analyst, Randall Clarke, “When it comes to diamond, each diamond is as different from the other as chalk is fromcheese. This makes setting a common trading price for diamonds highlyimprobable, if not impossible.” The lack of a common trading price or standard price, like in gold or silver, makes tracking prices of diamonds, extremely difficult.  

The purity of a diamond is also determined by the 4Cs. Now each diamond has its own unique, cut, color, carat weight and clarity, this makes it virtually impossible to find the perfect stone to compare all other stones to, let alone invest in.

Change in trends:

With the world economy in a slowdown mode, what were considered traditional powerhouses in terms of return on investment, like high yield bonds and long term fixed deposits and mutual funds, have taken a beating of sorts. High net worth individuals are now looking at non-traditional means of investments, which can also be enjoyed at the same time. Be it wine, art, gold or real estate, the returns in these, non traditional sources, is all of a sudden more attractive and by all means more enjoyable than the ‘waiting game’ that traditional investment sources of investment entailed.

When such a paradigm shift is slowly occurring, diamonds are the most logical next hottest investment destination. The roadblocks in such an investment option however, mean that diamonds aren’t yet the new currency of trade in the world. Clarke chips in, “Until the Securities and Exchanges Board, can determine a way, where diamonds can be traded in paper securely, over a Stock Market, something like a Diamond Exchange Traded Fund (ETF), the returns on investment will be more difficult to standardise and predict, making trading in diamonds a much riskier proposition.”

Mark up prices:

The reality of the matter is that unlike gold, oil, or property, diamonds are still traded in bourses across the world, by people who are old hands in the trade. The diamond trade is possibly the only one in the world that still relies on the ‘honor’ system, which dictates that a man’s word is his bond, and that reputation is something one must go by. Industry insiders say that every time a diamond changes hands, it’s price increases. From a polisher to a trader, the price can go up anywhere between 5% and 25%. This means that a stone bought from a trader, could have been obtained from a polisher for a fraction of the cost. Says Clarke, “People keen on buying diamonds would be well served to have an ‘in’ with a polisher. But since this luxury is not afforded to everyone, the reality of the matter is that diamond prices are what they are and they aren’t changing anytime soon. Hence the need for a market backed ETF which standardises both the prices of and the returns on diamonds.”   

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