The prices for gem quality diamonds have been soaring higher along with the price of gold. Does this mean that there is a direct price correlation between these two investments? Are people buying diamonds for the same reasons they are buying gold? Here are the answers.
The primary reason for the increase in gold prices this past decade is due to purchases by domestic and international investors as a “safe haven” against possible devaluation of fiat currencies caused by deteriorating world economies and excessive printing of money in the United States and other countries. Increased discretionary spending for luxury items has also added to the price of gold, but commercial demand has not increased in direct proportion to its price.
Gem Quality Diamonds
The principle reason for the increase in the prices of high quality diamonds is supply and demand. During the past decade, the continuing economic development of China, India and other smaller emerging economies has created a growing middle class that wants, and can afford, more luxury items. The demand for diamonds and gold in China and India is a major contributor to the increased prices of both. Also, many cultures have a propensity for hard assets as investments in lieu of paper assets like stocks and bonds.
There is at least a 2% (as high as 5%) short fall between the annual supply of diamonds and actual consumer demand, causing long term prices to increase. Industry pundits expect this imbalance to continue in the future, because the supply of diamonds is limited by current production of mines. Newer mines are in planning stages, but the actual amount of production is uncertain until the mines are operational. Also, it takes from 4 to 13 years to develop a new mine.
Gold has increased at an 18% compounded annual growth rate over the past decade. Larger, investment grade white diamonds have increased at a 10% compounded annual growth rate, based on a study entitled “Truth about Diamonds as an Investment: The 2012 Report.” This information certainly suggests that there are common profit motivations for investors to own both investments, but I cannot find any empirical evidence that supports a direct correlation between the prices.
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The Author: Paul Buchanan is a Graduate Gemologist, Graduate of the American Institute of Diamond Cutting, President of Bella Ideale Diamonds Consulting Service and has 30 years of investment management in traditional investments and venture capital.