Posted by Frugal on 27th April 2009
I have been asked by several people (mostly females), my wife and my mother-in-law included, that if gold/silver is a good investment, then diamonds must also be a good investment. And my answer is always an emphatic NO!
Yes, diamonds are very precious in the sense that they are probably one of the most expensive items per weight, much much more expensive than gold indeed. However, the value of an item is always subjective according to the observers. The value of diamonds and the sale of all kinds of jewelry go up in peace and economically prosperous time. However, they tend to go down in economic distress. In fact, in respect to investment, diamonds function more like investment in art works. The value of arts go up in a stock market boom, and they go down when stocks go down. In fact, artwork boom is the last indicator for a stock market making its final top back in 2007.
Why the big difference? The people buying diamonds thinking that they are buying into same class of investment as gold/silver do not understand what money means. One of the most important criteria for gold/silver being used as money historically is because of the divisibility of gold/silver metals. Been able to divide gold/silver into smaller pieces easily and still retain exactly the same value when summing back up is extremely important to function as money. Can you divide your 1 carat diamond into 0.5 carat diamonds and still get the same total for the values of the two pieces of diamonds? NO! Because 1 carat diamond is much more rare than 0.5 carat diamond. The price of rarity is higher in the eyes of beholders. Because of that, diamonds can never function like investment in gold & silver.
So if you like to buy diamonds, fine, just buy them. But don’t kid yourself into thinking that their value will go up along with gold/silver. In fact, the opposite is more likely to be true. Gold usually outperforms in a wild inflation and also deflation. Silver tends to under-perform gold, until the last final stage of gold bull market. Diamonds on the other hand will only perform in an inflationary environment, not in a deflationary environment, simply because diamonds are not money.