When it comes to investment assets, gold continues to attract while many still view diamonds with caution. This may be surprising given that diamonds are rarer, in terms of their value as a luxury product, and of course their stellar performance over the past decade.
Consider that the average price of a 1-carat diamond has increased by 59 percent since 2002 while 3-carat stones are up by 134 percent, according to the recently published Rapaport Diamond Price Statistics Annual Report 2011. While their performance may have been overshadowed by gold prices, which rose 454 percent throughout the past decade, diamonds have outpaced inflation, most currencies and financial markets to offer significant returns.
But the simple matter is that diamonds still have a way to go in enticing the investment market. The industry is still heavily dependent on consumer demand, and therefore economic growth, which may in itself add to investor restraint. The investment market therefore remains largely limited to specialty diamonds, thus making it less accessible to a wider group of investors.
This may be changing as the industry continues to become more transparent and as consumer knowledge and investor awareness about diamonds increases. But gold holds the advantage as investors big and small almost automatically turn to the yellow metal for value.
Gold has a tendency to perform in all market types. It is driven by both fear and greed so that historically speaking, when financial markets have been bearish, gold has served as the ultimate safe-haven asset, while in better times, it has maintained its bull-run.
Most relevant for today’s market, it acts as an inflation hedge and pulls strength from low interest rates. These were certainly at play in 2011 when gold gained around 9 percent during the year, setting record highs along the way. While the market peaked in early September as gold crossed the $1,900 an ounce barrier for the first time, it turned uncharacteristically volatile in the final four months of the year. Market talk hinted toward the end of the bull-run as prices dropped 19 percent from September through December, but the uptrend so far in 2012 has restored confidence.
In its quarterly Gold Demand Trends report, the World Gold Council (WGC) noted that 2011 was a year of contrasts, not only in price movements but also in terms of supply and demand. “It was a year characterized by dichotomous trends, manifest in price stability during the first half followed by higher than average volatility during the second,” the report explained. “It was also a year of intense scrutiny but despite a strong headwind from commentators calling the top of the market, gold continued its 11-year bull-run driven by a diverse set of factors.”
Those factors included “divergent” Indian and Chinese demand where China ranked as the largest market for gold jewelry and investment in the fourth quarter for the first time since the beginning of 2009. There was also strong net central bank buying as emerging markets took to gold to offset rising concern about their creditworthiness and the low yields of their existing reserve assets. In addition, growth in mine production during the year was slightly offset by a decline in recycled gold supply, which WGC took as a sign of a bullish market. The recent downtrend in recycled gold supply indicates expectations for higher prices, acclimatization of higher price levels, economic growth and exhaustion of near-market supply, WGC explained.
The numbers effectively tell the story. Global gold demand rose 0.4 percent year on year to 4,067.1 tons in 2011 as higher prices pushed the value of demand up 29 percent to $205.49 billion, WGC reported.
For the year 2011, the volume of jewelry demand fell 3 percent to 1,962.9 tons while the value of jewelry demand increased 25 percent to $99.18 billion. Indian demand softened during the fourth quarter as the weak rupee curbed buying during the Diwali season. Chinese jewelry demand became cautious in the fourth quarter until December when the market started to prepare for the Chinese New Year festival.
Jewelry accounted for 49 percent of the total gold market while investment demand held 40 percent, and technology the remaining 11 percent. Investment demand rose 5 percent to 1,640.7 tons and increased by 34 percent to $82.9 billion with demand for physical gold bars and coins driving the overall market.
One should expect the bull-run to continue through 2012, much for the same reasons. Gold has already gained 12 percent in value since January 1 and traded this week at around $1,770 an ounce. Certainly in the current first quarter, many of the influencing factors continue to ring true.
Political instability and economic uncertainty are feeding fears of high inflation while in the jewelry market Indian caution is being balanced by steady demand in the Far East. Furthermore, economic weaknesses are increasingly influencing a penchant for physical, rather than paper, assets. There may well be a strong touch-and- feel aspect to investing as financial market volatility and economic uncertainties take their toll.
These bode well for gold jewelry demand and for gold bars and coins. And it should bode well for diamonds as well, if not more so. If diamonds hold one advantage over gold, and most other investment assets, it is that they are easily transportable and thus theoretically should be more liquid.
The diamond trade would therefore do well to better inspire demand for this segment of the market. While there has been recent concerns expressed about the commoditization of diamonds – especially with the emergence of Anglo American as an important player in the market – these are unfounded. If anything, raising the investment profile of diamonds and making diamonds more accessible to the public should be viewed as a positive trend that will raise overall demand.
For such is the value of gold. Many predict that it’s going to be a hot 2012 for the yellow metal and that the bull-run will likely continue. But the forecast for diamonds is less clear. As long as consumer demand accounts for the vast majority of the diamond market, it will remain a fear- driven market. Consumers may well hold back in the face of economic uncertainty this year, while it appears that investors will continue to overlook diamonds in their search for safe-haven assets.
That is a pity and an opportunity lost. While it may take some time for diamonds to woo investors to the extent that they do consumers, that day must surely come. The potential for diamonds to offer golden returns is certainly there.