Properties of gold as a metal include that it does not rust or corrode, is malleable, and has superior ability to conduct both heat and electricity. Though it has some industrial applications, is largely used as a base for currency and jewellery.
Central banks all over the world also use gold reserves as a form of investment. However, as an investment class, demand for gold is determined by sentiment more than supply and demand principles. Since the supply of new gold mined is much lesser than the amount of gold held by individual hoarders, the price of gold falls when hoarders feel like selling.
***PHYSICAL YELLOW METAL***
There are more advantages to gold when buying it physically. It has no counterpart risk, meaning the value of it will never be zero. It is private and confidential in terms of no one knowing that you own it.
CASH FOR GOLD
Gold is also liquid and portable, making it easy to authorized resale places. Investments in gold can be liquidated much faster than other physical assets, It is also easier to store and comes with low maintenance and carrying costs.
Gold can also protect an investor’s portfolio during a time of crisis. Looking at the graph below, The value of gold doesn’t correlate with the market. When stock market declines, gold has rise more than actually fall in value.
Gold is a natural safe haven when a crisis occurs and fear is rising. Gold ensures that if more people look to invest in times like those, then the prices substantially increase. Gold offers massive profit given the “precarious nature of our economic, financial, and monetary systems”
When you buy diamond jewellery, you don’t get diamonds for its entire value. For instance, on purchasing a diamond worth Rs 50,000, about 17 percent goes towards gold charges (as part of jewellery), another 8 per cent towards making charges and another 3 percent as GST. So, effectively, only 72% of the purchase value is allocated towards buying diamonds.
Making charges are a form of mark-ups and over the years it has supposedly increased to help support diamond rates in the market. So, when you sell diamond jewellery, you will get value only for diamond and gold (mostly at a discount to current rates), while foregoing making charges and government taxes. This will further dent diamond’s price performance.
**Poor Secondary Market**
Unlike gold or silver, which has a very liquid secondary market, it is not easy to sell diamonds. Except for some large retailers, there are no transparent mechanisms of pricing or a system of buy-backs. A precious metal like gold is fungible and liquid. It could be stored and sold anytime in the market. However, that couldn’t be said about diamonds.
**Bigger is Better**
A one carat solitaire (single diamond piece) ring is more expensive than a 25-stone cluster ring. That’s because larger stones are rarer than smaller stones of the same quality. Moreover, if you are in the habit of buying many diamond rings – probably you stand to lose. Diamond prices usually rise in proportion to their size. Some experts in fact advise buying diamonds upwards of a carat. However, that might not suit everyone’s pocket.
**In a Nutshell**
Diamonds might be a girl’s best friends. However, its poor price performance and an illiquid secondary market make it a poor investment candidate. So, buy diamonds only for once-in-a-lifetime gifting and nothing more. Adopt equities or other financial asset classes for meeting your investment goals.
In short, investing in diamond would have eroded your wealth in the past decade. Gold in comparison did relatively better – it was up 84% during the same period, while equities (Sensex) gave a return of 141 percent. Equities gave an inflation-beating CAGR of 9-10% for its investors.