As gold has been plunging, precious metal investors should follow the lead of Tiffany & Co (NYSE: TIF) and invest in diamonds through companies such as Harry Winston Diamond Corporation (NYSE: HWD) and Mountain Province Diamonds (NYSE: MDM). This is the opinion of Jonathan Yates writing at www.smallcapnetwork.com.
In a recent article in Financial Times, "Tiffany eyes further mine funding options," it was detailed how the US luxury jewellry retailer is financing diamond mines around the world. According to the piece by Barney Jopson and William MacNamara, Tiffany & Co. is lending "$50 million to a mine in Sierra Leone in exchange for the right to buy its rough diamonds."
Diamonds have many advantages over gold as an investment. The first is that gold is not an investment, it is speculating. Gold has no investment value as more than 90% is used solely for storing away as an inflation hedge or to protect against debasement of the currency. As Liam Denning wrote in "Bubbly Gold Might Take a Bath, a recent article for The Wall Street Journal, "In one respect, gold always is in a bubble. An inert metal in every sense, gold has no intrinsic value as an asset so buyers focus on is resale value. This search for the greater fool is characteristic of bubbles."
This is not so for diamonds. About 80% of diamonds are used for industrial purposes, such as lasers, drill parts and surgical equipment. This will continue to rise in the future. This will also prevent an asset bubble from forming for diamonds the way it has for gold. Those investing in diamonds do not have to worry about being the “greater fool.”
Much of the present increase in gold emanated from the weak dollar policies of the Federal Reserve. Quantitative Easing II, which began in November 2010, entailed the purchasing of $600 billion in Treasury bonds from the Federal Reserve expanding its balance sheet. This, not surprisingly, greatly increased the value of gold as speculators turned to hard commodities rather than more US dollars flooding the market. This did not, however, raise prices for diamonds. As a result, the current pricing structure for diamonds is fundamentally much sounder as it is based on economic demand, not "hot money" from speculators.
The future of investing also favors diamonds. For the high end sect, diamonds are a more attractive investment than gold. The value is more concentrated, the asset is more portable, and there is no property tax. As a matter of fact, diamonds represent the most concentrated store of investments that exist. This certainly is the demographic that Tiffanys is targeting.
In addition, the access is broadening to all investor classes as, according to Charles Wyndam, founder of PoishedPrices, "When you look at seriously expensive stones, they'll go straight into a safe...there is now a huge amout of interest to open lower-value diamonds to investors as well." This will serve to raise the prices of diamonds and companies in the industry in an orderly, responsible, and fundamentally sound process.
This is happening now across the globe as more affluent consumers in India and China are starting to realize the value of investing in diamonds. Prices have risen more than 50% since 2010, much of that in the last six months. According to data from PolishedPrices, the value of 5 carats, about 1 gramme, of top quality polished diamonds is now at $150,000 a carat, about a 50% increase from a year ago. While diamonds have already increased greatly in value, some analysts see prices doubling or even tripling by 2013. Much of this will result from the greater demand in Asia, as "...the emerging middle classes are buying their first diamonds," noted Pooja Kotwani, India Managing Director of Rapaport. "They are moving from a traditional gold band to a diamon-set ring. That is having a huge effect."
A major appeal of gold is also its major weakness. Gold can be bought through any number of instruments (exchange traded funds, stocks, bullion, pawn shops, etc...) This creates asset bubbles, which gold is clearly in now. The gold exchange traded fund, GLD, has the largest market capitlization of any. Bubbles like these do not exist for diamonds, which makes it a much more stable, and thus, much more attractive investment.
As Voltaire famously said in 1729, “Paper money eventually returns to its intrinsic value - ZERO." In a low interest rate environment that will last until at least mid-2013, this is certainly true for its investment return. With increasing economic demand for diamonds, share prices for Harry Winston Diamond and Mountain Province Diamonds should rise, too.
