By Marco Rabinowitz
One of the top headlines on the Drudge Report Friday night into Saturday morning linked to an interesting story from CBS Minnesota's Aristea Brady discussing how the price of diamonds is expected to significantly increase. From the article: "Jewelers say you can expect to see price increases ranging from 10 percent to 20 percent depending on the quality of the diamond ... Diamonds may be a girl's best friend, but new price hikes show they could become a man's worst nightmare."
Why would the value of diamonds rise and outperform gold? According to the article, "It all goes back to supply and demand, only this time, you have to take a global market into consideration." Diamond Direct owner John Sorich suggested that the fact that more individuals around the world are rising up to a middle-class level portends that demand for diamonds is increasing. Sorich: "There seems to be more and more people reaching this middle-class level, that once they get there, they become consumers."
According to India's Economic Times, the reason why diamond prices could outpace gold is because of "increased spending on luxury goods in China, India, and the Middle East." Economic Times: "The average price of rough, or uncut, diamonds will probably rise 9% to $145 a carat next year, 1.4% in 2013 and 4.8% in 2014." Even further, "Prices of top-quality diamonds climbed 23% this year, the biggest gain since at least 2006, according to the Rapaport Diamond Trade Index."
With an expanding middle class in China, India, and the Middle East, these regions in Asia "will account for 40% of global diamond demand by 2015, compared with about 8% in 2005." Whereas the impetus of the expected rise in diamond prices seems to center around growing demand in Asia, traders may want to take a look at companies like Tiffany & Co. (NYSE:TIF), Blue Nile, Inc. (NASDAQ:NILE), Signet Jewelers Ltd. (NYSE:SIG), and Zale Corporation (NYSE:ZLC).
Even if global demand makes diamond prices rise significantly in the near future, one should be aware that diamonds are fundamentally not the same as gold. Thus, before you rush off to Blue Nile, JB Robinson's, or Jared Galleria of Jewelry to invest in diamonds, you may want to do some research on the history of the diamond trade. I have written previously, "Unlike gold or silver, diamonds do not really have any intrinsic value per se." Though diamonds do have significant industrial purposes, a diamond engagement ring is pretty much a useless item.
Going along with my previous article, one may wonder if the popularity of diamonds will continue if society matures and financial belts are tightened. Of course, for the foreseeable future, it would appear that diamonds will remain a popular global commodity. That being the case, as human civilization grows up and matures in the long-term, diamonds could become significantly less popular -- similar to how we do not trade parcels of land for tulip bulbs today.
As DeBeers cornered the diamond market long ago, in some ways artificially manufactured demand (by virtue of an artificial monopoly) sustains the marketability of diamonds. As I explored previously, "the 'tradition' of giving diamond rings for engagement was promulgated and aggressively marketed to Americans in the 1930s and 1940s." As such, arguably, diamonds do not share the same quality of inherent value as gold or silver.
Supporters of Rep. Ron Paul may recall when the congressman boldly questioned Federal Reserve Chairman Ben Bernanke on if gold is money. Bernanke replied, "No. [Gold] is a precious metal." In comparing gold to diamonds, Ron Paul continued, "Why don't [central banks] hold diamonds?"
The reality is that though gold and diamonds may be put together for the sake of an engagement ring, diamonds are not like gold or silver.
Diamonds have not historically functioned (in terms of price and value) the same as gold or silver. In some ways, investing in diamonds would be like investing in oil if Saudi Arabia owned every last oil well and every last drop of black gold coming out of the ground on the planet Earth and could on a whim manipulate the price of oil at will. As the popularity of diamonds is a product of a successful advertising ruse, to use an analogy to the inherent value of diamonds, it would be as if a lone trader traveled to a lost island on a barge with a lifetime supply of Coca-Cola (NYSE:KO).
In order to deal with the natives on this lost island, the trader marketed empty Coke cans as valuable, magical items that a man must give his bride-to-be prior to marriage. Even in the context of the lost island, since the trader has a monopoly on a lifetime supply of Coca-Cola, the value of an empty Coke can (via marketing and trade) appears much greater to the natives than its inherent value -- which for most Americans, aside from recycling purposes, etc., an empty Coke can is merely useless trash.
Thus, the trader is able to live like a king among the natives owing to his endless supply of worthless empty Coke cans. Natives on the island may even go so far as to steal, murder, and get into conflicts over these empty Coke cans. Whereas this exploitative scenario may be great for the trader, the same cannot be said for the natives -- whose lives, in dealing with a society consumed by this marketing ruse, are made that much more difficult, dangerous, painful, stressful, and frustrating.
Given the artificiality and capriciousness of diamonds in terms of supply, demand, and profitable viability, not to mention bad publicity of diamonds courtesy of films like "Blood Diamond", some traders may understandably be leery of the diamond industry. Even further, given the market reliability of gold and silver as opposed to De Beers' artificially monopolistic control of diamonds, some traders may be wary and skeptical of the thought of diamonds outperforming gold. And while manufactured demand may be demand nevertheless, the bottom line is that as much as diamonds outperform gold in the short-term, diamonds will never be gold.
Traders who believe that diamonds will outperform gold might want to consider the following trades:
- Go long on Signet Jewelers, Blue Nile, Inc., Tiffany & Co., and Zale Corporation.
- Traders could also check out Harry Winston Diamond Corporation (HWD) and BHP Billiton plc (NYSE:BBL).
Traders who believe that gold will rise and the value of diamonds will collapse owing to a fall in demand and the nature of the diamond industry may consider alternate positions:
- Short the above, and check out gold coins & bullion and ETFS such as SPDR Gold Trust ETF (NYSEARCA:GLD) and iShares Gold Trust ETF (NYSEARCA:IAU).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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