Oh My Precious: Investing in Diamonds vs Gold

The vast majority of gold in circulation today takes the form of bullion (bricks) stored securely—and expensively—in banks and treasuries. Having such large amounts of gold sitting in one palace is economically impractical since storage is a sunken cost, so institutions often issue securities backed by their gold which are sold to retail investors. Investing in gold-backed exchange-traded securities (ETFs) is a tradeoff for retail investors because it only gives them access to 'spot gold,' a derivative of gold that's less correlated with the underlying asset.

Diamonds are another commodity infamous for high value and an association with prestige. Diamonds became popular thanks to an extremely successful post-war marketing campaign by the De Beers company that made the precious stone synonymous with love and matrimony. Like gold, diamonds are heterogeneous because they each have a different color, shape, weight, and clarity. Diamonds come in several natural colors, but colorless diamonds are the most coveted, especially when they're considered to have flawless clarity. 

One major determining factor of a diamond's price is its weight delineated by either carat (200 mg) or point (2 mg) for smaller diamonds. Also, the cut of the diamond is of key importance because good craftsmanship makes the diamond's best features stand out. Natural diamonds can be great investments because they're rare, durable, and function as an uncorrelated asset and a store of value, but an increase in synthetic diamond production threatens the waning De Beers monopoly as well as the overall diamond market value.

The main difference between investing in diamonds and gold is that there are fewer ways to invest in the former compared to the latter. For example, investors can either trade the spot price of gold using an ETF, buy gold and pay a service to store it somewhere else, or buy the physical commodity and store it themselves. 

When it comes to diamonds, investors are usually forced to handle the physical commodity in one way or another since there are no ETFs where diamonds are the underlying asset. A safety deposit box at a bank is a good way to safely store diamonds since they don't take up a lot of space, but the only legitimate way to obtain diamonds is from a dealer or jeweler that profits mostly from extreme markups.

Price & volatility

When comparing the prices of gold and diamonds over the past decade, there is a clear correlation between the two markets. Both diamond and gold prices reached all-time highs in 2011, but gold has since broken that record last year. The per-carat price of diamonds has also experienced a spike over the past year, although to a lesser extent. These price increases are largely due to the global economic uncertainty created by the pandemic, which led to higher demand for "safe haven" assets that are uncorrelated with the stock market.

While recent geopolitical developments are causing increased demand for both gold and diamonds, gold has the advantage of possessing more macroeconomic utility. Both gold and diamonds are hard commodities that are expensive to extract, which means mining is only performed when it's economically viable. While higher prices for hard commodities generally mean more resources are dedicated to extracting them, miners are more likely to pursue gold over diamonds because it produces more economic utility. This could mean diamonds will go up in price if demand stays the same, but this is a speculative assumption.