Gold and diamonds have been revered by humans for millennia because of their beautiful luster, useful properties, considerable scarcity, and inherent value. Today, these valuable assets are still popular investment vehicles for preserving wealth and hedging against inflation.
Despite many similarities, gold and diamonds represent a common dilemma among investors looking for the ideal asset. An honest assessment of the advantages and considerations of these safe haven assets can make it easier for investors to accurately determine which aligns best with their investment objectives.
Advantages of Investing in Gold
Price Stability
Gold prices have demonstrated remarkable stability, especially during periods of extreme economic volatility. This steady price performance has earned gold a reputation as one of the best options for keeping up with inflation. As paper assets buckle during bouts of economic instability and market fluctuations, gold assets tend to maintain or even gain value. This price stability is attributed to gold’s scarcity, intrinsic value, widespread acceptance, and long history of use.
Asset Diversification
Gold is a tried-and-true asset for optimized portfolio diversification. Unlike diamonds and other limited physical assets, gold offers a diverse range of investment options. Investors can choose between bullion gold coins, bars, and rounds along with investment-grade rare gold coins. This variety gives inventors more tools to work with when tailoring a diversified portfolio to meet their budget limitations, investment goals, and risk preferences.
High Liquidity
Gold’s universal recognition, inherent value, and surging demand make it a highly liquid asset. In other words, investors have no trouble selling their gold assets or increasing their holdings at will. This investment flexibility makes it easier for investors to take advantage of short-lived economic conditions or free up cash for emergencies. Gold’s liquidity adds an extra level of freedom and control that less-popular assets such as diamonds lack.
Market Standardization
Gold enjoys one of the most developed and sophisticated markets out of all tangible assets. Universally recognized benchmarks such as the spot price, coin grading, and standardized products in the form of coins and bars result in a highly uniform market. This translates to transparent pricing, smoother transactions, higher liquidity, and overall stability – characteristics that make physical assets highly sought after.
IRA Eligibility
The IRS has acknowledged the unique investment merit of gold by allowing investors to make this precious metal part of their nest eggs. Through a gold IRA, investors can put tax-deferred dollars towards various gold coins and bars so long as they meet purity, weight, and type requirements. This significant advantage isn’t extended to most physical assets such as diamonds because of their status as collectibles rather than investments.
👉 Suggested Reading: Eligible Precious Metals for IRA Investing
Investing in Gold Considerations
Counterparty Risk
The standardization of the gold market comes with tremendous advantages, but it’s not without potential downsides. Investors are inevitably exposed to more counterparty risk as the number of people involved in a transaction increases. For example, widespread suspicion of market manipulation was vindicated when two J.P. Morgan gold dealers were convicted of deceptive practices and outright fraud. However, some experts view this incident as a reckoning that will lead to a more tightly regulated and secure market.
Preservation
Some gold assets such as rare coins derive a significant portion of their value from condition and appearance. This requires investors to take extra precautions and make additional investments to preserve some physical gold investments. This isn’t the case for bullion bars or coins which are only worth their melt value. Furthermore, diamonds don’t require this extra layer of attention since they’re significantly more durable than gold assets.
Advantages of Investing in Diamonds
Appreciation Potential
Diamonds often have the potential for quicker and more pronounced gains when compared to other physical assets. The relatively small size of the diamond market along with the asset’s general scarcity contribute to more immediate price action. This appreciation potential can represent a significant investment opportunity when leveraged properly. However, the flip side of rapid gains is rapid losses. As with most tangible assets, diamond investors tend to see greater returns the longer they hold the investment.
Inflation Hedge
Along with gold, diamonds are considered a hedge against inflation. These physical investments hold an inherent value which isn’t affected by inflationary pressures and other economic instability. This way, investors can ensure a portion of their wealth is protected no matter what happens to the paper markets. Diamond assets often go further than merely preserving wealth by appreciating even when the rest of the economy falters.
Investing in Diamond Considerations
Subjective Evaluations
Unlike the gold market which has a standard spot price calculated daily, the diamond market has no uniform reference for evaluations. As a result, it’s more challenging and time-consuming to determine an asset’s worth. Diamonds derive their value from the so-called four Cs: color, cut, clarity, and carat weight. The high subjectivity of these characteristics makes it hard for investors to accurately assess the value of their investments and increases the likelihood of disagreements between buyers and sellers.
Volatility
Diamond prices are subject to immense volatility due to the lack of market structure. Unlike gold and other precious metals, there’s no centralized trading system for diamonds which leaves prices susceptible to rapid and unpredictable swings. These violent price fluctuations often attract speculative traders seeking to make quick returns. In turn, this short-term trading creates more instability as prices struggle to find equilibrium.
Low Liquidity
Low liquidity is a byproduct of the subjective nature of diamond evaluations. Without a universal method for determining value, the processing of buying and selling diamonds remains contentious and time-consuming. Investors don’t have much flexibility for quick investment decisions to jump on short-term market conditions or to respond to changing personal financial circumstances.
Synthetic Rivals
The rapid development of synthetic diamonds poses a serious threat to the evaluations of their naturally occurring counterparts. The lab-grown diamond market is rapidly expanding and artificial versions are becoming virtually indiscernible from the real deal. As technology continues to advance, the quality of synthetic diamonds will only increase. Some experts worry the potential for an unlimited supply of artificial diamonds will deflate the value of authentic diamonds, destroying their investment potential.
Gold or Diamonds: Which is the Best Investment?
Gold is generally considered a better investment compared to diamonds due to its steadier price performance, higher liquidity, greater variety of assets, superior market standardization, and IRA eligibility. Diamonds are largely viewed more as collectibles because of their association with luxury, speculative trading, and subjective evaluations. Both gold and diamonds can yield significant returns for investors, but gold has proven to be a more stable, secure, and profitable option in the long run.
If you’re interested in learning more about investing in gold assets, grab a copy of our FREE precious metals investment guide. It covers everything you need to know about diversifying your portfolio with gold to preserve your wealth and hedge against inflation.