All that bling cannot hide what silly investments diamonds are

PUBLISHED : Tuesday, 31 July, 2012, 12:00am
UPDATED : Tuesday, 31 July, 2012, 12:00am

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Are diamonds the new best friend of investors?

SCMP headline, July 30

No. There's a direct answer for you. And I have also never gone for that De Beers marketing line about diamonds being a girl's best friend. Try some day to engage one in conversation and see just how much friendliness you get in return.

That line helped sell a lot of diamonds, but I rate it about as silly as the other one that a diamond is forever. Smash a diamond with a hammer and see how forever it is.

I particularly find the diamond cartel's disparagement of 'blood diamonds' objectionable. These diamonds come from places that resist the cartel's marketing dictates, some of which happen to be politically unsettled states in Africa. Their troubles have been made very much worse by the cartel's efforts to exclude them from world markets. If there is blood on these diamonds it comes from the cartel's hands too.

And you have the difficulty that none of the tests of a fake are completely reliable. You always need a professional to tell you. Even then, excavated diamonds do not generally give the beautiful blue fluorescence of manufactured diamonds, which are just as real as excavated ones and which improved technology has made steadily larger and clearer.

All these difficulties are also good reasons why diamonds are unlikely to be good investments. The biggest reason, however, is that diamonds are not really an investment anyway. They fall under the heading of speculation.

The difference is that investment is about putting a value on a continuing stream of income from something you own. Thus you might think stocks attractive at prices of 50 times their annual dividends and bonds at 40 times their coupon rate.

You cannot do this with a diamond. It offers you no income. It only imposes costs on you. You must pay for its storage and for theft insurance. The same is true of gold and old master paintings. Their prices are purely and only based on what the buyers hope subsequent buyers will be prepared to pay.

Thus in money terms of intrinsic value, any of them are as cheap or as expensive at $1 a unit as they are at $1,000 a unit. If you must value them, do so in terms of thrills of appreciation or looks of awe. These are the only currencies in which they have value. In money terms they have only price.

But, that can still be a pretty good price, you say. Take the steady increase of the price of gold over the last 10 years and weren't you, Mr van der Kamp, the know-it-all columnist who, with gold at less than US$350 an ounce 10 years ago, said it was going nowhere but further down?

Guilty.

If you want to keep chasing the price of gold, go ahead. It has been going my way again for about the last year.

But at least what gold has going for it is that it has always been reckoned as valuable right back to the mists of antiquity. Go that far back in precious stones, however, and you will find the fashion was for rubies, emeralds and colour. The big diamond mystique is of comparatively recent origin.

The concept of gold as a precious metal is eventually doomed because its traditional qualities of being lustrous, malleable and resistant to rust are now shared by things such as the wrapper of the chocolate that I just had with my coffee. If you wish to make me a bid for that wrapper because of the qualities it shares with gold, I'll fish it back out of the rubbish bin.

Diamonds have even fewer traditional qualities to recommend them. Listen to all that talk of 'very slightly included' and 'very special old pale' and all it can tell you is that diamonds sparkle. Yes, and I know of people who keep their diamonds in the safe and have cubic zirconium copies for social occasions. Can you tell the difference at normal conversational range? Be honest.

I fully accept that diamonds may go up in price. Given the efforts of the world's central banks to destroy investment value with ill-conceived stimulus policies, old bricks will probably go up in price.

No, sorry, bad comparison. Bricks have real uses.