Which is a more sought-after investment option — gold or diamonds?

Commodity investing, the term for purchasing raw commodities and aiming to sell them later, tends to be a safe option during economic uncertainty. And precious metals and gems like diamonds and gold are typically considered “safe-haven” investments.

Let’s explore the key differences between diamonds and gold and some nuances of investing in them.

We’ll also share a long-term investment alternative you can consider — investing in shares of fine art through Masterworks. 

Investing in Diamonds (Common Benefits & Drawbacks)

Diamonds (including colored diamonds) have proven to be suitable investment options for many investors. 

After the De Beers company launched a compelling marketing campaign post-World War II, the precious stone grew extremely popular. Until then, diamonds weren’t considered as valuable as they are today.

While colored diamonds are beautiful and a potential investment option, colorless diamonds are the most sought-after.  

Here are some reasons why investors place their bets on diamonds:

• Rarity: Diamonds (including colored diamonds) are always in high demand. Diamonds can be unique due to their size and quality, and the rarer they are, the more valuable they become.
  
• Durability: Many precious gems can wear down easily, but not diamonds — they’re durable gems. After all, they’re the hardest naturally occurring substance in the world, ranking on the Mohs Hardness Scale at a 10.
  
• A Safe Investment During Economic Uncertainty: Diamonds may be inflation-proof, making them a good investment option during economic downturns.
  
• A Beautiful, Versatile Investment: Buy loose stones (yes, even colored diamonds), and you can turn them into a diamond jewelry piece, like a diamond engagement ring.
  
• Easy To Move or Store: A diamond piece won’t take up much space and can easily be stored in a safe or jewelry box.  

Things To Evaluate While Investing in Diamonds

Here’s what investors are careful of when considering a diamond investment:

• The 4Cs: Diamonds are valued based on four characteristics — diamond cut, color, clarity, and carat (the 4Cs). It’s best to research the price and the 4Cs before investing in diamonds.
  
• Certifications: A legitimate certified diamond from an accredited gemological labs (like the Gemological Institute of America) ensures that a diamond is being sold at a fair value. It can also show the history of the diamond, and whether it’s an earth-mined or a lab grown diamond.
  
• Mounting: Ideally, loose diamonds should be mounted onto a high-quality metal. For example, a diamond can be mounted on a gold ring. This way, investors may earn a good return on both the diamond and the gold.
  
• How and where to resell: Savvy investors usually only seek out reputed diamond retailers with a wide network of private clients and auction houses when they wish to resell their diamonds.    

Note: Always opt for a polished diamond over a rough diamond. Although it’s generally less expensive than polished diamonds, turning a rough diamond into a finished product is harder and riskier.

Downsides To Investing in Diamonds

There are a few drawbacks to putting your money into these precious stones:

• Low Price Transparency: Diamonds don’t have a proper price index. While there are indices like the Rapaport index, they often aren’t sufficient on their own. Some legwork needs to be done to compare diamond prices from online retailers. This process is more challenging for colored diamonds, as each diamond is different.
  
• Tough To Resell: The resale opportunities for diamonds are slim. But if you own a unique, high-end diamond jewelry piece or family heirloom, you could sell it through auction houses like Christie’s and Sotheby’s. Watch out for their high fees.
  
• Easy To Lose: Diamond stones or jewelry are small enough to be carried around. But this also means they can easily be lost, misplaced, or worse, stolen.
  
• Lab Grown Diamonds Can Pose A Threat: With technology advancing rapidly, the price of lab grown diamonds continues to decrease. While earth-mined diamonds are maintaining high prices, this may complicate the market for diamonds moving forward.

Now let’s look at the nuances of investing in gold.

Investing in Gold (Benefits & Drawbacks)

This precious metal has been used in jewelry and as a currency for thousands of years. Today, gold can be liquidated into cash easily.

Here’s why gold is a popular investment:

• Hedge against inflation and market risks: Gold can hold its value over the long term and is often used as a hedge against moderate inflation. Even during market risks like terrorism, political conflict and more, gold remains protected.
  
• Can’t be manufactured artificially: This precious metal can’t be recreated in a lab. 
  
• Beautiful and wearable: Aside from storing gold coins or bars in a safe, this precious metal can be an appealing investment to wear.
  
• Easy to liquidate: Since information on gold is easily accessible, liquidating it is relatively easy. Unlike diamonds, you wouldn’t need in-depth knowledge about gold to liquidate it.

Downsides To Investing in Gold

What are the disadvantages of investing in gold?

• Fear-based decisions during market downturns: When economic markets get shaky, many people fearfully turn to gold as an asset class. Ideally, they should make a calculated decision for long-term success. 
  
• No returns on physical gold while it’s with you: Physical gold will not generate passive income like mutual funds or stocks.
  
• Storage and insurance can be expensive: If you’re investing in gold bars or coins, suitable storage, like bank lockers, may be be required. But watch out for insurance and annual maintenance fees that will slowly add up in the long term.
  
• Premiums and taxes: Gold is typically sold at a premium. So in the unlikely case gold loses its value, you’ll incur a loss equal to the current value of gold. When you sell it for a profit, you must also pay a capital gains tax. 

Diamonds vs Gold: A Detailed Comparison

Here are the five factors to evaluate both metals on, from an investment perspective:

1. Price

Finding out the prices of diamonds on your own can take time and effort, as you need to analyze the 4Cs to calculate their value. 

While there isn’t one official way to obtain global market prices (like gold), you can get an approximate diamond price from the RapNet Diamond Index. It sets down a weekly price average listed in Diamond Bourses (or exchanges) in dollars.  

The London Gold Fixing is how the price of gold is set. It’s a procedure where members of the London Gold Pool fix a price for settling contracts between members of the London bullion market. It also provides a recognized rate to be used as a benchmark globally. The gold price fixing is done twice a day. 

As you may know, the value of gold is calculated in karats, a measure of purity. 

For example, pure 24K gold, the highest karat, is a soft and heavy metal, so you typically don’t want to turn it into wearable jewelry. You need an alloy to increase its hardiness with durable metals like copper, silver, iron, nickel, or aluminum. So an 18K gold piece will have 18 pure gold units and six parts of other metals. Which metals make up the alloy will depend on whether the resulting color is white gold, yellow gold or rose gold, but gold is the value driver.

As such, the final value will also depend on the gold-to-metal ratio. 

2. Price Volatility

The price of diamonds fluctuates a lot less than gold year over year. Their market value depends on the 4Cs. 

The value of gold is tied directly to economic conditions and the stock market, so its price fluctuates in the short term. 

In 2011, gold hit a record high ($1,440 an ounce), while the price of wholesale diamonds (1 carat) rose to $196.96. But, in 2020, gold reached all-new highs at about $1,895 per ounce as many sought a safety net during the pandemic. 

3. Liquidity 

Liquidating gold is pretty straightforward. 

But it’s much harder to liquidate diamonds. You’d need to analyze the diamond cut, color, clarity, and carat and access a professional network to sell it. No two diamonds will have the same characteristics.

4. Returns

Investors may receive a good return on their gold investment in the long term. 

While gold will be worth around the same when you buy or sell it (plus a goldsmith’s commission), a diamond ring would lose 80% of its value the moment you leave the store. Moreover, when selling diamonds, you have to contend with high fees. 

Gold’s pricing is uniform and based on weight and karat. 2 ounces of 24K gold will be the same price as 2 ounces of less pure gold. But a 0.99-carat diamond can cost half the price of a 1-carat diamond. 

If you buy a diamond ring from a high-end retailer, you may experience a more significant loss on the secondary market than buying from a small online retailer. This is because a high-end retailer can have markups and premiums included in the retail diamond price.

5. Fewer Ways To Invest in Diamonds Compared To Gold

There are a few ways you can invest in gold:

• Physical Gold: You can invest in solid gold bars, gold coins, a gold engagement ring, white gold jewelry and more. 

• Gold Exchange Traded Funds (Gold ETFs): You can invest in gold without buying physical assets. You can trade gold ETFs, so you can invest a more flexible amount.

• Gold Mining Stocks: Another gold investment option is investing in companies that mine for gold. Typically, the share prices of these companies increases when the gold price rises. 

• Gold Futures: Trading gold futures is a form of speculative investing. With a futures contract, you agree to buy or sell a security for a specific price on a certain date, irrespective of market conditions. 

On the other hand, aside from the physical commodity, there aren’t many options to invest in diamonds. 

Now, if you want to explore another reliable inflation hedge, consider investing in fine art.

An Alternative Long-Term Investment Option: Fine Art

The fine art market continues to soar in popularity as more investors turn to it as an asset class. 

The art market generates about $5.7 billion in auction sales between January and May 2022. 

Contemporary art prices have appreciated faster than gold and real estate prices. According to the Masterworks All Art Index, fine art has also outperformed the S&P 500 and other inflation hedges like gold over the last 26 years.

The best part?

Fine art investing is no longer reserved for the rich and well-connected. 

Anyone can invest in multimillion-dollar blue-chip art by investing in shares of these masterpieces. 

How?

Invest in Shares of Fine Art With Masterworks

Masterworks is a fine art investment platform that acquires iconic art pieces from artists like Picasso, Banksy, Andy Warhol and more. Investors can then invest fractional shares of these extraordinary artworks.

Here’s how it works:

• Once the research team identifies which artist markets have potential, the acquisitions team locates and purchases the desired piece.
• Masterworks then files an offering to the SEC (Securities and Exchange Commission) to securitize the artwork.
• Once you’ve invested, you need to sit back and wait. Masterworks will keep the painting for about 3-10 years. You’ll receive pro rata returns after subtracting fees if the art piece is sold for a profit. 
• However, you can also sell your shares on the secondary market. 

Keen to get going? 

Sign up for the Masterworks membership application.  

This article is sponsored by Masterworks. This material is provided for informational and educational purposes only. It is not intended to be investment advice and should not be relied on to form the basis of an investment decision.

See important Reg A disclosures: Masterworks.com/cd