11
Dec
2008

Diamonds and Jewelry as “Rock Solid” Investments

There have been a spate of articles in the press recently including the Personal Finance section of the Irish Times touting jewellery and diamonds as safe haven “rock solid” investments.

Rock solid investment

Looking for a rock-solid investment?

A girl’s best friend and a smart way to invest

This is dangerous nonsense and irresponsible journalism of the highest order.

Investors have lost enough money in recent years due to appalling investment “advice” regarding equities and property and it is important they do not compound that by “investing” in diamonds and jewellery.

As ever real diversification in all asset classes is essential.

This Christmas Do Not Buy Jewellery and Diamonds as “ Investments”: Diversification Remains Key to Weathering the Economic Storm

With the economic slowdown and the consequent fall in jewellery sales, jewelers have recently begun touting the merits of jewellery and diamonds as being “investments”.  Gold, silver, platinum or palladium rings, bracelets and necklaces and diamonds or other gem stones should not be sold as an investment and it is irresponsible to sell them as such. This is dangerous nonsense that may lose investors even more of their hard earned savings.

Firstly, jewellery and diamonds attract VAT at 21.5%. Investment grade gold bullion (0.9999 or 24 carat) coins, bars or government gold certificates are stamp duty and VAT free due to the EU Gold Directive.

Gold bullion coins, bars and certificates can be put in a pension fund unlike diamonds and jewellery which is another reason that they are not “investments”.

Another important consideration is that the jewellery market is known for having huge mark ups over the actual gold content or intrinsic precious metal value of the jewellery itself. Which means that standard, run of the mill 9 carat, 14 carat and 22 carat rings, bracelets and necklaces have mark ups of hundreds of percent over the precious metal content value.

This means that a very large necklace that has 1 ounce of pure gold (0.9999 pure or 24 carat) contained in it will normally cost well in access of 250% over the market price for gold. Thus, for example if the price of gold is trading at €600/oz, the necklace may cost well in access of €2,100/oz. A gold bar which also has 1 ounce of pure gold in it will cost €600oz plus a much smaller mark up of some 5% or €630.

This is just on the buy side. As important, is the sell side consideration. When an owner of jewellery goes to sell their “investment” they will be lucky to realize 30% of the cost price of the jewellery item. In fact most jewelers will not even consider buying the piece back and the buyer will be forced to sell it at a massively discounted price in a pawnshop or on Ebay.

This massive instant depreciation is not seen in asset markets including the gold market itself.

A gold certificate or gold bars can be bought at 2% to 6% over the live market gold price. A day, week, month, year or years later the same gold certificate or gold bars will be automatically bought back by a bullion broker or government mint at near 100% of the market value –at some 1% below the actual market price or even slightly above the market price.

Gold not Diamonds

This means that the spread between the buy and the sell price for investment grade gold bullion is in the low single digits and is tiny whereas the spread between the buy and sell price for rare stones or jewellery is extremely high making any sort of investment return nigh impossible.

There is no local or international jewellery or diamond market place where jewellery or rare stones  are traded on a daily basis on an exchange as there is with equities, commodities, bonds, currencies and gold. Therefore there is no efficient market  or price discovery mechanism which means that the price of jewellery and rare stones is subjective and subject to the whims of individual jewelers and valuers.

Even international experts in the trade itself deny that jewellery or gemstones are investments and deny that they are not correlated with equity markets and therefore “rock solid investments”.  Lisa Hubbard, executive director of International Jewelry at Sotheby’s  notes that ” Diamonds tend to go up and down with the value of the stock market.“

Unlike, jewellery and rare stones, investment grade gold bullion (0.9999 pure) does have an inverse correlation to property and equity markets as was seen in the 1930’s and 1970’s and in recent months.

A Euro perspective of the world markets

08-Dec-08

Last

1 Month

YTD

1 Year

5 Year

Gold €

606.48

5.06%

6.15%

11.54%

81.93%

Silver €

7.47

-6.95%

-26.27%

-23.45%

66.88%

Oil €

34.77

-44.99%

-48.86%

-41.84%

37.85%

FTSE €

3,556

-3.89%

-25.04%

-23.98%

15.72%

Nikkei €

68

-11.22%

-27.97%

-29.99%

-14.68%

S&P 500 €

665

-10.97%

-33.95%

-34.64%

-23.68%

ISEQ €

2,509

-17.98%

-63.81%

-64.00%

-47.54%

EUR/USD

1.271

-1.55%

-12.84%

-12.91%

4.34%

EUR/JPY

117.3

-7.51%

-27.99%

-27.54%

-10.54%

EUR/GBP

1.1552

-5.80%

-15.13%

-16.78%

-18.71%

© 2008 Goldassets.co.uk

Jewellery and rare stones are not investments. Some quality jewellery pieces and top quality very rare stones may be stores of value and retain their value in the event of a continuing and deep recession however the vast majority of jewellery pieces and rare stones will fall in value. As the expert from Sotheby’s noted diamonds are correlated with equity markets as are the art and wine market. Sotheby’s own share price has fallen from nearly $60 to $10 per share today.

In the current unprecedented financial and economic climate there are very few safe havens but gold bullion remains one. Central bank gold sales and leasing of gold have artificially suppressed the price of gold in recent years but with gold  lease rates surging and central banks concerned about financial, economic and systemic contagion, this source of supply is set to dwindle in the coming months. Indeed many South American, Middle Eastern, Asian (including the Chinese) and the Russian central bank have already stated their intentions to and are adding to their gold reserves.

The German Bundesbank recently clearly stated how they view gold as an essential monetary asset. “National gold reserves have a confidence and stability-building function for the single currency in a monetary union,” the Bundesbank said. The wise sages in the Bundesbank said that financial and political uncertainty make their gold reserves even more important than before. The Bundesbank is the world’s second-largest holder of gold after the US Federal Reserve, and has sold just 20 tonnes out of total reserves of over 3,000 tonnes in the past five years.

gold reserves by country

http://en.wikipedia.org/wiki/Official_gold_reserves

This Christmas, buy jewellery or a diamond as a beautiful gift for a loved one not as an ‘investment ‘ that will protect you from the global economic recession.

As ever real diversification and real diversification in pension funds is absolutely essential to all investors and best of breed equities, property, commodities, government bonds, cash and gold bullion should be included in all investors portfolios in order to protect ourselves in 2009.

Mark O'Byrne
Executive Director