Gold prices enjoyed a revival at the beginning of 2016 as investors sought refuge from the financial turbulence that beset stock markets in the first few days of trading, and diamond prices also suffered a slump in 2015, so when comparing gold and diamonds, which one could be considered a better investment for 2016?
To try and evaluate whether your focus of investment attention should be more towards gold or diamonds, it is important to take a look at what clues the markets have been providing and what the outlook is for the year ahead.
Rough diamond market
Analysts will tend to agree that 2015 was a challenging one for the diamond market.
What we saw in 2015 was a large diamond price slump, which had the knock-on effect of forcing major diamond miners to adjust a react quickly to the turmoil.
The Zimnisky Global Rough Diamond Price Index showed that diamond prices managed to fall by 13.53% in 2015. The index was created in order to try and provide a reliable and easy-to-access rough diamond price guide, which is updated on a weekly basis, primarily utilizing price data from reported rough diamond transactions.
It has become an index that is extensively used by the diamond industry and is calculated from a starting value of 100 as of April 2004. Since the inception of the index, the value of rough diamonds managed to climb 35.2% in a ten-year period to 144.47 on the index.
Despite the 13% drop in values based on the index price in 2015, the rough diamond index was at 144.47 by mid-March 2016, so it is clear that a recovery of sorts has already taken place in 2016, bringing the index value back to where it was in 2014.
Bankers to blame
There are some who blame the bankers for a number of current financial hangovers that we have still not completely recovered from, and it seems that some prominent voices in the diamond industry are pointing the finger of blame in this direction too, as the reason why prices suffered a slump.
Martin Rapaport, who is the chairman of the Rapaport Group, published an article in November 2015, blaming diamond miners and banks for the downward trend in the diamond price.
What Rapaport is saying is that banks began to large substantial sums of money to diamond cutters after the global financial crisis in 2008. This strategy helped the cutters to stay in business and ride out the financial storm, but the major problem with this strategy according to Rapaport, is that the money helped to support rough diamond prices that were noticeably higher than polished diamond prices.
The effect of this move, created a scenario where cutters were borrowing money to buy the rough diamonds,but after they had polished them and tried to sell them on, they were subsequently unable to sell them for a profit.
Bankers it is alleged, have to bear some responsibility for their actions in the diamond industry, which resulted in a global supply glut of low to mid-quality polished diamonds. This explains a plausible reason why rough diamond prices have suffered on the Ziminsky Index, so what does it mean for prices in 2016?
Hidden amongst the gloom about price falls, is some good news, which is that 2015 witnessed the discovery of some significant diamonds.
Lucara Diamonds stole the limelight in this respect, with the discovery of a 1,111 carat diamond, although Petra Diamonds and Rio Tinto also reported valuable finds.
Combine this positive news with the fact that the rough diamond price drop didn’t influence fancy colored diamond prices, which managed to climb by between 5% and 6% on average, and the outlook seems reasonably positive for 2016.
Two significant factors that are increasing prices are rarity and a high level of demand from affluent customers. Although there are still voices of dissent, such as Rapaport, who remains unconvinced that the conditions are still challenging to allow prices to rise by any worthwhile margin, there are perhaps a number of reasons why diamond prices might move higher in 2016.
What miners have effectively been doing in recent times, is to react to lower rough diamond prices by reducing supply to the market, which is helping to boost prices in order to meet demand.
There is some consolidation within the industry still required and although there are some reasons to be cautiously optimistic about the diamond market, there are still some bumps in the road that could derail the progress.
Gold prices in 2016
A comprehensive survey published by GFMS Thompson Reuters titled Gold Survey 2015, provides some revealing insights into what events and scenarios could influence the price of gold in 2016.
The reports highlights that demand for worldwide gold coins and bars was 26% higher in the third quarter of 2015, when compared to the same period of 2014. Another upward trend that also shows an improvement in the third quarter of 2015 in comparison to the same period of 2014, is that central banks purchased a total of 132 tonnes of gold, a 13% higher number than the same period 12 months earlier.
It will also not surprise investors who understand the driving forces behind gold markets, that India and China were reported to be solid buyers in the first nine months of 2015, with India acquiring 642 tonnes and China 579 tonnes of the precious metal.
If you take a look at the import figures for India that were published in August 2015, gold bullion imports into the country rose by a healthy 140%. $4.95 billion of gold found its way into India in that month, which is a number that is virtually double of July’s total of 89 tons of gold
Supply and demand
These figures are significant, as they seems to demonstrate a general increase in the number of buyers acquiring gold elsewhere too.
You may be surprised to hear that Russia, a number of former Soviet states and Mexico, are named as countries that have been significantly active in buying gold at a record pace, according to a Bloomberg report published in September 2015.
When you combine what could be classified as a spending spree on gold in recent times, with the news that the number of new gold discoveries has fallen quite dramatically, you begin to get a sense that the economics of supply and demand are going to play their in helping to push the gold price higher at some point, when the squeeze is felt more acutely.
Not only is demand for gold rising, which could push prices higher in 2016, but with supply numbers contracting, it could turn out to be a positive year for gold investors.
Both diamond and gold markets are currently being influenced by supply and demand factors, but if forced to decide which one to invest in, it would seem that maybe gold has the greater scope for 2016.