Are diamonds and listed diamond producers brilliant safe-haven assets to buy alongside gold? There could be some logic behind the answer being yes.
Both diamonds and gold have eternal appeal thanks to their immense sentimental qualities. There have also been products launched in recent years that allow investors to buy a package of investment-grade polished diamonds as an alternative to cash or other flight-to-safety assets.
But before you rush off to research diamond firms, think twice. A quick look at stones prices suggests that the sparklers are anything but a trusted lifeboat in troubled times. According to the RapNet Diamond Index, values of one-carat pieces dropped 6.8% in March as coronavirus fears rattled buyer appetite.
Compare this to gold’s price ascent over the recent months. The yellow metal touched fresh seven-year peaks around $1,750 per ounce earlier this week. And some are tipping new record peaks above $2,000 in the months ahead.
Locked down
The recent global lockdown has delivered a hammerblow to diamond prices. Travel restrictions have hampered stone auctions and the processing of polished product, particularly so in the manufacturing hotbed of India.
Market conditions are likely to remain tough even when Covid-19-related quarantine measures are eased. Sales of diamonds in key markets like the US and China have been in the toilet for the past couple of years. It’s a result of tense trade talks between the two countries that have worsened the global economic slowdown. With a pandemic-related recession just around the corner, it’s likely that demand from these critical territories will sink still further.
There’s another reason why diamond prices have performed much more weakly than gold. Natural diamonds have come under intense attack from the synthetic stone segment in recent years. Technological developments mean that the quality of lab-grown products have improved markedly. Gold, meanwhile, has no artificial rival to try and bat away.
Cheap for a reason
Despite this cloudy outlook, diamond digger Gem Diamonds (LSE: GEMD) has witnessed some healthy dip buying of its shares in April. It’s a trend that has lifted the small-cap back above the recent all-time lows around 27p hit in March. Prices of 34p were last reported.
It’s likely that Gem Diamonds’ cheapness could attract even more buyers in the days ahead. At recent values, it commands a forward price-to-earnings (P/E) ratio of 8 times. Buyer beware, though: the multitude of market troubles mean it trades at low cost for a very good reason.
No safe haven
The company, which produces stones in the southern African nation of Lethoso, made $7.8m from its latest tender in March. This was down a shocking 18% from what it realised at the last small diamond sales event in December.
Gem Diamonds is also facing troubles on the operational front. It was forced to shutter its Letšeng mine for an initial three weeks following advice from the government there. News that it is to remain closed during the Q1 update on Tuesday (April 21) could sink its share price once more, as could scary commentary on the weak diamond market. I think this alleged safe-haven stock should be avoided at all costs.