Gold has traditionally been considered a safe haven from global and political turmoil and a hedge against inflation, deflation and currency devaluation, but current market uncertainty is testing its reputation.

As the price of gold tumbled 5 per cent to
a six week low of $1,659 a troy ounce last Friday, nearly its sharpest weekly
drop since December 2008, investors may start considering a new best friend
– diamonds. 

According to September’s Diamond Prices
Index, which records the average retail price per carat of loose diamonds,
values have steadily risen by nearly 75 per cent since January 2006. Prices are
still rising. In the last year the price for the best polished diamonds of 5 carats has risen as much as 50 per cent from $100,000 a year ago to $150,000 a carat. South African miner De Beers, in its July results posted record first half rough diamond sales totalling nearly $4 billion. 

The investment story is playing out
in auction houses – as well as trading rooms - around the world. In Macau last
week, a rare 10 carat vivid yellow diamond sold for a record $1.6 million, while another
yellow diamond sold for nearly $3 million the week before in an Ohio auction. Demand is being driven by Asia. In June the Hong Kong Jewellery & Gem Fair saw a 25 per cent increase in the number of exhibitors on last year - an all time record.

$1.6million Fancy Vivid Yellow Diamond at Macau Auction

“Diamonds are now the most concentrated
form of wealth on earth. Hailed as the next ‘gold’, diamonds
have become hot property and have performed year-on-year better than
practically any other investment,” said Ansar
Ali, chief executive of Elite Gems, a Mayfair-based investment
group.

He
added that the Chinese and Indian demand for jewellery are buoying high end
investments such as diamonds. As the shift
of wealth moves from the west to east many companies are now setting up offices
overseas to accommodate the insatiable demand for high-end goods.

“The
market for natural coloured diamonds is very
strong at the moment and prices have risen by 25 per cent within the last year.  If that pace continues, an investment in natural coloured diamonds today could double in value in the next
24 months. With low capitalist self-confidence in paper assets, loose coloured diamonds are an outstanding way for investors to
diversify their portfolio, as they may provide support for the duration of
hyperinflation, international financial crisis, or in times of dire need," he added.

A Gold Bubble?

However, diamonds’ price rise pales in
comparison to gold’s meteoric surge of nearly 200 per cent in the last five
years, according to Goldprice.org, although in recent months the precious metal
has been unusually volatile.  

Gold has traditionally been considered a
safe haven from global and political turmoil and a hedge against inflation,
deflation and currency devaluation, but current market uncertainty is beginning
to test its reputation for stability, as fear drove a selloff on Friday. Last
week traders swapped their profitable gold holdings in favour of liquidity in
cash as fears over the Eurozone debt crisis and the battered global financial
system lingered.

However notwithstanding a few fluctutations, gold
is expected to continue to rise buoyed by demand in Asia. According to the
World Gold Council, gold demand in China is forecast to rise 10 per cent this
year.

“Basically a lot of supportive factors for
gold are still in place…things like Asian demand are very strong at this
point,” said Standard Chartered analyst Daniel Smith in a report last week.