Why Gold Instead of Diamonds?

 Photo by Mario Cateb licensed under Creative Commons Attribution-Share Alike 3.0 via  Wikimedia  

Photo by Mario Cateb licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia 

Esteemed monetary economist JP Koning at Moneyness has published an analysis of what substances are the most efficient (gram per gram) store of value, a fundamental attribute of “moneyness.” 

Koning there rounds out the qualities of "moneyness" very succinctly:

Store of value is one of the three classic functions of money that we all learn about in Money and Banking 101: money serves a role as a medium of exchange, unit of account, and store of value. So presumably if bitcoin wasn't going to be a medium of exchange (and certainly not a unit of account thanks to its volatility), at least some claim to money-ishness could be retained by having it fill the store of value role.

In his 1867 Money and the Mechanism of Exchange, political economist William Stanley Jevons formally introduced the term "store-of-value" into monetary economics (although Nathan Tankus tells me that Marx may have originated the idea albeit with different terminology, and Daniel Plante tips Aristotle)…

As an aside, Koning reports that the hallucinogenic LSD wins the prize for most concentrated value. (LSD’s effective dose is some millionths of a gram. Thus its unit value is highest of all substances there scheduled, close to $100 million per pound in 2008 prices.)

For quite a few reasons which need not be belabored here, LSD is not an optimal store of value. But what about diamonds?

Good quality one carat diamonds come in second to LSD for concentration of value, at close to $10 million per pound in 2008 prices. You reportedly can now buy blockchain tokens for diamonds much as you can, here, for gold. Why, then, might you find gold superior to diamonds as store of value?

Diamonds are hard to sell and, when sold, typically are sold at the deeply discounted wholesale price, not the retail price you pay for them. In February 1982, in The Atlantic Monthly, Edward Jay Epstein wrote a long, erudite analysis of the value of diamonds and the quirks and foibles of the diamond market. It was entitled Have You Ever Tried to Sell a Diamond? 

Spoiler alert! If you’ve ever tried to sell a diamond you will quickly discover that they are difficult, sometimes impossible, to sell. In economese this is called “an illiquid market.” In plain English it means you’re stuck.

When you can sell it, you will end up selling it at a whopping discount.  If you bought a diamond for $50,000 and held it for many years while the price of a stone of similar cut, clarity, color and carat weight had appreciated, at retail, to $100,000 you will find that you likely will have to sell it at around 70% (or worse) discount from retail price.

Notwithstanding the paper appreciation of the value of your stone you would realize only something like $30,000, thereby incurring a $20,000 loss.  (The true loss is greater if one accounts for inflation or time use of money.)

Want to sell a diamond? Epstein:

Selling individual diamonds at a profit, even those held over long periods of time, can be surprisingly difficult. For example, in 1970, the London-based consumer magazine Money Which? decided to test diamonds as a decade long investment. It bought two gem-quality diamonds, weighing approximately one-half carat apiece, from one of London's most reputable diamond dealers, for £400 (then worth about a thousand dollars). For nearly nine years, it kept these two diamonds sealed in an envelope in its vault. During this same period, Great Britain experienced inflation that ran as high as 25 percent a year. For the diamonds to have kept pace with inflation, they would have had to increase in value at least 300 percent, making them worth some £400 pounds by 1978. But when the magazine's editor, Dave Watts, tried to sell the diamonds in 1978, he found that neither jewelry stores nor wholesale dealers in London's Hatton Garden district would pay anywhere near that price for the diamonds. Most of the stores refused to pay any cash for them; the highest bid Watts received was £500, which amounted to a profit of only £100 in over eight years, or less than 3 percent at a compound rate of interest. If the bid were calculated in 1970 pounds, it would amount to only £167. Dave Watts summed up the magazine's experiment by saying, "As an 8-year investment the diamonds that we bought have proved to be very poor." The problem was that the buyer, not the seller, determined the price.

The magazine conducted another experiment to determine the extent to which larger diamonds appreciate in value over a one-year period. In 1970, it bought a 1.42 carat diamond for £745. In 1971, the highest offer it received for the same gem was £568. Rather than sell it at such an enormous loss, Watts decided to extend the experiment until 1974, when he again made the round of the jewelers in Hatton Garden to have it appraised. During this tour of the diamond district, Watts found that the diamond had mysteriously shrunk in weight to 1.04 carats. One of the jewelers had apparently switched diamonds during the appraisal. In that same year, Watts, undaunted, bought another diamond, this one 1.4 carats, from a reputable London dealer. He paid £2,595. A week later, he decided to sell it. The maximum offer he received was £1,000.

Selling diamonds can also be an extraordinarily frustrating experience for private individuals. In 1978, for example, a wealthy woman in New York City decided to sell back a diamond ring she had bought from Tiffany two years earlier for $100,000 and use the proceeds toward a necklace of matched pearls that she fancied. She had read about the "diamond boom" in news magazines and hoped that she might make a profit on the diamond. Instead, the sales executive explained, with what she said seemed to be a touch of embarrassment, that Tiffany had "a strict policy against repurchasing diamonds." He assured her, however, that the diamond was extremely valuable, and suggested another Fifth Avenue jewelry store. The woman went from one leading jeweler to another, attempting to sell her diamond. One store offered to swap it for another jewel, and two other jewelers offered to accept the diamond "on consignment" and pay her a percentage of what they sold it for, but none of the half-dozen jewelers she visited offered her cash for her $100,000 diamond. She finally gave up and kept the diamond.

The firm perhaps most frequently recommended by New York jewelry shops is Empire Diamonds Corporation, which is situated on the sixty-sixth floor of the Empire State Building, in midtown Manhattan. Empire's reception room, which resembles a doctor's office, is usually crowded with elderly women who sit nervously in plastic chairs waiting for their names to be called. One by one, they are ushered into a small examining room, where an appraiser scrutinizes their diamonds and makes them a cash offer. "We usually can't pay more than a maximum of 90 percent of the current wholesale price," says Jack Brod, president of Empire Diamonds. "In most cases we have to pay less, since the setting has to be discarded, and we have to leave a margin for error in our evaluation—especially if the diamond is mounted in a setting." Empire removes the diamonds from their settings, which are sold as scrap, and resells them to wholesalers. Because of the steep markup on diamonds, individuals who buy retail and in effect sell wholesale often suffer enormous losses. For example, Brod estimates that a half-carat diamond ring, which might cost $2,000 at a retail jewelry store, could be sold for only $600 at Empire.

Whereas if you had bought $50,000 worth of gold (currently somewhat more than a kilogram) and it had appreciated to $100,000 if you sold it on the open market your typical buyer would take perhaps a 3% discount over spot price. You would realize a tidy $47,000 pre-tax profit.

With the G-Coin™ and Responsible Gold™ supply chain, no discounts are charged when you trade in your gold for cash. That’s really a dramatic difference. If a comparable discount applies to diamonds on the blockchain as on the street, caveat emptor.

If you are looking to stash your cash somewhere that is a truly reliable store of value -- a “store” from which you can retrieve your hard-earned money without taking a bath, gold’s the place. And gold-on-the-blockchain -- Responsible Gold™ -- is the easiest, most convenient, and most economical way of buying, holding, and, when the time comes and you need the money, selling gold.