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Can you improve the polish of your portfolio by adding gemstones? (2013)

by on October 10, 2013

three recent papers suggest that the answer is  yes, perhaps you could. Diamonds have of course for long been one of the preferred stores of portable value. Every bad movie has a baddie wanting to be paid in uncut stones, and they are, as we are told (ok, it was a marketing ploy) a Girls Best Friend. They are not particularly useful as a safe haven however and to get meaningful usage from them in a portfolio requires a high allocation, up to 60%. This is not feasible.

The  papers go into some detail on the diamond  and precious stone markets, the nature of the investment and how to use it.

Methods: Conditional correlations, portfolio analysis, safe haven analysis

Auer Abstract

During the recent turbulences in the world’s financial markets, diamond companies have started advertising diamonds as a new asset that can hedge against market volatility and be a valuable portfolio component. To put this claim to the test, this article investigates (i) the performance of investments in diamonds of different quality grades, (ii) time-varying correlations between the returns on diamonds and traditional asset classes and (iii) the role of diamonds as a potential diversifier in a world market portfolio. Our results, based on monthly PolishedPrices diamond index data for the years 2002 to 2012, show that in this crisis-ridden period, an investment in a diversified diamond portfolio has outperformed a diversified stock market investment. Additionally, evidence on low time-varying correlations to traditional asset classes highlights that diamonds offer some diversification potential. However, further analysis shows that diamonds can only generate economically significant value in a world market portfolio (by either reducing risk or increasing mean return) when rather high diamond proportions are included in the portfolio.

Auer and Schumacher abstract

Currently, the role of diamonds in the global financial system is under intense discussion in the financial media because individual investors and portfolio managers have begun to consider them as potential investment assets. To address the growing interest in diamonds, this article examines the historical performance of investments in various diamond quality grades. Furthermore, it investigates their relation to stock market and currency risk. Specifically, we focus on two important practical investment questions: Can diamonds function as a hedge or a safe haven against stock market volatility or fluctuations of the US dollar? Can diamonds be regarded as effective diversifiers in a stock or a currency portfolio context? Key findings are as follows: (1) The investment performance of diamonds is lower than the one of gold and silver. (2) Diamonds have only acted as a weak hedge and a weak safe haven against stock market downturns and currency risk associated with the US dollar. (3) Within global stock and currency portfolios, 1.0 carat fine diamonds show valuable diversification potential in that they can increase portfolio performance to an economically significant extent. Interestingly, this final result is fairly robust to the choice of performance measure.

Renneboog and  Spaenjers abstract 

This note examines the investment performance of diamonds and other gems (sapphires, rubies, and emeralds) over the period 1999–2010, using a novel data set of auction transactions. Over our time frame, the annualized real USD returns for white and colored diamonds equaled 6.4% and 2.9%, respectively. Since 2003, the average returns have been 10.0%, 5.5%, and 6.8% for white diamonds, colored diamonds, and other gems, respectively. Both white and colored diamonds outperformed stocks between 1999 and 2010. Nevertheless, gem returns covary positively with stock returns, underlining the importance of wealth-induced demand for luxury consumption in collectibles markets.

The citations in full are

Auer, B.R.
Could diamonds become an investor’s best friend?
(2013) Review of Managerial Science, pp. 1-33. Article in Press.
http://www.scopus.com/inward/record.url?eid=2-s2.0-84880003847&partnerID=40&md5=487621a800ba86c4d81280f894a68d02
Auer, B.R., Schuhmacher, F.
Diamonds – A precious new asset?
(2013) International Review of Financial Analysis, 28, pp. 182-189.
http://www.scopus.com/inward/record.url?eid=2-s2.0-84876451719&partnerID=40&md5=b7ac1b75d260c30f1aff2ccce8303cd6
Luc Renneboog, Christophe Spaenjers, Hard assets: The returns on rare diamonds and gems, Finance Research Letters, Volume 9, Issue 4, December 2012, Pages 220-230, ISSN 1544-6123, http://dx.doi.org/10.1016/j.frl.2012.07.003.
(http://www.sciencedirect.com/science/article/pii/S1544612312000323)

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From → Empirical, Gold

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