Ever since screen goddess Marilyn Monroe breathily sang the famous lyric in the 1959 hit movie Some Like It Hot, diamonds have come to be known as “a girl’s best friend.” You can understand why. They’re flashy and sparkly and pricey. And some girls actually drip with them – usually assorted Hollywood starlets, celebrities, and certain members of British royalty. Diamonds are probably unparalleled as a gem for jewelry and display. As an investment? Not so much. Even if they are, as they say, “forever.”
The trouble with diamonds is that in purely investment terms, they are a non-producing asset. In other words, they don’t pay interest or dividends. Is there potential for capital gain? Possibly. But have you ever attempted to sell a diamond? You soon discover that it’s akin to trying to sell a used car. Where’s the market? Where are the dealers? Whom can you trust?
If you go to the guy with the cheesy late-night commercials who promises to “buy your jewelry for cold, hard cash,” you will never get what you paid for it, or anywhere even close. You can try going to diamond centres like Antwerp or New York and peddling your diamond there, but unless you have a little black bag full of stones of the very first quality, you’ll have spent all the proceeds on airfare and hotel rooms.
Speculating versus investing
You see, that’s the trouble with classifying non-producing assets like gems and precious metals as “investments.” They’re not. They are, in fact, more like a speculation, and in many cases, a bad one at that.
Unlike an investment in, say, a stock or a bond, where you expect the asset to produce a return in the form of interest or dividends arising from an underlying legal promise to pay (in the case of a bond) or from profitable operation of a business (in the case of a company), gems and precious metals provide no return at all. You essentially hope that you can sell your commodity down the road to someone who’s willing to buy it at a higher price than you did. Will there be such buyers down the road? Will there be such a big demand for (or a sudden shortage of) diamonds or gold or silver to the degree that you’ll profit handsomely when you sell? Who knows? When you purchase these types of assets, you’re betting that there will be. And note the key word there: “betting.”
Gold bugs versus bank bears
Here’s an example of what I mean. Let’s say you succumbed to gold fever back in September 2011, when it appeared very much as if the global financial system was set to crumble. Gold was headline news. You could purchase an ounce of gold for around US$1,900 – a record high. But plenty of people did just that anyway, either through outright purchases of bullion from your friendly neighborhood gold dealer or through an exchange-traded bullion fund, like the iShares Gold Bullion Fund (in Canadian dollars), which was trading at $16.92 on the Toronto Stock Exchange back then.
So what happened? Well, the world’s financial system didn’t implode. Economies began a slow recovery. And financial markets recovered. Gold, however, has dropped since September 2011 to a recent US$1,281. The iShares Gold Bullion Fund was recently trading at $11.38. That’s a slide of over 30% in just over two years. So for those who bought the yellow metal back then, it hasn’t even been a good “store of value,” let alone a brilliant bet.
Now let’s say that instead of buying that ounce of gold in September 2011, you went out on a limb and, for example, bought shares of Canada’s biggest and most profitable bank, Royal Bank of Canada at $52.80 per share. Of course, banks were out of favor then. “Everybody” said so. Today, however, it’s trading around $68.20, a gain of 30%. But wait! If you add in Royal Bank’s dividend payout of a total of $5.35 per share over the period (yes, Royal and most of the other big Canadian banks continued to pay regular and rising dividends), your total return actually comes to just shy of 40%.
A girl’s real BFF
I’m not advocating you go out and buy shares of Royal Bank or anything else here. What I’m saying is that when it comes to investment assets, it makes a whole lot more sense to purchase ownership in something that grows intrinsically while rewarding you along the way.
So in that sense, gold may glister and diamonds may sparkle. But dividends really are a girl’s best friend.