Diamonds vs Real Estate
Would you ever think to compare diamonds and real estate? At first glance, they seem like two completely different things.
Famous economist Anthony Sutton first drew the parallels in his work “The Diamond Connection.” Sutton notes that a diamond is more akin to real estate than one might think because it, like real estate, requires time to convert into other forms of wealth. While a diamond can always be sold within a few hours, the cost is prohibitive. To realize the investment takes time. A diamond sold under pressure is a diamond that will not yield its full value in the market place.
Let’s look from an investor’s prospective how investment in diamonds and real estate, two “hard assets,” correlate and differ.
The most important similarity is that both real estate and diamonds are hard assets, similar to other commodities and unlike bonds and stocks.
Hard assets in general are considered inflation hedges. Hard assets are typically negatively correlated with bonds and stocks. In other words, when the prices of stocks and bonds drop, the value of hard assets tends to appreciate.
That being said, not all the hard assets perform the same. Financial crisis proved that real estate could be very highly volatile. Diamonds, on the other hand, are part of a relatively closed industry that is much more stable.