Why record high gold prices would be bad news for diamond

Citigroup Inc.’s prediction that gold could rally above $2,000 an ounce in two years would be negative for another precious and shiny commodity: diamonds, according to Barry Ehrlich, an analyst at the bank.

Citi’s bullish scenario for gold is based on drivers including the prospect of the Federal Reserve cutting interest rates to zero, rising risks of a global recession and heightened geopolitical tensions.

Compared to gold, diamonds are an inferior store of wealth and therefore unlikely to benefit significantly from an investor flight from fiat currencies, Ehrlich wrote. A weaker global and U.S. economy would hurt demand.

“A healthy diamond market requires a healthy U.S. (and China, India) middle-class consumer,” he said.

Finally, history shows that elevated gold prices result in higher levels of recycling.

During the 2011-12 rally, when gold touched its current record of $1,921.17 an ounce, “along with this recycled gold also came increased diamond recycling,” Ehrlich said. “If economic conditions deteriorate, we should expect not only subdued demand but additional diamond supply from recycling.”

Courtesy: LIVEMINT