Wurdy Writes

Why don't people invest in Diamond or Platinum over Gold?

Someone asked me recently, why don't people invest in Diamond or Platinum? They are more valuable than Gold.

I had never given this much thought before.

My perception was that we should invest in gold because it is valuable, because it is rare.

Silver isn't as rare, hence, not as valuable and nowhere as good an investment as Gold.

To me, Diamond and Platinum looked like even better alternatives to Gold, instinctually.

I was stoked, I thought I had had an epiphany, stumbled upon a revelation.

Before you get too excited; I didn't stumble upon a goldmine (or a diamond mine rather). There's good reason why investing in Diamond and Platinum isn't as popular as investing in Gold and Silver. I just didn't know it then.

If you don't either, and are wondering: What's wrong with investing in Diamonds? Read along.

Firstly, let me get one misconception out of the way. Gold is not an excellent investment. In fact, I'll go as far as to argue that gold is not an investment at all. Period.

I can almost see y'all furrowing your eyebrows staring at the screen while you read this.

Let me explain.

You see, an investment is something that you do to get better returns. How do investments do that? Well, you get your money to work for you in all sorts of ways.

An extremely simple and old example is a cowherd. Suppose you purchased a cowherd, and reared the cows for a couple of years. The cows will reproduce in the meantime. The herd will thus increase in size.

Do you see it now, an investment is something that increases itself over time. A business expands, cows reproduce, land produces revenue infinitely till the end of time through farming or rent.

Gold doesn't do anything remotely similar. It will sit around looking pretty for all eternity.

It's about time I clear something before you curse me out. I am not telling you to boycott Gold or something. Of course it is useful; it wouldn't be around for so long in such high demand if this was not the case.

(Readers: Hypocrite!)

Let's discuss the uses to soothe some of you troubled souls.

Most of the things in nature reproduce, being organic and all. This comes with a disadvantage in the realm of economics. The more of a thing there is and the more easily it is available, the lesser its value.

Hence, if cows reproduce at such a pace that surpasses all things in existence, nobody will trade in cows anymore. Everybody would have them already.

Of course if cows gain intelligence and band together to subdue all existence, the above hypothesis falls apart. Safe to say, however, it's unlikely to occur.

Okay, you're getting impatient with all this sophistry, I'll come to the point.

You see, money also keeps on increasing in the economy. Countries keep printing more and more over time.

Suppose that you had 100 dollars at one point of time, and the total number of dollars doubled in the following 10 years. If you held onto your 100 dollars over this period of time, they would then be worth only half as much, equivalent to having 50 dollars a decade ago.

So, you see, investing in Gold via money seems to imply that you're jumping form a slow ship to a fast one.

What you're actually doing is to abandon a sinking ship and saving your hide by boarding a slow one.

I hope I have sparked a flicker of understanding within your eyes. Although I am sure you took some offence to gold being referred to as a slow ship.

But it's true. The big ships expand like hot balloons. Microsoft stock gained almost 30 percent compounded annually from 2000 to 2020, from $40 per share to $6500 per share.

Gold compounded at roughly 7 percent annually during the same.

Don't make the mistake of thinking that gold was only four times slower.

If Gold was worth $40 in 2000. It would be worth only $155 by 2020.

Yes. $6500 v/s $155. That's compound interest for you.

By the way, if you're wondering what the hell Microsoft did to earn so much, they only created an operating system that every other computer uses. And they did it at a time when computers became so common as to be present in every home.

In short, great investments are usually things that can scale and take a very important place in the society in the coming years.

I digressed there a little bit, I hope I haven't lost you yet.

Let's find fault with diamonds first, then I'll tell you why I think Platinum is no good either.

Gold is a great store of value because it is finite in the world, and although more is mined everyday, the gold already above ground is so great that the mined quantity doesn't change the total amount of gold in the world significantly.

Diamonds check the first box okay, it's rare, doesn't increase much. Or so you'd think.

You might already know that diamonds can be produced in labs. The production is not significant as to change the total amount of diamond in the world.

But the artificial production is the main problem.

This means that there is no longer a limit to how much diamond there can be in the world. Diamond will keep on being artificially made in labs forever, hence they are not as good a store of value as gold.

Additionally, the value of a diamond is tricky to evaluate. The cut of the diamond makes more of an impact than its size. Diamonds are comparable to art pieces rather than Gold in this regard.

Okay, you might say, but Platinum is just like Gold and even rarer. True.

Platinum doesn't have the same pitfalls as Diamond. It is an element like Gold, cannot be artificially produced, in mass.

Although nuclear reactors can get Platinum as a byproduct but the quantity is very less and the process is not commercially viable.

However, Platinum is an even worse store of value than diamond!

The value of one ounce of platinum was $2000 in 2008. If you'd bought it then, you'd have made a profit of -55% by sept 2022. Yes, at the time of writing, the price of Platinum is a mere $900.

This is because Platinum is valuable not because of its rarity, beauty or a currency. It is valued mostly for its industrial applications.

So the price of Platinum increases with industrial demand, sometimes unreasonably so when every company wants some and drive the prices sky high as they did in 2008.

And if one day industries find a substitute for Platinum? Bye-bye investment.

So my advice, don't. But what do I know.

People might find even more applications and Platinum might go up 10 fold in the coming 10 years. I'll leave that up to you.