(TIF) Are Diamonds an Investor’s Best Friend?

All that glitters isn’t gold… but can still be worth a fortune to investors.

For example, I have my eye on a sparkling commodity that’s taken its licks this year but looks like it could have a stellar 2014.

It’s not gold. I’m talking about diamonds.

And diamonds have been selling cheap.

According to PolishedPrices.com, the price index for polished diamonds has gained 1.7% since the start of 2013. But that comes after a slump last year. Diamonds are still down from last year’s peaks. And RBC Capital Markets recently issued a report on the “tough times for rough diamonds.”

But there is good news for diamonds.

Russia-based Alrosa, the world’s biggest diamond producer, expects diamond prices to jump in 2014. Alrosa anticipates that production will fall, and demand will rise.

What’s more, you can buy stocks of companies that make money on this commodity when it goes up… and make even bigger profits when it goes down.

That latter group is having a great 2013. And those companies should have a great fourth quarter regardless of what happens with diamond prices next year.

Supply vs. Demand

As with many commodities, demand in China is the key. China is the world’s second-largest diamond market, after top-place India. And mega-miner Rio Tinto says that China is buying more diamonds, and more colored diamonds. Select colored diamonds are more expensive than clear ones.

Rio expects explosive growth in Chinese demand over the next decade.

Let’s talk about supply. It’s a fact that gem-quality diamonds aren’t easy to find. I once made a site visit to a diamond-exploration camp in Nunavut, in the far north of Canada. It was so far north that the big tourist industry is fishing off of icebergs, and God help you if you fall in the water (you’ll freeze to death in a couple of minutes).

But that’s where you go when you’re looking for diamonds.

Even if you find diamonds, there is a difference between industrial-grade and gem-quality diamonds. Investment-grade, gem-quality diamonds are just 2% of total production.

At the site I visited, for example, everyone was excited by the discovery of fresh deposits of diamond-bearing rocks called kimberlite. But, like 99% of kimberlite deposits, this one did not contain enough diamonds to make it worth mining.

With diamonds so hard to find, we fall back on the four countries that are the main producers of diamonds – Russia, Botswana, Australia and Canada.

And the mines in those countries are purposely tight-fisted with production to keep prices higher.

And supply will soon get even tighter. Rio Tinto’s Argyle Diamond Mine in Australia, which produces more than 90% of the world’s natural pink diamonds, is expected to close in 2020. And mining labor troubles are cropping up all over diamond-rich Africa.

So, with demand poised to expand in China, and with supply under pressure, you can see how prices for diamonds could go higher.

Make Money Either Way

Whether diamond prices go up or down, jewelers make money. When prices go up, demand goes up, too. When prices of the diamonds go down, jewelers don’t lower their retail prices, so their profit margins widen.

And if those diamonds go into fancy gold settings, well, the price of gold is down, too. And that also widens the jewelers’ margins.

There are three big jewelry store chains traded in the United States. They are Tiffany & Co. (NYSE: TIF), Signet Jewelers Ltd. (NYSE: SIG) and Zale Corp. (NYSE: ZLC). And they’ve all done pretty well recently.

Even the laggard of the group, Zale, is up 5.29% in the past three months. And Zale had a huge move earlier in the year. Meanwhile, Tiffany is up 13.2% and Signet is up 15.3% in the past three months.

Is there more to come? I sure believe so. All three of these companies do big business in the fourth quarter, when people buy jewelry for the holidays. And the economy is slowly improving. This could be a very good time for jewelers.

I’m especially bullish on one of these three, and have recommended it to my Gold & Resource Trader subscribers. (Click here for more information.)

I always say you can make money on both sides of gold. The same is true for diamonds.

Good investing,

Sean


View original at: Investment U

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