Gemstones have been sought after for their beauty and rarity for centuries, but more recently they have also been recognized as a unique investment class. As tangible assets, gemstones have maintained their value over time, akin to other luxury items such as fine art and antique collectibles, making them a desirable alternative investment class.
The global gemstone market is estimated to be worth around $30.78 bn as of 2022 and is projected to double by 2032. India is a major global player in this segment, with the overall gemstone and jewellery market value worth over $78.50 bn as of 2021 - making it one of the highest contributors to the country’s GDP.
The gemstone market, like most other markets in the global economy, was impacted by the COVID-19 pandemic but maintained its value better compared to the stock and bond markets. These traditional financial markets experienced a significant decline in value (over 30% drop by March, 2020) at the onset of the pandemic due to uncertainty and market volatility. The gemstone market, however, being a relatively illiquid market with a smaller pool of participants, was less affected by the market volatility, and maintained its raison d'etre – a haven for the preservation of wealth.
In general, gemstones can offer portfolio diversification benefits due to their low Beta coefficient, and can also act as a hedge against inflation as their value can increase over time. It should be noted, however, that gains in the gemstone markets are not guaranteed, and although this asset class is not as volatile or dependent on economic cycles like stocks and bonds, it does somewhat oscillate with overall business cycles.
Given these dynamics, gemstones present a compelling opportunity for investors seeking a unique addition to their investment portfolios. In this article, we delve into 4 compelling reasons why gemstones should be a consideration for your overall investment strategy.
Why You Should Consider Investments in Gemstones
1. Store of Wealth
Precious stones have been leveraged by mankind for over 5,500 years to retain wealth. Since these natural minerals are small and concentrate their value in a small volume, they are easy to pass on to future generations. The value of gemstones, particularly rare and investable-quality gemstones, has historically increased over time, as evidenced by this chart below.
Figure 1: Chart indicating the value development of certain gemstones since 1995. (Source: The Natural Gem)
2. Inflation Hedge
Gemstones have the potential to be a valuable inflation hedge due to their scarcity as well as the fact that historically, demand has outpaced their limited supply. Moreover, historically the value of certain gemstones has increased over time, outpacing inflation and providing a hedge against its erosive effects. Bain & Co., a leading consulting agency, found that certain rare, coloured diamonds increased in value by an average of 15% per year from 2005 to 2015, outpacing the average annual inflation rate of 2%. This particular feature of gemstones particularly warrants further investigation in light of the current high-inflation environment of the global economy.
3. Higher-than-Average Historic Returns
Gemstones have the potential to exhibit higher-than-average returns as an investment class due to their scarcity and the factors that determine their value, such as quality, rarity, and demand. Historically, some gemstones have shown substantial appreciation in value, outpacing other traditional investments such as stocks, bonds, or real estate. For instance, the same study conducted by Bain & Co. referenced above, found that the price of coloured diamonds increased by an average of 15% per year from 2005 to 2015, outpacing the average annual return of the S&P 500, which was 6.7% over the same period.
4. Portfolio Diversification
Gemstones are incredible portfolio diversifiers and could be used as an addition to minimise the overall risk of any investment portfolio. This is majorly due to their low Beta coefficient as compared to overall markets, which means that they are not as volatile as other traditional asset classes such as stocks, bonds, and real estate – especially during times of crises.
The Gemstone Market: Past, Present & Future
The last decade and a half have seen 3 major economic turnarounds – the 2008 global financial crisis, the COVID-19 pandemic and the 2022 Russia-Ukraine crisis. These events marked major downtrends in the financial markets, but the gemstone market was one of the least impacted. Gemstone exports from India continued to grow from $25 bn in 2009 to about $40 bn in 2022 and the Russia-Ukraine crisis, which adversely affected global stock and bond markets, failed to acutely impact the global gemstone market, which continued to grow at a CAGR of 5.6% since 2017.
In general, investing in gemstones has its own set of unique benefits which other asset classes may be unable to offer. These tangible precious assets demand a deep understanding of the market for anybody considering an investment in them, and have the potential to offer returns and benefits that other alternative investment classes may not. There are over 200 varieties of gemstones available globally today – each with its unique set of demand and supply, quality, rarity and overall value appreciations or depreciations. Akin to stocks and bonds, an investment in gemstones boils down to one’s expertise, and risk-taking abilities since these are relatively high-value items.
To summarize, including gemstones in your investment portfolio can offer valuable diversification and potential for long-term growth. Conducting a thorough market analysis can help determine if investing in gemstones is a smart financial choice. With a strategic approach, gemstone investments can fill any gaps in your overall portfolio.
Disclaimer: Gemstone prices may fluctuate and are subject to market conditions. The information presented in this article is for reference only and should not be considered as investment advice. Please seek financial advice from a certified professional before making any investment decision.
