Jewelry is generally referred to as a mineral shaped for personal adornment. As a general rule, they are beautiful looking, rare, and durable stones. Most of them are minerals, which are natural, inorganic substances, with a stable chemical nature and smooth internal structure, and there are only a few more obtained from plants and animals such as amber and pearls. But the more precious parts of jewelry are the metals used on it. The most commonly used metals in jewelry are gold and diamond. Gold and diamond are also used as capital assets. So, do you think jewelry is a capital asset?
Yes, we can say that jewelry is a capital asset. Jewelry such as gold and diamond can be used as capital assets. Their prices tend to rise over time, and they do not lose value in time since they are very durable. Preferring jewelry as a capital asset is common all around the world. In this article, I will touch upon using jewelry as a capital asset, especially gold and diamond jewelry. Let’s explore the world of gold and diamond as capital assets together!
Preference of Gold as a Capital Asset and Its Usage Areas
Gold is the most commonly used jewelry as a capital asset. The most important use of gold is in the making of jewelry. For this reason, gold, which is used as an investment tool in addition to its aesthetic value, is bought and sold in many countries for both investment and savings. Easily deformable, gold can easily combine with other metals and has been used for thousands of years all over the world as a means of exchange, investment, and wealth accumulation. The use of this metal, which has a very high electrical permeability, in high-tech defense systems and in the industry is becoming more and more common. Thanks to its superior resistance and long life, it can be used in computers, some industrial processes, and aircraft engines.
This precious metal, which preserves its indispensable place in the production of jewelry and ornaments almost all the time, is actively used in the treatment of some ailments in dentistry and medicine, as it easily adapts to the oral tissue. In addition, it prevents the high temperature in the atmosphere from entering the vehicle in space vehicles. In addition to all these, gold is also used in military jet turbine engines, high-performance rocket engines, coin and medallion printing, book decoration, interior and exterior decoration of buildings, and accessories such as pens, lighters, and watches.
At the same time, despite the fact that the Bretton Woods system, which enabled the convertibility of gold to the dollar, came to an end in 1968 and the entire relationship between gold and the dollar disappeared in 1971, the central banks of many countries still hold a significant portion of their reserves (9 percent on average) in gold. Approximately 16% of the world’s gold stock is in the vaults of central banks as reserves. Undoubtedly, this is because gold is an asset that preserves its value.
The use of gold as money dates back to 561-546 BC. The gold coin was first printed and used by the Lycian King Croesus and has continued until today. It continues as an ongoing habit in today’s world. These gold coins are used as medallions and commemorative coins to commemorate various national occasions, important events, as well as as an acceptable gift and reliable investment tool in ceremonies and various occasions, which are bought and sold with a very low margin.
Gold, which has been accepted by almost all civilizations in the history of humanity, has its own demand conditions because it is both a commodity and a financial asset today. Thanks to the great importance that comes from history and that people still attribute today, it is in high demand from many different segments of society in many different parts of the world.
Demand for Gold as a Capital Asset
It is known that individuals and institutions store large amounts of gold and gold-based jewelry for various reasons. People with high income are interested in gold as jewelry and for speculative purposes, while people with low-income demand and store gold for both the purpose of owning jewelry and for security and precautionary purposes. In fact, buying jewelry for sociological reasons is also a motive for burial.
The fact that gold is seen as an element of trust in psychological reasons also leads to burial. Especially in developing countries, where social security and financial institutions are not sufficiently developed and the variety of financial products in financial markets is limited, it is quite common to bury gold with this motive. It is through this burial that gold is seen as a wealth accumulation, that is, as an investment tool. However, the investment to be made in gold is basically realized in four ways. These are listed below:
- Purchasing and holding gold directly as bullion or gold minted money (coin),
- Investing in a gold account through a bank or brokerage firm,
- Making futures transactions,
- Investing in mutual funds that have gold in their portfolio.
Investors’ interest in gold is shaped by various factors. Some of these are the macro and microbalances such as international gold prices, interest rates, inflation, economic growth rate, foreign exchange prices and international political tension, and the returns of alternative investment instruments. Trying to get rid of the effect of inflation by investing cash funds in gold forms the basis of investment gold demand.
Falls and increases in gold prices affect investors’ demand for gold differently from other goods. While the demand for a high-priced commodity normally decreases, the opposite is true for the demand for investment gold. An increase in prices causes an increase in the demand for gold for investment purposes, and a decrease in prices causes a decrease in the demand for gold for investment purposes. Demand for gold generally increases when interest in other investment instruments decreases. In periods when real interest rates provide negative returns and interest in stock exchanges decreases, idle funds tend to gold.
In periods when alternative investment instruments provide high returns and the securities markets are active, the interest of the investor in gold decreases. As a result, gold, which does not provide dividends and interest income to individuals, quickly loses the interest of the investor in periods when the interest in other investment instruments increases. The rate of increase in gold stocks held by private investors is not regular. The rate of increase from one year to the next can vary between 50-60%. Gold bullion stocking is done by investors outside of North America and Europe.
Seasonal factors are also seen to be effective in the demand for gold for investment purposes. It is known that especially in rural areas, the people invest some of their earnings after the harvest time, and the weather conditions and rainfall in that period are effective in the income of the people and therefore in the gold investment. In addition to all these, gold’s prominence as an investment tool that offers a safe haven to investors in times of increased political tension such as war, turmoil, and tension causes inconsistent ups and downs in the demand for gold for investment purposes.
Gold in the International Monetary System and the Gold Standard
The “Gold Standard” (fixed exchange rate system) formed the basis of the international monetary system in the world economy from the 1870s to the First World War, and even partially after the war, until the 1929 world economic crisis (great depression). The gold standard was a monetary system that reflected the assumptions of classical economic theory and in which participating countries committed to pegging their national currencies to gold at a certain rate. In countries where this system was valid, the national currency could be freely converted into gold at a fixed rate. Accordingly, a country that adhered to the gold standard defined its currency in terms of a certain and unchangeable amount of gold.
The main features of this system were the definition of each country’s currency in terms of a certain weight of pure gold, the liberalization of buying, selling, exporting, and importing gold. The gold standard was a universal system. Since each country included in the system defined its currency with gold in this way, the currencies of all participating countries were naturally tied to each other. Therefore, with this system, exchange rates between countries were also fixed.
In case the exchange rates exceeded the cost of moving gold from one country to another or fell below the fixed gold parity, large amounts of gold were entering or leaving the country until the exchange rates returned to the official level. The gold movement that took place within the mechanism in question allowed the system to balance itself. However, this system became unsustainable with the onset of World War I. The most important reason why the system could not be sustained is that the countries participating in the war, in order to finance the war or to compensate for the damage they have suffered in the war, print paper money regardless of gold.
There have been many points where the gold standard system has been criticized both positively and negatively. One of the most important criticisms of the gold standard is that this system was one of the main causes of the Great Depression of 1929. However, the limitation of monetary policy towards achieving the full employment target in the economy is another important criticism. On the other hand, there are criticisms that the gold standard gives countries such as Russia and South Africa, which have large gold reserves, the power to influence international macroeconomic conditions through the gold market.
However, there are various opinions that bring positive criticism of the gold standard. Accordingly, it is thought that the gold standard affects the international trade volume positively. From 1870, when the gold standard was being implemented, to 1910, the international trade volume grew by about 30%. Another positive criticism of the gold standard is that the system sets limits on monetary expansion. Since there is a limit to the expansion of money supply in the economy in the gold standard regime, it is impossible to affect the general price level with expansionary monetary policies.
Diamond as a Capital Asset
Today, many people prefer gold products as an investment tool. An important product that can be preferred at this point is various diamond models. Are you planning to make precious jewelry an investment option? If your answer is yes, you can make diamonds a part of your investment portfolio. According to industry players, diamonds provide good returns. Most importantly, they have witnessed a steady price increase in recent years.
However, like any other type of investment, it has its own pros and cons. As an investor, you must be aware of these to get the most out of your investments. The last few years have seen a rapid increase in the use of diamond jewelry as an investment tool. Several factors make it a good investment option compared to gold. At this point, we can express the advantages of purchasing diamond jewelry as an investment tool as follows.
Size: Its first and most obvious advantage over gold is its size. Unlike gold nuggets, diamonds don’t take up much space. These gemstones have long been used as a great money transfer tool. A diamond trinket, no matter how small, will double or triple compared to gold jewelry of the same size. This means that diamond decorations, whether diamond bracelets or necklaces are good investment options.
Storability: Small size provides great storability. So much so that even in a small safe you can keep a diamond worth hundreds and thousands of rupees. Also, diamond jewelry is an investment that one can see, hold and wear. As a result, many people consider it a safer bet than stocks and other digital investments.
Durability: The durability of diamonds is another advantage naturally available to them. You can be sure that nothing will happen to him. As long as you take good care of it, you don’t have to worry about the wear of your diamond jewelry. This means you can wear your investment and enjoy it for as long as you want.
Putting all the benefits aside, there are also disadvantages and risks to owning diamond jewelry as an investment.
Lack of price transparency: First, there is no price transparency. While commodities like gold have a popular price index you can follow, none of these are available for diamonds. The price of diamonds depends only on the market, depending on supply and demand.
Lack of tradability: The second risk of buying diamonds as an investment is a lack of openness to trade. Buying diamond jewelry is much easier than selling it. Some companies will buy them, but the price they are willing to pay will be less than the price you buy them.
The long-term benefits: Guess what is the most test-taking of all the cons of investing in diamond jewelry? You need the patience to reap its benefits. Diamond decorations are not great tools if you are looking for a quick return or a short-term investment. If you are ready to wait for the gains, you can make them part of your long-term investment portfolio.
It goes without saying that diamond jewelry is a good investment option. However, it should only make up a small part of your investment portfolio. It’s a great choice to include in your alternative investment category. As long as you know the basic rules of investing in them, you can enjoy their benefits.
Learn the basics: The first thing to do is to understand the four C’s namely sharpness, cut, carat, and color. The fewer imperfections a diamond has, the higher its degree of clarity. It is a cut of a diamond that controls its brilliance, so the better cut, the more sparkle. Carat is a measure of the weight of a diamond. The last C is the color of the diamond, or rather its absence. White or colorless diamonds have the most value.
Once you understand the basics of diamonds, set a budget you want to invest in. Remember that diamond jewelry should be a part of your portfolio, not your only investment. It is true that you will need a much higher amount initially. However, when you decide to invest in jewelry with diamonds, make sure that it does not exceed your budget.
Make the purchase: Once you’ve set your budget, compare prices with different online retailers. The next step is to invest only in certified diamonds. GIA is a gemology laboratory with strict certification rules. This makes GIA-certified diamonds the most preferred gemstones. Having a certified diamond is important both when buying and selling it.
Diamond Also Became an Investment Tool
Despite the gold that has been put under the pillow for centuries as the safest investment tool, the diamond purchased for jewelry has also turned into an investment tool. Consumers, who turned to diamond jewelry due to the rise in gold prices, started to look at diamonds as an investment tool like silver. Diamond, which can be bought and sold as a bare stone and certified, attracts great attention from consumers for investment purposes as well as jewelry, despite the increase in price and the difference in trading.
Expressing that the increase of up to 2 times in a very short period of time under the International Association of Jewelers, headquartered in New York, has seriously affected the markets and gold sales in the world, and said that the sales of diamonds, which are closer to the price of gold, have increased significantly in the face of this high price of gold. Experts noted that although the price has increased by around 50 percent, there has been a significant increase in diamond sales compared to the previous months and years and that it is now much more common to buy diamonds at weddings, wedding anniversaries, and Valentine’s Day than in the past.
Jewelry experts point out that the significant profits of those who bought diamonds, especially in the last year, as a result of the rise in world diamond prices, cause diamonds to be seen not only as jewelry but also as an investment tool. They said that the increase made the diamond more attractive.
Experts also said that people between the ages of 25-35 prefer economical products, those over 35 prefer medium and high-priced products, that the use of diamond jewelry is very low in men, and that men use diamonds in rings, cufflinks, and tie pins. At the same time, they stated that gold prices increased 6-7 times with an “exorbitant” increase in the last 5-6 years and that the citizens turned to diamond or diamond stone products in the face of this increase. They said that it started to affect 25, and that diamond products remained cheap and affordable when an account was made for gold.
Emphasizing that the most important factor in purchasing diamond-studded products is the combination of elegance and value, experts say that diamond products can be resold or exchanged with a certain loss in case of need.
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