Recession takes the sparkle out of Antwerp’s diamond quarter

Although in a competitive currency devaluation situation as we have today you’d still probably be better off holding diamonds, rocks are no substitute for gold and/or silver. That is because the intrinsic qualities of gold are such that since the dawn of civilization it has been the currency of choice and, I might add, the only currency to never have been obliterated out of existence.

If you are asking what makes gold better than diamonds, it is the fact that gold is divisible; i.e. you can give half a gram or one kilo of gold as payment and it is still gold.

Monetary considerations not withstanding, the diamond trade suffers from a deflationary recession just like any other asset class will. Common wisdom says that in deflationary recessions your wealth can be preserved if you hold cash. I say that would usually be true. However, I believe this is the end of a secular inflationary cycle. This means that all the industrial capacity that we have accumulated over the past 80 years (we have to count 80 years because we are all on a US$ monetary standard so whether we like it or not, we have to contend with the Dollar’s inflationary trajectory since then) ensures that once we are unable to expand credit and the monetary base, industry loses pricing power. When that happens, lower earnings and layoffs follow thus reinforcing the deflationary dynamic. If as I believe this is the end of a secular inflationary cycle, this recession will be characterized by the destruction of most currencies and, probably, the destruction of the world reserve currency too. Thus holding currencies other than gold is dicey.

Only after the obliteration of excess industrial capacity will holding the currency of the emerging victorious nation be a sensible strategy. However, history demonstrates that at the point at which the industrial base has been destroyed, then real estate is once again a much better proposition… if you’re still alive at that point that is…


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