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February 17, 2013

Gold Is Political, Platinum Industrial, Diamonds Are Forever

Investors interested in the precious metals/stones sector have seen a number of factors in play on their chosen favorites. While some are common to all the entries in the sector, for gold, platinum and diamonds there are a few factors that have more influence over up or down trends than others.

Take gold, for example. Although sought after for jewelry all over the world, with China, India and the U.S. being large buyers, gold’s political importance because of its innate value can outshine its worth as a symbol of prosperity and the delights it offers as a glittering trinket. With its price on a more-or-less steady upward path for the past 12 years, gold has reacted to everything from the European debt crisis to the threat of the fiscal cliff in the U.S.

Gold also had to deal with unrest at the mines that produce the lion’s share of new supplies. In October, strikes at the South Africa mines of AngloGold Ashanti and Gold Fields Ltd., among others, were marked by violence and death, shutting down production and driving up the price of the metal as workers demanded higher wages. In response, the price of gold ticked up even as investors suggested that mining companies divest their South African operations to cut country exposure and boost value in their operations elsewhere in the world. News in January that the Fed was headed for a halt in debt purchases drove the price the other way, and gold hit a four-month low.

Most recently, however, the price has risen on Germany’s determination to repatriate a substantial portion of its gold reserves held elsewhere; to Russia’s determination to out-buy the rest of the world as it seeks to shore up its gold reserves, even as other central banks are selling theirs; and to uncertainty over North Korea’s nuclear missile program.

Germany’s action regarding its gold has increased “the mindfulness of gold in central banks,” said John Blank, chief equity strategist at Zacks. “Generally gold sat un-thought of for years, till it moved. The motion itself is interesting, because it raises the attention span of central banks to their gold reserves.”

While Germany’s action wasn’t expected to have any effect on markets, Blank said “It tells us that everywhere people are aware of where gold is and rethinking its use, position and value.” Germany’s move to shift its gold reserve home was a positive move, he said, because it indicated that Germany is “thinking of itself in a twenty-first century setting instead of a twentieth-century setting,” and considering how to position its reserves going forward.

Speculation on Russia’s move, however, is something else altogether. Published reports quoted lawmaker Evgeny Fedorov, a member of Prime Minister Vladimir Putin’s United Russia party, as saying, “The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency.” Putin’s own spokesman had declined to offer a comment on the Russian leader’s accumulation of 570 metric tons of the stuff over the last 10 years, making Russia outpace even China as the world’s largest gold buyer. Russia’s hunger for gold is not unique to Putin, of course; as far back as 1867 under Czar Alexander II, the country was on one of many gold-buying binges.

International Monetary Fund data through November indicated that, while emerging nations such as Russia and China are buying, developed nations are selling their stockpiles of gold, with Switzerland having sold the most during Russia’s buying decade. Other countries on the selling end include France, the Netherlands, Portugal and Spain.

Platinum has seen its share of market turbulence and labor unrest as well. But while the hunger for gold seems virtually inexhaustible, that for platinum apparently is not; it suffered a bit of a setback during 2012, thanks to the economic slowdown. It is, after all, more an industrial metal than a precious one, used in everything from catalytic converters to dentistry equipment. Lessened demand thanks to a slower global economy—notwithstanding the call for the minting of a trillion-dollar platinum coin—coupled with labor upheavals at platinum mines in Africa have meant that price increases in the metal were more due to concerns over utilitarian scarcity, particularly after Zimbabwe confiscated lands from platinum producer Zimplats Holdings Plc in February, than to real need.

Diamonds, in contrast, have other attractions, many of them emotional. While more than half of all diamonds mined are used for industrial purposes, the diamond itself owes most of its mystique, if not demand, to its symbolism when cut and polished. The lack of new diamond deposits and the dwindling of De Beers stockpiles point toward a rise in the price of stones, and machinations within the industry indicate that firms are positioning themselves to take advantage of the most profitable parts of the process.

Harry Winston Diamond Corp., for instance, sold off a luxury unit to Swatch for $1 billion so that it could invest that money in mining, which turns out to be more profitable than the bauble business. It announced in mid-January that it intended to buy a Canadian diamond mine stake from Rio Tinto. Both Rio Tinto and BHP Billiton, meanwhile, are looking to exit the diamond-mining business altogether.

Rough diamond prices lost 16% in 2012, although the jewelry market is positioning itself to boost demand in China and India—where consumers up till recently have been far more focused on the virtues of gold than on the sparkly stones. However, that is changing, with stronger demand in both countries. A Bain & Co. report estimated that globally, future demand for rough stones would grow at a rate of 5.9% through 2020, with India and China accounting for half that amount.

Of course, each country has its preferences: the gems in India represent conspicuous wealth, according to Bain, while in China diamonds are said to offer a sense of eternity.

Perhaps De Beers wasn’t all that far off when it said, “diamonds are forever.”

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