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Diamonds Are A Dictators Best Friend?

Jeffrey Coolidge | The Image Bank | Getty Images

With all the talk of 'regime elements' and wealthy businessmen fleeing Egypt, I've been thinking about gold and diamonds a lot lately.

We hear of dictators stashing large quantities of gold: For example, stories of Saddam Hussein's gold stash have achieved quasi-mythic proportions—George Clooney even starred in a film based on the premise.

But why not diamonds?

Diamonds are obviously orders of magnitude smaller, lighter, and easier to hide. On that very subject, I actually quoted a Wikipedia entry (in the article I linked to above).

"A high quality diamond weighing as little as 2 or 3 grams could be worth as much as 100 kilos of gold. This extremely condensed value and portability does bestow diamonds as a form of emergency funding. People and populations displaced by war or extreme upheaval have utilised this portable asset successfully"

All of this makes perfect sense.

So do a dictator's diamonds have a downside?

They do: Several, in fact.

The first advantage gold has is fungibility. That means any unit of gold can be substituted for another unit of gold of equivalent size.

In other words a kilobar of gold is a kilobar of gold is a kilobar of gold.

As anyone who has even remotely contemplated marriage can attest, a diamond most certainly is not just a diamond.

The so-called Four-C's—carat, color, clarity, and cut—create a multivariate matrix, which subtends a staggering array of price combinations.

When it comes to diamonds, one unit, arbitrarily selected, is not substantially equivalent to another. Not even kind of.

Then there is the matter of liquidity—which diamonds lack in comparison to gold.

Liquidity, in its most fundamental sense, is a measure of how readily a unit of something can be exchanged for cash.

Liquidity, in essence, is a measure of how quickly and easily something can be sold—without taking a bath on the price.

While the concept of liquidity seems straight forward enough, it gets rather slippery in practice when you try to pin a simple definition to it.

For example, Wikipedia offers the following three definitions in its entry for liquidity:

1) It can be sold rapidly, with minimal loss of value, any time within market hours.

2) The essential characteristic of a liquid market is that there are ready and willing buyers and sellers at all times. Another elegant definition of liquidity is the probability that the next trade is executed at a price equal to the last one.

3) A market may be considered deeply liquid if there are ready and willing buyers and sellers in large quantities.

(The concept of Liquidity is reminiscent of Supreme Court Justice Potter Stewart's famous analysis—of hard-core pornography. It may be difficult to define—"But I know it when I see it".)

Finally, the absence of a 'terminal market' for diamonds has an impact on their liquidly.

A terminal market is exactly what you might suspect: A central clearing house or exchange, where commodity trades can be executed; a place where all transactions can ultimately terminate.

But despite their shortcomings—in measures of fungibility and liquidity—despite even the absence of a terminal market—diamonds do confer unique advantages.

A fist sized wad of diamonds can be stuffed into a shirt pocket.

Or, for the truly paranoid, secreted in a false heel.

And—in the very worst case scenario—when the good guys are closing in—one can always swallow a handful of diamonds.

(Then hope for the best.)


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