What’s a Better Investment: Diamonds or Water?

What’s more valuable: a flawless, one-carat diamond or 1,000 gallons of fresh water?

I’m not trying to ask a trick question – because this question really doesn’t have an answer without some context. A newly engaged woman probably wouldn’t trade her diamond engagement ring for Lake Superior – whereas a thirsty diamond merchant would gladly trade 1,000 diamonds for a cold glass of tap water.

It might seem silly to compare the two, but in many ways the difference between diamonds and water is a metaphor for all resource investing.

One is highly speculative, somewhat rare, controlled by a handful of cartel-like corporations and governments, and the other is very ordinary, common, and considered by most people to be part of “public domain.”

But of course, diamonds really aren’t very rare – though they’re rarer than water. But even newlyweds would agree that they’re overpriced. That’s almost entirely because of the cartel-like market for diamonds. And when an asset is overpriced for decades on end, it tends to bring new players into the market.

Today, it’s not just cartels running the global diamond trade. Huge international mining outfits like Rio Tinto (NYSE: RIO) and BHP Billiton (NYSE: BHP) are in the mix along with De Beers.

But the real coup yet to come into the diamond market is the artificial manufacturers. These diamonds are like “real” mined diamonds in every way except that they’re completely flawless and, soon, will be much, much cheaper to produce.

Water, on the other hand, while extremely cheap on a per-unit basis, is actually relatively expensive to create artificially. It’s cheap to pump the stuff out of the ground. But once that stuff in the ground is gone, we might expect the price of water to rise three fold or more.

Desalinated water (sea water turned to fresh water) costs about $4 per 1,000 gallons. Compare that to even “expensive” pumped water in dry areas like Texas – where it costs about $1.65 to pump 1,000 gallons.

The big input for desalinization is oil, whereas the cost input for pumped aquifer water is electricity…

And as I said yesterday, the world’s largest aquifer, the Ogallala in the American Midwest, is being depleted. It’s already 25% lower than it was 30 years ago.

If you want to invest in diamonds, I suggest looking into BHP Billiton. They own diamond mines, and they’re scrambling to sell them today. They understand that artificial diamonds could make their mines turn to liabilities overnight.

If you’re interested in investing in water, that’s a different story. Because despite commonly held opinion, potable water really isn’t public domain – and unless you own water rights, or own a company that owns water rights, you aren’t likely to prosper when water prices go up…