The diamond industry’s multi-decade marketing campaign changed the institution of marriage forever, by equating love with the enduring perfection of a diamond. In the process, jewelers have reaped plenty of gold. We particularly like the future prospects of Tiffany & Co (NYSE: TIF), both as an inflation hedge and a growth investment.

From 1939 to the 1990s, the share of brides receiving diamond engagement rings in the US grew by 80 percent, according to a 2011 study of the diamond industry by Bain & Co. This success was later replicated in Japan, where from 1966 to 1990 the share of brides receiving diamond engagement rings jumped 77 percent.

More recently, explosive growth in China and other emerging markets countries has allowed diamond retailers to make substantial headway in those markets, as the growing middle class and elite embrace luxury goods.

In fact, diamond retailers showed their resilience during the latest economic crisis—and now they’ll prove an effective hedge during the inflation that we see coming down the pike in 2014.

During the 2008 financial crisis, individual jewelry markets performed in different ways. In India and China, the decline was not significant. From 2007 through 2009, these two markets increased their share of the global jewelry market from 28 percent to 35 percent.

In the US, however, the economic downturn had a far more dramatic effect, and sales of jewelry, by value, were severely dampened. The US jewelry sector suffered significant drops in store traffic, average sales, net sales and operating profits. And although the US remains the largest market for diamond jewelry sales, most new growth worldwide comes from China, India and the Persian Gulf states.

As most projections call for greater economic growth in 2014, the possibility of inflation is ever more likely, as is the need for more diversification among your investments. That’s where Tiffany comes in.

The single most important factor affecting polished diamond pricing is consumer demand. Historically, demand has been driven by macroeconomic factors such as total private consumption and the size of the middle class in different countries. As the world economy has grown over the past century, so has the demand for polished diamonds.

Akin to other jewelry manufacturing, diamond jewelry falls into two major categories: branded (or luxury) and unbranded. Because they can command higher prices, larger players with strong brands operate in the branded luxury segment, which has weathered the economic downturn better than unbranded retailers, according to the Bain report.

For example, a diamond engagement ring from Tiffany may enjoy up to a 40 percent premium over an unbranded ring with a stone of identical size and quality. Another key element of jewelry manufacturing is design (see Chart A), according to jewelry specialists.

Chart A: Tiffany’s Diamonds Command a Premium

Furthermore, jewelry that is well designed and distinctive will help set a manufacturer apart from the crowd. The highest portion of revenue is generated at the retail stage in the diamond industry, with revenues in 2010 slightly exceeding $60 billion worldwide, according to the Bain report.

The Case for Tiffany

Tiffany is an American multinational luxury jewelry and specialty retailer, headquartered in New York City. Tiffany sells jewelry, sterling silver, china, crystal, stationery, fragrances, personal accessories, as well as some leather goods.

Many of these goods are sold at Tiffany stores, as well as through direct mail and corporate merchandising. Tiffany is renowned for its luxury goods and is particularly known for its diamond jewelry. Tiffany markets itself as an arbiter of taste and style.

The firm admits it has been facing cost pressures, as well as a difficult global economic environment and challenging year-on-year comparisons over the last few years. Nonetheless, the firm has been consistently raising sales globally and weathered the storm better than most.

In 2012, Tiffany’s achieved a 4 percent increase in worldwide net sales to $3.8 billion. The company is now in a sweet position to capture even more global market share in future years (see Chart B).

Chart B: Tiffany’s is Best Positioned to Capture Global Diamond Growth

That said, the company’s profit margins have been choppy. Net earnings declined in 2012 by 11 percent, following an earnings increase of 24 percent in fiscal 2011 when worldwide sales had increased 18 percent.

Many analysts attribute the short-term volatility to the firm’s expansion initiatives worldwide and a recent lawsuit ruling against the firm over a failed partnership with Swatch, which cost the company $450 million. Tiffany expects to fund the payment with a mixture of cash and debt that will reduce full-year earnings by roughly $2.30 a share, but this expense should have no real impact on its business going forward.

In November 2012, the company operated in 22 countries. Given global growth forecasts, Tiffany’s investments in stores worldwide should deliver greater earnings and diversification in the years to come.

In fact, during the 2013 holiday shopping period, the firm reported a 4 percent increase in holiday sales, driven by demand in the US and Asia. Global sales in November and December rose to $1.03 billion, a 4 percent gain over the period a year earlier.

Moreover, Tiffany reported a 6 percent jump in sales at stores open at least a year during the holiday shopping period, helped by strong demand in America. In December, the company maintained its full-year profit forecast, in contrast to other large retailers that have slashed their outlooks due to steep discounts.

Tiffany’s has delivered a whopping 37.94 percent total return over the last year, as compared to a 26.58 percent total return for the S&P 500. Tiffany beat the S&P 500 three-year total return by a hair or a few basis points, even as both the firm and index delivered 51 percent.

Over the last year, the company sported a 17.55 percent return on equity, as well as diluted earnings per share (EPS) quarterly year-over-year growth of 48.98 percent. We believe the firm is best positioned to deliver earnings diversification. Moreover, given its high-end products, the company is able to pass along costs during inflationary environments, particularly when love is in the air in the coming spring and summer months.

Our newest addition to the Survive Portfolio, Tiffany & Co is a buy up to 90.