Are Diamonds the New Gold?
With tens of thousands of stocks, futures, mutual funds, and exchange traded funds to choose from, there is a way to trade almost every public company, food, commodity, and currency in the world. Investors have seen it all, as every valuable asset has been tapped and brought to market. Except one… diamonds, the last untamed investment frontier.
A thick and tangled underbrush of appraisal standards have kept the diamond industry disconnected from the paved roadwork of the highly standardized and finely measured investment market. Diamonds vary in size and quality to such extents that it has been almost impossible to devise a contract or stock to trade them in the financial markets.
Until now. GemShares LLC is preparing to offer the first ever exchange-traded diamond trust.
But with so many uncertainties in diamond trading – ranging from gem quality to mining practices to connections with warlords and terrorists – how will GemShares ensure the high level of quality and ethics that today’s diamond investors demand? There are many risks in the wild frontier of diamonds that must be overcome.
Polishing and Setting the Diamond Industry
The diamond industry has long been like the product it trades – rough, variable, and hard to cut into. Miners range from legitimate and legal operations that follow ethical practices to criminal outfits that use near slave labor. Many of the distributors are affiliated with warlords, terrorist groups, and dictators, who use the proceeds to finance their criminal and political interests. Even vendors vary in their assurance of the quality of their diamonds and how they were obtained.
Then there is the question of how to devise a pricing system that will accurately value diamonds, which are for the most part a decorative item whose value is subject to an individual’s taste and appreciation.
Bringing diamonds to the investment market will require a lot of polishing of the industry and the setting of a few standards of evaluation. This was precisely the message in Blain & Company’s “Global Diamond Report 2013: Journey through the Value Chain,” published in association with the Antwerp World Diamond Centre.
The report calls on the diamond industry to “address the transparency of pricing and establish an independent source of diamond prices,” as cited by Resource Investing News.
The report also sheds some light on the three main stages of the diamond trade to help investors determine if diamond investing can be their portfolio’s best friend.
Upstream: In the mining stage known as the “upstream”, producers will mine and sort diamonds according to size and color. About 65% of rough diamonds are sold through long-term contracts with jewelery manufacturers, while some 30% are sold through auctions. The remaining 5% of diamonds are sold through short-term contracts “used to sell leftovers or stones that fall outside the typical size range.”
Some of the challenges facing diamond producers, the report explains, are “increasing mining and exploration costs, stricter beneficiation requirements and finding the most efficient routes to market.”
Middle market: This stages involves the cutting, polishing and setting of diamonds into jewelery. Given the diverse scope of activities during this stage of a diamond’s journey to market, its challenges are “wide ranging” and include “remaining cost competitive in terms of cutting and polishing, accessing customers and maintaining beneficiation requirements.”
Downstream: The final stage of vending diamond jewelery, known as the “downstream”, is becoming increasingly concerned with tracing diamonds through their entire journey back to their mines of origin, “ensuring that jewelry is ethically sourced” and with a “particular emphasis on acquiring diamonds that have not helped finance warlords and terrorists.”
The diamond demand was reported as being a little weak over the short term due to slower GDP growth in China and India, two of the largest jewelery markets in the world. Yet that slowing demand is being offset by the recent “closure of some of the already limited number of diamond mines in Africa and Australia,” the Sacramento Bee informs.
Looking ahead, Blain & Company expect the diamond demand “to grow at a compound annual rate of 5.1%, rising to almost $26 billion by 2023.” They see the supply/demand picture relatively balanced until 2017, after which the demand will outpace the supply.
But supply and demand figures don’t mean very much without a universally accepted means of pricing rough diamonds.
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The GemShares Standard
That’s where GemShares comes in. Recognizing the need for a standardized means of determining the monetary value of rough diamonds amidst their wide variety of size, color and quality, GemShares has devised and patented its own valuation methodology, known as the GemShares Global Investment Grade Standard (“GIGS”).
As PR Newswire defines it, the “gemological, proportional, optical and light-behavior guidelines” of the GIGS system “will provide a standardized pricing mechanism for valuing a diamond basket that could be used for the development of financial products.”
One such financial product is GemShares LLC’s proposed diamond trust ETF. “The trust’s primary objective,” outlines the SEC filing, “is for the Shares to reflect the performance of the wholesale price of diamonds...The Shares are designed for investors who seek a cost effective, transparent and convenient way of making an investment similar to an outright investment in physical diamonds.”
Dan Gramza, a Partner of GemShares LLC, proudly announced to PR Newswire the trust’s position as a “significant bridge between the financial and diamond industries that brings the benefits of investing in diamonds to investors around the globe.”
“The establishment of the GemShares GIGS Diamond Basket Index will lead to the securitization of diamonds by bringing a new and enhanced level of confidence through the addition of transparency and liquidity to the process of pricing these assets for investment purposes,” Gramza promises.
Just through its own untamed and non-standardized market, the diamond as an asset class has since the 1970s “increased in value by an average of 10-15% each year - through periods of recession and economic instability,” informs the Sacramento Bee.
Take that already stellar asset appreciation, monetize it using a patented pricing mechanism, and securitize it as an ETF on the NASDAQ exchange as GemShares is arranging, and we just may see this first ever diamond trust do for diamond prices what gold ETFs did for gold five years ago – push the price sky high.
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