US firm aims to cut investors in on $1.2tn diamond market
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A New York-based technology company is attempting to succeed where several firms have failed and make the $1.2tn global market for diamonds more accessible to financial investors, through the creation of a futures contract and a fund tracking the price of the gems.
Diamond Standard is trying to establish the equivalent of the gold bar for the precious stone market, which is dominated by jewellery houses and which, unlike gold, is not commoditised. It plans to launch a futures contract for diamonds on the Minneapolis Grain Exchange (MGEX) by the end of the year, chief executive Cormac Kinney told the Financial Times.
If successful, that would pave the way for a diamond-backed exchange-traded fund to be launched as soon as the end of next year, should the firm be able to solve longstanding problems of fungibility and liquidity that have in the past prevented gemstones from trading like other commodities.
Diamond Standard faces an uphill battle to turn diamonds into a tradeable market. Every stone is unique, while futures markets can take years to build. MGEX’s owner, Miami International Holdings, has yet to start the approval process with US derivatives markets regulators to list diamond futures and options contracts.
Many previous attempts to create alternate vehicles to invest in the precious stone have fallen flat, according to diamond industry analyst Edahn Golan.
Specialised diamond fund Diamond Circle Capital listed in London in 2008 before liquidating its gemstone portfolio five years later. IndexIQ filed a prospectus to set up a diamond ETF in 2012 but never launched. And Swatch-owned jeweller Harry Winston had plans the same year to set up a $250mn fund to buy diamonds with money from institutional investors.
Diamond Standard launched a peer-to-peer trading marketplace in September for bars and coins that contain equally valued clusters of diamonds encased in a slab of plastic resin. Along the bottom runs a slender wafer housing a chip used for authentication and transactions that has a QR code imprinted on it. Each coin is worth $5,210 while each bar is worth $52,100, and the products have attracted wealthy individuals and family offices.
Kinney said that launching a futures contract is the next step towards attracting large asset managers to buy diamonds as part of their investment portfolio.
“Diamonds are worth more than silver, platinum, palladium and rhodium combined. It’s a neglected resource that investors couldn’t touch as each diamond is different,” he said.
The move comes as gold prices approach a record high, reflecting investor demand for safe places to park their cash during times of inflation and shocks to the global system. Diamonds have tended to hold their value through times of economic turmoil, while they typically display low price volatility and benefit from a tailwind of declining mine supply.
However, diamonds contend with the challenge that each stone varies based on the so-called four Cs — cut, colour, clarity and carat weight — meaning they are not readily interchangeable in the way a barrel of oil might be and pricing transparency is tough.
“Diamonds are definitely a very attractive category as they are high value versus weight, have low volatility and consistent price growth,” said Olya Linde, partner at Bain & Company’s energy and natural resources practice. “However, there are issues — fungibility and a transparent spot price — that need to be resolved.”
Diamond Standard, which has raised $45mn to date, has struggled so far to build liquidity with only $900,000 worth of trading last month but Kinney is hopeful of growing that once a futures contract is established.
The diamond industry can only dream of replicating even a slice of the gold industry’s success. Gold-backed ETFs exploded in popularity two decades ago and about 30 per cent of the yellow metal market is allocated to investors. Increasing investors’ share of the $1.2tn diamond market from the current 1 per cent to half of gold’s levels is equivalent to $180bn and would push up diamond prices, according to Kinney.