Diamond was largely inaccessible to investors until the recent advent of regulated commodities, due to a lack of price discovery and transparency. The characteristics of individual diamonds, especially the carat weight, color and clarity, have significant impact on values, but transactions were always private. With the standardized commodity as an underlying asset, several market traded financial instruments have been announced
Diamond Standard Commodities
Diamond Standard is the producer of an exchange traded, regulated diamond commodity. Equivalent to a standard gold bar for the diamond market, the diamond coin and bar enable investors to access an estimated $1.2 trillion asset class for the first time. Futures contracts are in development by CFTC-licensees, and an investment trust launched in 2022.
The commodity makes diamonds accessible to fund managers because the commodity is marked-to-market daily. The coin and bar are physical, and each contains a standardized set of diamonds, graded and certified by the GIA. The diamonds are acquired using an automated market-making and statistical sampling process. The geological details of the diamonds is stored on a public blockchain.
Diamond Market Prices
Diamond prices are influenced by global trends. The largest markets are USA (about 65%), China and India. Since 2008/2009, larger diamonds have appreciated better than smaller ones.
Diamond Price fluctuations
Polished diamond prices vary widely depending on a diamond’s carat, color, clarity and cut, sometimes referred to as the 4 Cs. In contrast to precious metals, there is no universal world price per gram for diamonds. The industry refers to price guides.
Rough diamond prices have historically been impacted by the mining companies controlling supply, most notably De Beers. However, after the dismantling of the De Beers cartel in 2001, the industry is now more fragmented resulting in a higher percentage of diamond sales taking place in the form of auctions and other forms of open-market sales.
Polished diamonds
There are several factors contributing to low liquidity of diamonds. One of the main factors is the lack of terminal market. Most commodities have terminal markets, and some form of commodities exchange, clearing house, and central storage facilities. Until recently[this did not exist for diamonds. Diamonds are also subject to value added tax in the UK and EU, and sales tax in most other developed countries, therefore reducing their effectiveness as an investment medium. While most diamonds are sold through retail stores at high margin, investment diamonds are usually sold at auctions or privately.
Diamonds in larger sizes are rare, and their price is dependent on the individual features of the diamond. Fashion and marketing aspects can also cause fluctuations in price. This makes it difficult to establish a uniform and readily understood pricing system. Martin Rapaport produces the Rapaport Diamond Report, which lists prices for polished diamonds. The Rapaport Diamond Report is relatively expensive to subscribe to and, as such, is not readily available to consumers and investors. Each week, there are matrices of diamond prices for various shapes of brilliant cut diamonds, by colour and clarity within size bands. The price matrix for brilliant cuts alone exceeds 1,400 entries, and even this is achieved only by grouping some grades together. There are considerable price shifts near the edges of the size bands, so a 0.49 carats (98 mg) stone may list at $5,500 per carat = $2,695, while a 0.50 carats (100 mg) stone of similar quality lists at $7,500 per carat = $3,750. This difference seems surprising, but in reality stones near the top of a size band (or rarer fancy coloured varieties) tend to be uprated slightly. Some of the price jumps are related to marketing and consumer expectations. For example, a buyer expecting a 1 carat (200 mg) diamond solitaire engagement ring may be unwilling to accept a 0.99 carats (198 mg) diamond.
There are numerous diamond grading laboratories, with each offering investors, consumers and dealers similar diamond-grading and verification services, including the Gemological Institute of America (GIA) and the CIBJO (Confédération Internationale de la Bijouterie, Joaillerie et Orfèvrerie), also known as the World Jewellery Confederation. If the standards set by such organisations are called into question, ramifications are felt throughout the diamond industry. In 2005, the GIA was sued by a dealer who had supplied diamonds to the Saudi royal family after the accuracy of GIA-issued certificates was questioned. As a result of a subsequent investigation, four GIA employees were fired for breach of the GIA’s ethical codes. The GIA also claims to have changed some of its procedures to prevent such occurrences from happening again.
The non-linear pricing of different sizes (weights) of diamonds means that it is not realistic to exchange, for example, two quarter-carats (50 mg) for one half-carat (100 mg). With commodities such as gold, it is clear that one 20-gram bar is worth the same as two 10-gram bars, assuming the same purity. In most terminal markets, there needs to be a readily available standard quality, or limited number of qualities, available in sufficient quantity to be tradeable. This is a major factor which affects liquidity. The many variables in diamond quality makes commodity-like pricing difficult, especially with rarer stones that merit special handling above standard-issue diamonds.
The investment parameter of diamonds is their high value per unit weight, which makes them easy to store and transport. 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 used this portable asset successfully.
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