ETF Would ‘Commoditize’ Diamonds
April 16th 2012 at 12:57pm by John Spence
Diamonds could follow precious metals such as gold to be “commoditized” by the introduction of exchange traded funds based on this obscure market if regulators approve the products.
An ETF could be diamonds’ best friend or their worst enemy, based on your perspective.
ETFtrends’ Tom Lydon spoke with CNBC’s Street Signs on Monday about how a diamond ETF could affect the market. [Are Diamonds the Next Gold?]
Last month, news reports surfaced that ETF provider IndexIQ had filed with the Securities and Exchange Commission to launch a physically backed diamond fund. [Investors May Soon Access a Diamond ETF]
“Diamond is the last uncommoditized commodity, and so it’s drawing in many organizations,” said Edahn Golan, the editor in chief of IDEX Online, in a recent New York Times article. “I assume that by the end of this year there will be a bunch of [funds] out.”
However, there are many challenges involved with launching diamond ETFs. Unlike gold, the gems are not uniform. There are many different types of diamonds, based on size, quality and other factors.
In the diamond market, the Polished Prices index has risen 56% since its inception in 2003, according to the NY Times article. Gold prices entered 2003 around $350 an ounce, so the precious metal has rallied about 370% to its current price of $1,650 an ounce.
De Beers controls roughly 40% of the diamond market, while uniform pricing has been notoriously difficult. However, several firms are trying to develop standardized indices of diamond prices.
Unlike most commodities, there is no futures market for diamonds. [Why Isn’t There an ETF for Diamonds?]
The proposed IndexIQ ETF would be backed by physical diamonds stored in Antwerp.
Diamonds more than doubled gold’s returns for 2011, according to Pinnacle Diamonds.
“Historical price performance of polished diamonds since 1982 is strong relative to gold, yet in the last 10 years it has lagged behind gold and other commodities,” says Alex Fray, chief financial officer of DODAQ.
Martin Rapaport, who founded a popular gauge of diamond pricing, said recently that he was preparing to release a “few” products this year that would be available to retail investors, the NY Times reports.
In the early 1980s, Rapaport submitted a contract proposal to the New York Commodities Exchange for the creation of a futures market for diamonds, according to a 2007 MarketWatch story.
It was rejected, he said, because the “diamond industry didn’t want price transparency.”
‘Difficult to create’
Some advisors are already advising caution on a diamond ETF, even though it’s not clear whether such products will gain regulatory clearance.
“Stay away until you know exactly how it works, and can be sure it’s acting like you think it will,” said Ron Rowland at Capital Cities Asset Management, in the NY Times article. “It’s going to be a difficult market to create.”
If diamond ETFs are launched, the gems could be the new gold. Bullion prices have soared the past decade on turmoil in global financial markets, currency debasement inflation concerns. Gold ETFs have allowed any investor with a brokerage account to buy bullion without the need to insure, store or transport the metal. Hedge funds have also been big buyers of gold ETFs, although it’s difficult to quantify how much ETFs have contributed to the historic rally. [Gold ETF Investors Unfazed by Pullback]
“The allure of diamonds is that, like gold, they are easily authenticated and long lasting. But unlike gold, and oil, diamonds have not had much price volatility, in part because they have not been touched by large flows of speculative money, though that could change if the new efforts succeed,” the NY Times reports.
Gold holdings in global bullion-backed ETFs total about 2,400 metric tons, close to a record.
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.