A Diamond Miners ETF for Precious Gems

January 18th at 4:09pm by Tom Lydon

The market for precious gems has weakened over 2012 but they are beginning to stabilize in recent weeks, reflecting the improvements in the global economy. While exchange traded fund investors can’t directly invest in a precious gems through ETFs, there is a relatively new diamonds and gemstone miners ETF to watch.

The PureFunds ISE Diamond/Gemstone ETF (NYSEArca: GEMS) has gained 6.2% over the past month, compared to the 3.3% rise in the S&P 500. [A New ETF for Diamonds and Gems]

Diamond prices have been declining over 2012 as slower growth forced consumer to cut back on discretionary spending.

“The story behind these declines will be familiar to those who watch the global economy: slow growth in the U.S. was more than offset by declines in Europe and the emerging markets (especially China),” Nicholas Colas, ConvergEx Group chief market strategist, said in a recent research note.  “The good news is that pricing has in fact stabilized in recent weeks, and overall price levels are – like equities – above their 2008 level.”

While the U.S. and Europe remain the dominate markets for diamonds, Colas noted that emerging markets, like China and India, are adopting western traditions, like gifting diamond engagement rings.

However, demand for diamonds remains shaky, especially with Europe and Chinese demand weaker than expected at the start of the year. Meanwhile, U.S. demand, which accounts for half of the global market, did hold up.

“Since diamonds and gold share many basic characteristics, it is tempting to lump them together into a ‘precious metals/materials’ bucket along with silver,” Colas added.

Basic price fundamentals and its “hard” asset status both contribute to the argument. However, diamonds experience a wider bid/ask spread due to its categorization into the “four Cs” – color, carat, cut and clarity.

Due to their wide variations, the ETF industry has also struggled to provide a uniform physically backed diamond ETF. Although, there are some providers, like GemShares and IndexIQ, that have shown interest in a physical diamond ETF offering. [Diamond ETFs in the Works — Will Investors Bite?]

For more information on diamond funds, visit our diamond category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.

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