A New York-based tech company is trying to succeed where many companies have failed and make the $1.2 billion global diamond market more accessible to financial investors, through the creation of a futures contract and a fund that tracks the price of gemstones.
Diamond Standard is attempting to establish the equivalent of gold bullion for the gemstone market, which is dominated by jewelry houses and which, unlike gold, is not commoditized. It plans to launch a diamond futures contract on the Minneapolis Grain Exchange (MGEX) by the end of the year, chief executive Cormac Kinney told the Financial Times.
If successful, it would pave the way for the launch of a diamond-backed exchange-traded fund as early as the end of next year, if the company is able to resolve long-standing fungibility and liquidity issues. that have in the past prevented gemstones from trading like other commodities.
Diamond Standard faces an uphill battle to turn diamonds into a tradable market. Each stone is unique, while futures markets can take years to build. MGEX owner Miami International Holdings has yet to begin the approval process with US derivatives regulators to list diamond futures and options contracts.
Many previous attempts to create alternative vehicles for investing in the gemstone have failed, according to diamond industry analyst Edahn Golan.
Diamond fund Diamond Circle Capital listed in London in 2008 before liquidating its gemstone portfolio five years later. IndexIQ filed a prospectus to create a diamond ETF in 2012 but never launched. And Swatch-owned jeweler Harry Winston planned the same year to set up a $250 million fund to buy diamonds with money from institutional investors.
Diamond Standard launched a peer-to-peer exchange in September for bars and coins containing clusters of diamonds of equal value encased in a plate of plastic resin. Along the bottom is a thin wafer housing a chip used for authentication and transactions that has a QR code printed on it. Each coin is worth $5,210 while each bar is worth $52,100, and the products have attracted high net worth individuals and family offices.
Kinney said the launch of a futures contract is the next step to entice major asset managers to buy diamonds as part of their investment portfolio.
“Diamonds are worth more than silver, platinum, palladium and rhodium combined. It’s an overlooked resource that investors couldn’t touch because every diamond is different,” he said.
The move comes as gold price nears record high, reflecting investors’ demand for safe places to park their money in times of inflation and shocks to the global system. Diamonds have tended to retain their value during periods of economic turmoil, when they typically experience low price volatility and benefit from a tailwind of declining mining supply.
However, diamonds meet the challenge that each stone varies according to the so-called four Cs – size, color, clarity and carat weight – which means they are not easily interchangeable like a barrel of oil might be. and price transparency is difficult.
“Diamonds are undoubtedly a very attractive category as they have a high value to weight ratio, low volatility and steady price growth,” said energy and resources practice partner Olya Linde. products from Bain & Company. “However, there are issues – fungibility and a transparent spot price – that need to be addressed.”
Diamond Standard, which has raised $45 million to date, has so far struggled to create cash with just $900,000 in trades last month, but Kinney hopes to increase that once a futures contract will be established.
The diamond industry can only dream of replicating even a part of the success of the gold industry. Gold-backed ETFs exploded in popularity two decades ago and about 30% of the yellow metals market is attributed to investors. According to Kinney, increasing the investor share of the diamond market by $1.2 billion from the current level of 1% to half gold levels is equivalent to $180 billion and would drive diamond prices higher.
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