Rare Diamonds an Investment Haven; Derivative Market Still Lacking

Finance and Trade
22/07/2016 10:47

"With new fortunes being created around the world faster than at any time in history," write David Brough and Atul Prakash for Reuters, "more of this expanding elite of wealthy investors are looking at different ways of protecting cash that now earns close to zero percent interest in bank accounts, while asset market turbulence can wipe out millions in hours. Some are eyeing rare diamonds as a best friend, or long-term haven at least. And it's no longer just a top table of 'super rich' billionaires who are gravitating to this arcane world. A second division of wealthy is emerging. They can’t afford the Oppenheimer Blue [the 14.62-carat Oppenheimer Blue recently sold for a world record $57.5 million at a Christie's auction], but they can take a stake in rare diamonds via specialist investment funds." Gem specialists promote rare diamonds as 'safety' investments, and big players are now treating fancy color diamonds as an asset rather than a jewel. 

There are a few vehicles for those investing in diamonds at a slightly lower level, but. "the club is shut to most ordinary savers due to its complicated, insider nature - characterized by poor liquidity, a lack of price transparency and high fees. While some are making efforts to create a liquid market, the process has been slow." Brough and Prakash mention a few, such as Sciens Coloured Diamond Fund II, one of the more established funds (now shut to new investors, entry level $1 million), which sees, "Color diamonds are a hedge against inflation, currency risk, market fluctuations and political uncertainty", and Solitaire Diamond Co., backed by an assortment of white diamonds of high-grade clarity and cut weighing under 5 carats. 'Despite a handful of diamond-backed initiatives," the authors write, "fund managers have struggled over the years to find the right investment vehicles for diamonds due to illiquidity, a lack of price transparency and high transaction fees." "I am very dubious about diamond-backed investment because the price of diamonds is not listed anywhere and the market is too illiquid," said Edmund Shing, strategist at BNP Paribas and former global equity fund manager of BCS Asset Management.

Derivative markets exist for most major commodities, according to Investopedia, but diamonds stand out from the crowd as a shining exception. The derivative markets for oil, corn, soybeans and other staples of the global economy are well established, with robust trading in financial contracts that derive their value from the underlying asset. Part of the problem with diamond investing is that different categories make it difficult to compile generic prices. Unlike other commodities, diamonds have little value from an industrial application perspective. They also lack standardization or a benchmark making is easy to compare one to another. In short, each diamond is different, making them difficult to value. At present, there is no spot price for diamonds, which means that would-be investors have no way to gauge the price, as prices vary from vendor to vendor. Still, there is great interest in creating a derivative market for diamonds ... if the price is right.