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The world of diamond finance in the month of June 2007 experienced three important announcements: the launch of a $400m fund to invest in large diamonds, polished tenders and commoditization.  All three announcements, if they materialise can significantly affect the diamond industry.

 Oddly enough, the one which shall have the worst impact on consumers shall be the large diamond fund.  As planned, the fund will only invest in diamonds worth more than $1m, which it aims to sell on at a profit.  In reality, the fund shall corner the market for these large stones, going against the trend of the industry to create more efficient channels of distribution.  The industry will benefit from the availability of an extra few hundred million dollars, but this liquidity will only go to a select number of diamond manufacturers.  The majority of diamond manufacturers never see a stone worth $100k yet alone $1m.  Is it really good for the industry when the new funding goes only to a few suppliers at the expense of higher prices passed on to the consumer?  Even the very rich consumers deserve the best prices.

Martin Rapaport’s ambition to create a transparent pricing index through the tenders of polished diamonds is not driven by pure philanthropy, although he does a lot of that as well.  Profit will be made managing the tenders, and selling the resultant pricelist.  Tenders and auctions are not necessarily the best indicator of market prices, as a good auctioneer in other areas can be expected to achieve higher than market prices, and diamond should be no different. However, because the online trading platforms do not record the actual transaction prices, this will be first open record of actual transaction prices. 

Unlike stock and commodity exchanges, members of the diamond bourses do not have to report their individual transactions.  On the contrary, diamantaires profit precisely from this inefficient dissemination of pricing information.  A move to disclosing the winning bid prices from the tenders will be a worthy enterprise.  Over a period of time, a serious of adjustments and discounts will be established to reflect

Commoditization seems to strike fear into a lot of diamantaires but it follows the trends of a lot of other raw and processed products. A lot of technical, legal and accounting work is required before the futures and options can be traded, and there are enough parallels with other products and exchanges.

The entry of investment and speculative funds will add liquidity to the market, but will also increase volatility.  Also, the polished diamond market is not that large and there is always the risk of large players cornering the market and raising prices.

 Lowell Kwiat, co-president of Kwiat, New York, commented “A diamond futures market affords the opportunity to hedge diamond inventory against short-term fluctuations in pricing. It also can compensate for the carrying cost of inventory, which is something that we, as merchants, are not currently paid for. It is possible that the entry of speculators will fuel volatility, which could mean higher prices for the consumer.  There will be many beneficial aspects to commoditization, but there are likely to be unforeseen and unintended consequences.”

But as we have recently seen, you can demand higher prices, but the jewellery manufacturers may not be willing to pay them.  Speculators can also lose, that is a risk of speculating.

editor@diamondfinance.info