Will Diamonds become a Traded Commodity?

[DiamondExpert]

http://www.marketwatch.com/news/story/diamonds-may-have-future-commodity/story.aspx?guid=%7B9376AEDE%2DCB8D%2D4101%2DAC8C%2DCF0015191A65%7D

Rapaport thinks so...what do you think?

 

[Adylon]

Maybe rough diamonds could be traded as a commodity in a futures market. People buying polished diamonds based on numbers or a market ticker will probably lose out unless they're dealing in very large quantities bought cheap in bulk.

I don't think diamonds could ever be traded like money, as some commodities are or could be.

In order for a commodity to become money, it needs to be able to do certain things. It's needs to be easy to carry and identify or test, it has to be divisble, etc.

You can easily test a kilo of gold... but convincing someone diamond is diamond is not so easy. It's also easy to split a kilo of gold up into oz's or grams to make change in an exchange of goods, and then put it back together again later.... but once you break up a diamond, there's no putting it back together again, the value is significantly decreased when it's broken up.

If there was ever a total devaluation of all paper currencies and anarchy I think gold, precious metals and oil would become the standard, and that's the true test if something is a real commodity or not.

 

[CaptAubrey]

I think they aren't because the major players don't want them to be. If De Beers (and by extension, their sightholders) refuses to get on board with this, how far is it likely to go?

The plain fact though, is that both rough and polished diamonds are routinely traded in bulk precisely because they are, in fact, alike enough to traded in bulk. That makes them a commodity of sorts.

If the commodities markets can handle variations in other commodities such as crude oil and grain, I think they could handle diamonds--that is, if the producers let them. And I don't see them wanting to.

 

[kenny]

What would change?

Who would benefit?
Who would suffer?
Why?

 

[CaptAubrey]

Date: 2/9/2007 2:27:04 PM
Author: kenny
What difference would it make?
What would change?
Who would lose or gain?
Why?

One hope, I assume, is that the industy would gain some much-needed transparency in how the products are traded and priced. But there are some who--in good faith, mind you--are afraid of transparency because it represents a threat to their margins.

 

[Garry H (Cut Nut)]

Its not a new idea - I know 2 other groups that have wanted to do it - one all alone with their own initiative.

But as we well know - the cut component is anything but standardized.

This GIA Ex is an AGS5
And this AGS0 is a GIA VG

 

[diagem]

Date: 2/9/2007 3:48:48 PM
Author: Garry H (Cut Nut)
Its not a new idea - I know 2 other groups that have wanted to do it - one all alone with their own initiative.

But as we well know - the cut component is anything but standardized.

This GIA Ex is an AGS5
And this AGS0 is a GIA VG

So true, so imagine standartizing fancies.

In my opinion, Rapaport Diamond Lists are too becoming irrelevant on the larger/high quality Diamonds...
Today these Diamonds are priced individually based on their own identities... I have witnessed being priced and traded within a range of 40% in a matter of days..
That is not getting closer to commoditation, its going backwards from it...

 

[Paul-Antwerp]

The real issue is not trading individual diamonds on the basis of some kind of spot-price. It is the development of a hedging-instrument.

Rapaport is a new player in this game, as his opposition (www.polishedprices.com) has developed an index of polished prices, based upon real transactions at the wholesale-level. This index apparently is a clear indicator of the directions of prices, and the extent of price-changes.

ABN-AMRO is now in the process of trying to create hedging-instruments based upon that index. This could be very interesting for companies in the sector, to use the index in long-term-supply-contracts, and to be able to hedge their risk. Depending on the party in the contract, the risk could be lower or higher prices over time.

Since such hedging-instruments are possibly in demand with diamond miners, cutters and/or wholesalers and jewellery manufacturers, it is logical that someone will be able to develop them. The fight is about which index will be used as a base, that of polishedprices or that of Rapaport. Theoretically, Leonid and Irina could also develop an index and enter the fight.

Live long,

 

[diagem]

Date: 2/9/2007 2:21:54 PM
Author: CaptAubrey
I think they aren''t because the major players don''t want them to be. If De Beers (and by extension, their sightholders) refuses to get on board with this, how far is it likely to go?

The plain fact though, is that both rough and polished diamonds are routinely traded in bulk precisely because they are, in fact, alike enough to traded in bulk. That makes them a commodity of sorts.

If the commodities markets can handle variations in other commodities such as crude oil and grain, I think they could handle diamonds--that is, if the producers let them. And I don''t see them wanting to.

You are right, some (usually the smaller sizes) Diamonds are traded in bulk, but that is minimizing each day..., today even if Diamonds are traded in bulk, most often they are calculated on a per-stone-basis, especialy the larger high quality Diamonds.

 

[CaptAubrey]

Date: 2/9/2007 4:18:02 PM
Author: Paul-Antwerp

Since such hedging-instruments are possibly in demand with diamond miners, cutters and/or wholesalers and jewellery manufacturers, it is logical that someone will be able to develop them.

If I recall correctly, Maurice Tempelsmen mentioned this issue in passing in his address to the GIA symposium last summer. Time will tell...

 

[Adylon]

Another entity that could potentially create an index would be polygon, I know they already have these types of reports and I think their prices are more accurate then rapaport, I didn't know that polygon published these lists until recently.

 

[Paul-Antwerp]

Date: 2/9/2007 4:27:25 PM
Author: DiaGem

Date: 2/9/2007 2:21:54 PM
Author: CaptAubrey
I think they aren''t because the major players don''t want them to be. If De Beers (and by extension, their sightholders) refuses to get on board with this, how far is it likely to go?

The plain fact though, is that both rough and polished diamonds are routinely traded in bulk precisely because they are, in fact, alike enough to traded in bulk. That makes them a commodity of sorts.

If the commodities markets can handle variations in other commodities such as crude oil and grain, I think they could handle diamonds--that is, if the producers let them. And I don''t see them wanting to.

You are right, some (usually the smaller sizes) Diamonds are traded in bulk, but that is minimizing each day..., today even if Diamonds are traded in bulk, most often they are calculated on a per-stone-basis, especialy the larger high quality Diamonds.

I am not talking about this level of trading.

As a true-world-example. Last year, Rio Tinto, as a major miner-producer was the first to enter into fixed price-fixed supply contracts with their customers. So, as a major cutter, you had a contract that guaranteed you a supply of specific rough-assortments over an extended period of time. At a fixed price, which gave you, as a cutter, again the possibility to enter into fixed price-contracts with your customers, being big jewellery manufacturers or big chainstores, as an example.

However, the prices in the contract were fixed at a top in the rough market, and general pricing of rough went slightly down on the overall market. Finally, Rio Tinto has to unilaterally decide to lower their prices, because their customers were hurting.

That is when a good pricing-index could have been valuable. Because you can factor this index into the pricing-mechanism or your contract. Then, pricing would be automatically adjusted downwards in line with the market trend, or upward, if the general market level takes that direction. And financial middleman can create hedging instruments based upon the index.

In that way, Rio Tinto could have insured itself against a drop in the market, thus guaranteeing their revenue. In the end, this instrument greatly reduces the risk of a miner, or a mining country for that matter, and in that way, these miners can get loans at better conditions again, simply because the risk of their business has been reduced. I do not even want to imagine the possibilities of this for a mining country.

The demand for such financial instruments exists. The technique to develop them is not overly difficult. Hence, this market of financial instruments will be created, regardless of how the trade in individual diamonds develops.

Live long,