Diamonds: The next big thing ! Move over gold bugs! Futures traders in precious assets may have a new best friend: diamonds.
That’s if Martin Rapaport has his way. The chairman of the Rapaport Group, a source of pricing and other market information in the diamond world, first wrote a diamond-derivatives proposal for the New York Commodities Exchange back in 1982. It was rejected.
But Rapaport has been working on it ever since—and believes that creating a futures market for diamonds is well within reach. In fact, he’s aiming for a late 2016 to early 2017 launch.
Rapaport isn’t the only business mind to try to establish a diamond-backed futures market, efforts have been made to establish one in fits and starts over more than 30 years.
But Rapaport said it can only become a reality with a spot-cash market. “You can’t have a derivatives market without a legitimate, transparent, competitive and efficient spot-cash market,” he said.
A spot-cash market is a market in which goods are sold for money and delivered immediately, or in a short period. A futures market, meanwhile, is a market in which participants can buy and sell a commodity or futures contract for delivery on a specified date in the future.
“A diamond futures market will help the industry,” Rapaport said. “Right now, the diamond trade is forced to be in a long position. If there’s a downward movement in prices, the whole trade is at risk.”
With a derivatives market or a futures market, however, the trade will be able to reduce and even eliminate risk, he said. “Risk reduction is a win-win situation for the entire industry.”
Here’s an account of some of the challenges a diamond-futures market has faced:
Standardization
One of the main problems inherent in dealing in diamonds is the fact that they comes in all shapes, colors, sizes, quality types and clarity levels, making it a challenge to come up with a standard price.
Diamonds “lack fungibility” since there are thousands of different categories of diamonds and because wholesale diamond transactions tend to be private, said Paul Zimnisky, an independent analyst and consultant to the diamond, mining and investment industries.
That’s why there is no listed futures market for them or a physical-diamond exchange-traded fund, he said.
Investor’s didn’t take a shine
A previous investment vehicle for diamonds saw its run cut short. In November 2012, the PureFunds ISE Diamond/Gemstone ETF was launched. It shutdown in January 2014, after just over a year of trading.
Zimnisky was chief executive officer of PureFunds at the time. “The fund was closed after about a year due to apathetic investor interest,” he said.
The ETF, which tracked the price-and-yield performance of the ISE Diamond/Gemstone Index, “had the liquidity and price transparency of equities, but was sensitive to implied diamond prices because miners’ revenues, profit and diamond inventory in the ground tend to be sensitive to diamond prices,” said Zimnisky.
Zimnisky launched the Zimnisky Global Rough Diamond Price Index in July of this year to help create some transparency in the industry.
Progress
Through the years, Rapaport has remained confident that a futures market for diamonds can exist and has made progress.
He started RapNet, part of the Rapaport Group, in 1992. It is the world’s largest diamond-trading network and Rapaport said it provides “unprecedented transparency” in the diamond industry.