Attempts to turn polished diamonds into a full-fledged investment instrument have a history of more than 40 years but remain totally unsuccessful to this day.
This particular product is not amenable to standardization, and therefore cannot serve as a basic exchange-traded asset.
All those savvy versions of "diamond baskets," "portfolios" and "standard sets" developed by diamantaires and financiers have not been able to solve this problem.
And if there is no underlying asset, there is nothing to bed derivatives on.
It would seem that the very long-standing practice of fruitless efforts to devise "investment diamonds" or "diamond index futures" or "diamond-based mutual funds” and other similar miracles should be a perfect argument to put an end to the protracted debate about the investment value of polished diamonds.
But alas, the best-dressed lineups of those eager to walk twice into the same water are displaying confident energy and optimism, both worthy of better application.
And who needs a new investment instrument based on diamonds and for what purpose? Stock-exchange speculators?
But they have dozens of proven, clear and transparent tools at their disposal – is there any guarantee that mysterious "diamond futures" will be at least an inch more attractive than oil or gold futures?
The same goes true for long-term investors – why is this confidence that they will be queuing for instance for “diamond-based mutual fund” equities?
The market of investment instruments is noted for tough competition, and there are just no comprehensible arguments in favor of a high competitive edge allegedly intrinsic to "diamond derivatives" and other likewise inventions.
Maybe this kind of tools is needed for diamond market participants - say, for mining companies – if only as market indicators?
Generally, growth of gold and oil futures entails an increase in capitalization of mining companies, but polished diamonds are not rough diamonds, the difference between these markets is too substantial.
It is unlikely that fluctuations of a “polished-index future” whelped in great intellectual pains could in the slightest degree serve to assess the state of a mining company and influence, for example, its creditworthiness.
The idea of viewing rough diamonds as an underlying asset is beyond any common sense at all - this product is even more distant from the concept of "standardization" than polished diamonds.
Maybe “diamond derivatives” are able to attract diamond manufacturers and wholesalers as a means of hedging price risks?
But on the backdrop of rough scarcity forecasts and taking into account that the cost of any finished diamond contains 95% of the cost of rough it is made of, these risks are not too high.
And besides, there is no need to invent sophisticated wheelworks to hedge risks, especially if there is a well-developed spot market for polished diamonds with a sufficiently transparent pricing.
As for jewelry companies, retailers and actual buyers of diamond jewelry, it is obvious that their interests are in no way associated with "diamond derivatives."
The only sector of the market from which we hear insistent calls to introduce "diamond derivatives" is represented by a few specialized consulting agencies known for their techniques of "indexing" the diamond trade.
Offering highly sophisticated methods of designing investment instruments based on polished diamonds, the initiators of this process are apparently assigning themselves a role of some authorized clearing agencies, which will trade in such instruments.
Such a motivation is quite understandable and easily explained: risks are always carried by traders and gamblers but never by brokers and croupiers.
Sergey Goryainov, Rough&Polished
