In a week in which gold suffered its biggest price decline in 30 years, one former futures trader is here to herald the next long-term commodity star—diamonds. Yet others insist that reports of gold’s death are greatly exaggerated.
Kristopher Schellhas has invested heavily in what he regards as the rotation into the next big investment wave. The former Chicago Board of Trade futures trader, together with partner Chris Duffield, a former hedge fund trader, are not simply going long on diamonds. They have created an exchange to facilitate others’ investments in the light-dispersing gemstone.
Through their newly launched Investment Diamond Exchange, investors can now buy investment-grade diamonds at rock-bottom prices with complete transparency—as well as take physical possession, track prices in real time and liquidate their portfolios.
The two Los Angeles-based partners want to capitalize on trends that began to emerge when De Beers, through lawsuits and privatization in the early 2000s, lost its more than century-long monopoly over the diamond market.
“They no longer have the ability to manipulate diamond prices, and their stockpile was officially depleted in 2004,” Schellhas (right) tells AdvisorOne. “The market was democratized,” he adds, noting that the participation of companies like Alrosa, Rio Tinto, Harry Winston and Petra Diamonds in diamond production have allowed market forces to prevail in the formerly De Beers-dominated industry.
Adding to the new liberalization of the market are what Schellhas regards as exceptional supply-demand characteristics.
“The fundamentals for diamond price appreciation are amazing now because all the existing diamond mines that are substantial are at their peak capacity,” he says. “The supply of diamonds are going to remain static for the decade and continuing on till 2030, and no new diamond mines of substantial size have been discovered.”
And even if new discoveries are made, Schellhas says it takes 8 to 13 years to get a mine up and running. And while the supply appears attractively limited, Schellhas points to a surge in expected demand coming from China, India, the Middle East and Brazil.
“These emerging economies are fueling unprecedented demand for diamonds and jewelry,” he says, noting forecasts of 276 million new middle-class households in China and India by 2020.
“That’s more than three times the middle-class households in the U.S. right now,” Schellhas says. “These countries have an insatiable appetite for luxury goods. It’s woven into their culture. They love jewelry, and of course developed countries are going to buy jewelry as they always do.”
But Leigh Greenberg (left), a precious metals dealer with Universal Bullion, also in Los Angeles, counters that demand factors still favor other commodities.
“The demand for jewelry in gold and silver is much higher than for diamonds,” he told AdvisorOne. “Diamonds are for weddings—they’re one-time purchases. Gold and silver demand is throughout the year.”
Apart from diamonds’ constricted supply and demand growth in line with emerging economies’ GDP growth, which is north of 5% according to a Bain & Co. study Schellhas cites, it may be diamonds’ novelty as an investment that makes them shine brighter than gold.
While gold owners may be miffed that their precious metal now trades at a 2-year low, or about $1,400 an ounce, the commodity was priced at just $450 an ounce before the GLD ETF was launched in 2004. Schellhas believes the ETF, by making it easy for ordinary investors to trade, fueled speculative interest in the commodity.
He cites research indicating that 40% of the gold market is speculative capital, compared to a mere 1% speculative investment share for diamonds.
But Greenberg doubts diamonds can rise to gold’s age-old status as a store of value.
“If we look at history, gold has always been considered money; diamonds have never been considered money,” he says. “People have always used gold for money, barter, trade. Diamonds just don’t qualify for that category.”
Yet plans afoot to release the first diamond ETF by the end of this year fuel Schellhas’ confidence in a coming surge of speculative investment in diamonds.
Schellhas concedes that the uniqueness of each individual diamond has been a barrier to commoditizing them and turning them into a publicly traded asset class.
But a company called GemShares, which will be issuing the aforementioned ETF, has succeeded in patenting a class of “investment-grade diamonds”—specifically, 0.5- to 5-carat, round, brilliant, clear or colorless GIA-certified diamonds—for public trading.
Those are the only diamonds that Schellhas sells through his Investment Diamond Exchange.
Schellhas calls the patent and the investment commoditization process it will launch “a precursor to creating a futures market for diamonds.
“It overcomes all the idiosyncratic features of a diamond; it overcomes the fact that… there’s roughly 16,000 variations of this diamond,” he says.