Throughout history, diamonds have embodied luxury and represented financial security. Meant to last forever, diamonds are symbolic of love and they seal unions to come.
And now, diamonds are set to become a part of the global hard asset monetary system, along with gold, silver and platinum, thanks to the efforts of firms including GemShares, which is pioneering the delivery of physically-backed diamond investment products to regulated exchanges around the globe.
Securitizing diamonds and building a transparent, liquid financial market around them is an idea that’s generated a great amount of interest for sometime, said Andrew Feldman, a partner at GemShares, which has been pondering diamond securitization for the past eight years. After all, diamonds are arguably the last, securitizable asset out there.
But figuring out how exactly to package diamonds for the financial markets has been a challenge, Feldman said, in large part because of the close knit nature of the diamond industry, on one side (which is dominated by family-owned businesses), and the financial industry—whose involvement has thus far largely been limited to credit and lending to diamond mining companies—on the other.
“We are trying to bridge the two communities together to build product,” Feldman said.
GemShares recently patented a rules-based, objective pricing standard for diamonds, the GemShares Global Investment Grade Standard (GIGS) diamond. The standardized pricing mechanism is designed to turn these precious stones into fungible products, Feldman said, and allow investors to capitalize on price fluctuations.
“What we’re trying to bring to the table here is transparency, low cost and liquidity,” said Rich Keary, a consultant to GemShares. “We want to build a closer relationship between the financial and diamond industries and bring new distribution channels to the diamond industry.”
Today, the diamond industry generates around $60 billion to $70 billion a year, but traditionally, it’s been a very proprietary world, Feldman said, with businesses tending to be family run.
However, the diamond industry as a whole has been finding it very difficult to grow and achieve scale, which is why securitizing diamonds and building diamond-backed financial products will help a great deal in bringing the industry “to a new level,” he said. “As we bring transparency to the pricing of diamonds, there are huge growth opportunities for the industry.” To create the “baskets” that will back GemShares’ future financial products, the company will choose stones that meet certain gemological, optical, proportional and light-behavior guidelines.
“Each basket will be put together using specific rules, and all the rules will create fungible product, so that Basket Number One will be financially fungible with Basket Number Two and Basket Number 2,000,” Keary said.
Access to this new asset class, once it’s up and running, will provide investors with additional diversification and risk management tools as well as the opportunity to take advantage of lower diamond prices by shorting diamond securities, something that cannot be done today.
“By creating an investment grade diamond industry, people will be able to take a more calculated approach to diamonds, asking questions like ‘where do diamonds fit into my portfolio, why would I want diamonds and how to diamonds compare to other assets that I own,” Feldman said.
Investors and investment banks will also be able to use GIGS diamond-based financial products to hedge their exposure to companies in the diamond industry. The GemShares team is building upon their experience securitizing other assets, notably currency.
Diamonds have been and continue to be a source of great controversy, particularly after the notion of blood diamonds, which are diamonds mined and used to finance insurgencies and warlord activities in Africa, came to light. The industry as a whole suffered, however, governments, non-governmental organizations and the industry itself have been diligently working together to tackle the issue and in 2002, these parties came together to establish the Kimberley Process Certification System, a United Nations-backed process that has virtually eliminated the trade in conflict diamonds.
Today, over 99% of the world’s supply of diamonds is from sources free of conflict, according to the World Diamond Council, an organization that was set up in 2000 by the diamond and jewelry industry to tackle the problem of conflict diamonds.