A diamond is eternal, but not for much longer. Spot trading in commoditized diamond clusters began in September, and the company behind the electronic exchange hopes to launch a futures contract on the Minneapolis Grain Exchange next year. Diamond Standard Inc.'s plans to include gems in commodity fund indexes include the creation of an exchange-traded fund.
"That's the tipping point for our early investors," said Cormac Kinney, founder and CEO of Diamond Standard, which buys about 10,000 diamonds per week and sells plastic-encased, equally valued clusters to investors.
Mr. Kinney wants to achieve something similar to what happened when gold was financialized. When investors could buy and sell gold without having to transport bars of the precious metal, commodity funds and others made allocations that drove the price of the precious metal to new highs. To be sure, ETFs and new futures contracts fail all the time. And functioning markets in investment diamonds have remained elusive, despite investor interest peaking during periods of high inflation, such as now, when people are eager to stash away wealth. Purchasing diamonds is the simple part. The issue is selling them, which is what the famous De Beers advertising line about holding forever was supposed to discourage.
For one thing, many buyers pay retail but sell to dealers at wholesale prices, as Americans who were sold diamonds by telemarketers pitching sparkly hedges against inflation learned in the 1980s. Though the value of diamonds has consistently increased over the decades, it can take years to make up for the markup. Long holding periods on ring fingers and in safes, combined with jeweller competition for investment-grade stones, have limited liquidity, or the ability to transact at expected prices.
According to Olya Linde, a Zurich-based partner at consulting firm Bain & Co. who specialises in energy and natural resources, the biggest barrier for investment diamonds is fungibility, not opaque pricing or illiquidity. "If anyone can solve that, that's the first major step toward unlocking investment demand," she said. "This is where real technology, such as artificial intelligence and machine learning, may be able to help." Mr. Kinney, a computer scientist, believes he has figured out how to monetize diamonds. He has run a quantitative hedge fund and developed and sold trading programmes and other software, including to News Corp, the parent company of The Wall Street Journal.
When he met his wife, Mimi So, a gemstone dealer and fine jewellery designer, he became interested in diamonds. Purchasing an engagement diamond for someone like her was difficult. He had access to a wealth of market data through her company and approached diamond selection in the same way he approached quantitative trading.