Don't Knock it If You Don't Get ItMarch 22, 12
I’ve become used to seeing inaccuracies about the diamond industry in articles in the general press. While someone who writes about a wide range of topics might misunderstand a fact or two that is not what you expect from analysts who opine on the merits of a Wall Street product, for a living, for example.
The slew of proposed diamond funds has finally caught the attention of Wall Street commentators and the reviews are mostly negative. Sadly, the negativity exposes deep ignorance, leaving us to shake our heads in a mixture of awe and disbelief.
Lack of Knowledge
One observer stated that a diamond fund “would not succeed because De Beers controls the price of polished diamonds.” Apparently, this writer doesn't know about the switch that has been made from a supply-driven to a demand-driven market in the diamond industry. I expect he has never heard of the DTC boxes that linger for weeks on the shelf to find a buyer, or that simply sell below the price at which De Beers sold them.
Elsewhere, a commentator wrote that there was weak investment demand because there are only two diamond investment funds around. Homework is in order: there are a number of diamond funds active, and at least two more in different stages of development. Besides, there is always a first for everything, just ask Thomas Edison or Neil Armstrong.
Another downside of the funds, in this writer’s opinion, is that prices are mainly driven by demand for jewelry, a factor he sees as a "problem." Isn't demand for milk or wool consumer driven? Why is this demand not a problem there?
Another criticism he levels at the funds is that diamond prices are stable, especially compared to gold and silver. The writer fails to understand that this is actually an attractive aspect of diamonds. Most commodities are traded in the derivatives market and their prices fluctuate wildly. In times of economic duress, such as in late 2008, commodity and share prices fall deeply, while diamonds were much less affected. An investment in diamonds is, therefore, theoretically a hedge that will better protect the invested value.
Not All Criticism Is Out Of Tune
Someone said in a webcast that diamond funds are a bad idea because a fund "can be very easily gamed," and that "market participants in the diamond industry…are able to influence the grading of certain diamonds and therefore able to maybe influence the types of diamonds that get into this portfolio."
A worrisome point, but it has more to do with the perception of the diamond industry. Public perception of the industry may be a hurdle, although we already know that the industry will stand or fall on its reputation.
An issue raised by many is the inconsistent character of diamonds, their fungibility. It is true that on an individual basis, diamonds are not homogenous. The non-standardness of individual diamonds raises the question of how they are priced.
Obviously, pricing, even in the relatively opaque diamond industry, is not an issue. Moreover, in large quantities of narrowly defined categories, diamonds price trends are trackable. IDEX Online, Polished Prices and Rapaport have done it for many years. Wherever there is a market, there is a price.
Why Consider Funds?
With the banks refusing to increase their funding, the narrow-margin diamond industry – especially manufacturers – is in dire need of new sources of cash in order to develop.
By buying diamonds in the market, diamond funds, and other diamond-related investment tools, could stream hundreds of millions from the financial sector. Imagine what would happen if some of it was funneled to marketing efforts?
This column is not providing a blanket endorsement for all these vehicles. Each fund should be judged on its own merits. A futures market may actually be a bad idea, for example because of the price volatility it would introduce.
However, we should not give up on a unique opportunity just because a number of people with limited understanding and insight of the industry say so. On the contrary, it is innovative and creative thinking that has always helped the diamond industry flourish.