Or even chatter of a diamond ETF.
In this article from the NY Times about Chinese citizens trying to get their money out of the local currency there are people buying jewelry (three carats per ear) among other things.
With what has happened to the global financial system and the paranoia that has ensued you'd think some ETF provider would try to capitalize on that with a diamond ETF.
No doubt there would be plenty of things to figure out like valuation, consistency of quality, storage and so on but it is an interesting thought.
16 comments:
I would guess it's a liquidity and pricing issue, right? Since there's no central exchange and DeBeers has a stranglehold on the supply.
obstacles galore, I mentioned a couple but I don't really know. If there was genuine investment demand someone would be working on a solution so I guess there is no genuine demand but I wonder why.
There's no diamond ETF because diamonds aren't a natural commodity. There is no natural shortage and value is really only derived from the cutting of diamonds into "gem quality" stones.
In actuality over 80% of mined diamonds go into industrial uses and are sold at considerably lower prices to the jewels that we normally connote with diamonds. Even gem diamonds are typically sold for in excess of 40% margins between wholesale and retail. Add on the fact that the diamond market is manipulated by one major player, the rise of synthetic diamonds which are molecularly equivalent to natural diamonds, and the low liquidity in actual diamond investments and you can see why a large scale fund is not likely to be feasible. Or, if it is feasible, not likely to be as successful as the typical consumer would assume based on retail diamond values.
That's not to say the buying and selling of rare or otherwise exquisitely cut diamonds wouldn't be beneficial for an individual looking for a store of value just a large fund trading commodity diamonds is not likely to be successful as their value comes from a more notional rarity than any fundamental rationale. It's basically analogous to investing in art versus investing in investing real assets. It's hard to justify a billion dollar art ETF, but a billionaire could well invest a billion dollars in art.
oh yeah?
lol
While you are at, why not a fine wine ETF. I think there is an index trading in London.
I sure if you contacted Bernie Madoff he could get it started and sell it.
there are a couple of wine funds out there but i don't know how they have done. there was an article in the WSJ about some guy leaving UBS to start one.
there have also been (are) art funds and to my recollection they have done poorly, probably attributable to the wrapper than anything else.
Curious Investor has it right IMO: Anyone who ever bought a diamond at retail (or close to it) and then tried to sell it later gets a pretty rude awakening when they see the wholesale bid; makes the premium on gold coins look like chump change.
If Rapaport or someone like that successfully created a futures exchange for diamonds it might be feasible (I know there was a proposal last year but have no idea what happened to it) but in the absence of such a market a fund would presumably have to buy physical lots at wholesale and I'd bet they'd become a dumping ground for lower grades and stuff w/o pedigree pretty quickly, with everyone from industrial buyers to dirty money sterilizers using them to improve their spreads. In the absence of a more predictable arbitrage mechanism it just sounds like too much overhead and potential tracking error to sustain an ETF, at least to this relatively untutored eye.
I suspect this is probably true to some degree of all the proposed 'collectibles' ETF ideas I've seen floated out there including wine, art, etc; these kinds of items gain their value because they are arguably unique in some way but a futures market requires standardization and transparency so one contract is comparable to another. Now I can see how you might be able to standardized diamonds (assuming you could get DeBeers to agree which I doubt) but, otherwise, I really don't see how you manage risk. The whole idea sounds ripe for manipulation and I'm not sure even a long performance history could convince me to trust it.
Shorter version, there is probably demand but there doesn't seem to be a model.
It is interesting. I suppose you could buy Blue Nile or Tiffany to try to capture the effect, but it's not the pure play that you're suggesting.
Fundamentally, diamonds are not fungible in the way that gold bars are.
However, I find the idea of both diamond and gold ETFs as a response to the financial crisis and ensuing paranoia rather inexplicable. If people are so paranoid as to want to hoard gold or diamonds (presumably fearing hyperinflation or nationalization of other assets - like bank stocks), what on earth makes them think that their rights as ETF holders will be respected in the event of actual financial collapse?
Roubini is placing the odds of a severe L shaped depression at 33% versus 6 months ago at 10%. Folks there is no large feel good rally coming our way and the trend is lower equity prices...
http://www.rgemonitor.com/blog/roubini/255398/is_the_us_a_japan_2_the_return_of_japans_free_fallin_stag-deflation_and_the_risks_of_a_us
What about an art ETF?
Bling-bling from the ying-yang, I guess.
Roger,
Off topic, but I thought you might get a kick out of this.
The Yield Curve as a Leading Indicator: Some Practical Issues
http://www.newyorkfed.org/research/current_issues/ci12-5.html
Just started K. Fisher's "The Only
Three Questions That Count" and the concept of constructing a Global Yield Curve is interesting.
Although not directly related to the prior statement, I like the notion that if he discovers something with a high correlation in a U.S. Market he will test that hypothesis in a foriegn market(s) to see if there are similar correlations and thus actionable inferences.
Good stuff so far.
When I lived in the Bay Area, there was an Asian-on-Asian crime from the gangs of home invasion looking for $$$ and valuables kept in the home. The Asian gangs knew that many 1st-2nd gen families didn't trust the banks (which seemed naive at the time) and kept wealth in currency and valuables at home, and often didn't report the crimes.
Italians and other Euro-immigrants did the same, at one time.
Wait 5 years, and you'll see news items of diamond thefts on the rise.
De Beers are considering the idea of a diamond etf actually.
According to: http://priceofdiamonds.net
"Apparently proponents of a diamond ETF have asked for De Beers’ input and expertise on the concept that an exchange traded fund with diamonds as a base could be constructed.
According to other sources, the MD was responding to reports that a diamond ETF could follow the success of gold, silver, platinum and other ETF funds.
It could attract investors because global diamond production was declining, with little prospect of new major mines."
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