The value of a diamond is more expensive than gold. Yet gold has always been the standard commodity for investment; there's a reason it's called the "gold standard." But recently, investors have been making moves to trade diamonds as a commodity, in a diamond-backed exchange-traded fund.
According to the New York Times, the Securities and Exchange Commission (SEC) is reviewing a proposal to create a diamond-backed exchange-traded fund for investors. This would establish the diamond as a reliable investment commodity instead of just a retail purchase-like engagement rings.
Diamonds, like gold, are easily authenticated and durable. This makes them a good prospective investment choice. Also, supply isn't expected to rise significantly, but demand from India and China is going up, making it a favorable investment in terms of supply and demand.
There are a few problems with this scenario, however. First, investors lack information about how the stones are graded by diamond laboratories. It takes an expert in the field to grade a diamond for valuation purposes, so investors will need to rely on reputable diamond certifications to establish the value of their investments.
Another problem is that the pricing for these precious stones is not uniform like gold is. Instead, prices are determined by the individual diamond bourses, like those in Manhattan and Antwerp. Prices haven't fluctuated as much as the gold and oil markets have, due to the relative lack of historical speculation, but they are more subjective.
Those who are against a diamond-backed exchange-traded fund argue that diamonds aren't a commodity, but that each one is a unique object that must be valued individually. Significant differences exist in color, cut, clarity, and carat value. While an untrained eye may not be able to tell the difference between a valuable diamond and a low-quality one, differences like fractures and haziness may become more visible under different light. That's why diamond grading is so important. In order to have proper diamond certification, a diamond must be graded by a reputable laboratory.
Diamond laboratories like http://www.eglinternational.org assess a diamond's attributes and rate it accordingly. For instance a high degree of fluorescence might cause a stone to appear milky or cloudy under UV light, thus degrading its value to consumers. Certain cuts and colors may be more functional and are more aesthetically prized. A certificate from a trusted diamond laboratory provides a validation of customer preferences.
While some attempts are being made to shift the market to a more standardized pricing, it is unclear whether any significant degree of commoditization of diamonds will work and how individual differences will be accounted for. For diamond buyers, knowing the true value of their investments remains important and could even become more critical, should diamond-backed exchange-traded funds manage to transform the diamond market and cause diamond valuations become more volatile. That's why it is important to ensure that any diamond you purchase has the proper certification.
Thomas J. Lee writes about diamonds and has been a fan since his first Earth Science class. He is always seeking to find more information about these fascinating stones.