Should diamonds be a commodity?

The idea of diamonds trading as commodities has been around for decades. Martin Rapaport proposed a futures market for diamonds with New York Commodities Exchange as early as 1982. Many investment experts believe there is a place for diamonds in the commodities market and there will probably be diamond-backed funds traded on a variety of exchanges in the near future. Diamonds will need to be stored in a central vault. Investors buy shares of those diamonds but they never actually possess the diamonds, it’s only on paper.

Diamonds are often compared to gold as a commodity. Gold and other precious metals are traded on exchanges word wide. But metals have the one thing diamonds lack: consistency. For this reason the common belief is diamonds can never be a commodity.

black gold

Diamond as a commodity.

We can more accurately compare diamonds with oil. Crude oil is not all the same. It is graded on viscosity, sulphur content and a few other variables. Diamonds have clarity, colour, cut and other variables. The difference is that every single diamond has its own grade while every barrel of oil from one source will be identical. But there is a precedent for commodities of varying grades so diamonds are a possibility.

In order for diamonds to be traded as commodities there needs to be strict, consistent and repeatable standards for diamond grading. Rappaport may be taking a step towards that on his own with his exclusion of EGL reports on his trading network, giving tacit consent to the standards of the remaining labs. EGL USA is planning to open a diamond trading platform to compete with Rap-net. They are not alone. IDEX and Polygon’s Cert-net are two other large diamond trading sites. On the consumer side there is Blue Nile and Pricescope. Any of these could become a diamond commodity exchange.

Higher grade stones will be snapped up by the exchanges to spend the rest of their existence in darkness. Diamond prices will soar and retail profits will disappear. They will be sold at market prices and not marked-up prices. Lower quality diamonds and melee will be easily available but the good stuff above a carat will be hard to find and even harder to buy.

Where does that leave the retail jeweller? The bridal market depends on good availability and affordability of centre stones. Jewellers will need to move toward coloured gemstones and lab-grown diamonds to regain profitability. The commoditization of diamonds may be the end of natural diamonds in the retail market.

Maybe that’s a good thing. If the financial guys want to play with all the details of grading, that’s fine. They like numbers so it should be easy for them. We can focus more on the beauty of jewellery and less on the detailed nit-picking of diamond grades. Let customer choose a stone that connects with their emotions rather than one that a piece of paper says is better. And jewellers can once again be artisans.

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