Wednesday, October 23, 2013

Physically Backed Diamond Investment Vehicles Won't Work

(Kitco News)

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Diamonds will need to continue to sit on the sidelines, waiting to be called off the bench to perform as a physically-backed investment vehicle.

The irony of what’s keeping diamonds from becoming a physically-backed commodity is that the uniqueness in each diamond is one driving factor that propels the price upwards, and is also what’s holding it back.

Paul Zimnisky, chief executive officer of PureFunds, a company that was the first to successfully bring a diamond ETF -- PureFunds ISE Diamond/Gemstone ETF (GEMS) -- to investors, doesn’t see a physically-backed diamond investment vehicle becoming available any time soon. The GEMS ETF includes retailers, companies that provide servicing equipment to the diamond cutting and polishing industry, among others.

“I applaud the attempt(s), but I don’t see the vehicle working,” Zimnisky told Kitco News. “I don’t see what they can do to make it work because the underlying fundamental issue is that physical diamonds are not fungible, they’re not price transparent.

“There’s a reason we don’t have one right now and it’s because diamonds lack fungibility, they all have different characteristics, different values, they’re individually graded,” Zimnisky said. “You’re trying to create a fungible asset out of something that’s not (fungible), you’re forcing the issue, and, when people buy an ETF, they buy it because there’s pricing transparency, there’s liquidity and you’re just not going to have that.”

There are several different ways to grade diamonds, which poses a significant obstacle. Zimnisky pointed out that there’s no spot market for diamonds. He also noted that there’s varying opinion over what diamond prices actually are.

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