Everyone knows that gold is one of the most prolific commodities of all time, as its store of value has been coveted by people across the world for centuries. But another commodity is equally as popular among the wealthy though its presence is relatively unknown. Diamonds are an extremely lucrative hard asset that may soon become the next big commodity given a recent filing. GemShares, a Chicago-based firm is expected to secure a patent to create an index for diamond pricing which can then be applied to futures contracts and ETFs and so on [for more breaking commodity news subscribe to our free newsletter].
What Took So Long?
If diamonds really are that popular, it was recently found that most wealthy investors have equal amounts of diamonds and gold, what has taken so long for them to be used as securities? Pricing. Everyone knows what the price of a bag of coffee or a bushel of corn is as they are easily accessible in the market. Diamonds, on the other hand, are all unique, making a standard pricing very difficult. In fact, you can take the same stone to two different dealers and receive two different price quotes because it is so difficult to nail down a standard way to value these minerals.
But that could all change with the new index, “in which diamonds are arranged in 10 layers of comparable quality and value from cheapest at the bottom to most expensive at the top” writes Jason Zweig. GemShares even has a plan to displace conspiracy theories that often plague GLD and SLV (along with other precious metals ETFs); they are contemplating picturing each diamond on their home website for all of the world to see. GemShares hopes to create as many trade-able units as the market can handle [see also Doomsday Special: 7 Hard Asset Investments You Can Hold in Your Hand].
Who Would Invest In Diamonds?
At first it may seem like a rather far-fetched scenario, but the use for a diamond security has the potential to be very high. First, there are all of the producers and miners who could utilize the diamond-based products to hedge against unforeseen issues in production. But more importantly, the average investor would be able to invest in these ultra-expensive minerals with (presumably) a much lower cost, allowing even the average Joe to add diamond exposure to their portfolio.
The timeline for the introduction of the first futures or ETFs investing in diamonds is pegged around mid-2013 for the time being, but that is subject to change depending regulation snags and all of the administrative work that goes along with the ground-breaking idea from GemShares [see also The Ten Commandments of Commodity Investing].
Disclosure: No positions at time of writing.