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Johannesburg - Everyone is looking for less risk and - at least some - returns. So, when the latest Singapore Diamond Mint announcement came out, it made headlines around the world.
As of October 10, investors in Singapore and select other cities in the world can trade something new on an investment exchange – diamonds.
According to The Singapore Diamond Mint Company, its new Diamond Bullion product, exclusive to the Singapore Diamond Investment Exchange (SDiX), means that diamonds can be traded on a global investment exchange at market-driven, transparent pricing – for the first time in history.
“The new Diamond Bullion presents expert investors the opportunity to invest in diamonds as a safe haven asset for the first time ever,” explained Alain Vandenborre, founder and chairman of the Singapore Diamond Investment Exchange (SDiX), and director at The Singapore Diamond Mint Company (SDM). “It is designed to bolster investment in diamonds as an asset class.”
But is this sparkling opportunity shelter from the headwinds, or risky business? And what does it mean for investors in South Africa?
Experts the world over are warning that we are heading into unchartered territory here, as diamonds have simply never been standardised enough to be a “real” asset class. At less than one month in, things are largely speculative at this stage, with many investors assuming that the diamond exchange will behave like gold.
Arguably, most South African investors have little to no practical experience in trading in diamonds – on an exchange or otherwise.
Nevin Sher of Johannesburg’s Central Diamond Administration, a specialised diamond and jewellery valuations firm in Johannesburg, qualified with America’s Gemological Institute of America, has been in the business of grading, manufacturing and trading diamonds for over 10 years and he has concerns.
“I can be a layman and invest in the stock market, and the exchange ensures all the due diligence and so on is in place – but diamonds have to contend with an existing lack of transparency in the industry.”
It is perceived that there is a correlation between a healthy economy and the demand for luxury goods like diamonds, however there is no scientific proof in this regard. The reasons for volatility around diamond prices are so vast that this is something where you really need to be an expert in what you are trading.
Trading diamonds
This seems that things could go very wrong. However, they could also go very, very right, according to Vandenborre.
“We believe that diamonds have the potential to rival gold’s status as a secure store of wealth and an alternative investment; hedging against inflation, volatility and currency deflation,” he said.
“When gold bullions were introduced, they grew from $250m in 1900 to $200bn today. The Diamond Bullions traded on the SDiX will very likely follow a similar path.”
“What the SDIX has done is take a certain range of GIA-certified diamonds and say: ‘this is the combination of clarity, colour, cut and so on that will be worth this much’,” explained Sher.
“But you’d have to have the right experts putting together the basket. A diamond exchange or a fund would require a fund manager or portfolio manager, someone who really understands investment but also really understands diamonds. Even a gemmologist will know how to grade a diamond but not value a diamond.”
There have been several attempts to standardise diamonds – like the West Coast Commodities Exchange of 1974, the short-lived diamond index and Polished Prices conference of 2007 and many others.
According to Vandenborre, 2017 technology is precisely what makes this attempt different.
“The Diamond Bullion is a fintech product using proprietary technology to authenticate and trade at fully transparent pricing on the SDiX, in a tamper-resistant zirconia case with unique optical signature recognition and a serial number that can be instantly authenticated via a secure mobile app (both Android and Apple).
“The GIA certificates of every diamond within the Diamond Bullion are pulled from the server and shown on the app – removing the need to have any expertise of diamonds.”
Still, Sher cautions that “diamonds are one of the most difficult things to standardise, because a one carat diamond can have over 100 different combinations of colour, clarity, cut, weight, inclusion and more and each of these has a different value.
“So, two different products could vary greatly with the exact same specifications on paper, and even the same stone could vary based on opinion. Gold is transparent – everyone in the world agrees that this much is worth this amount - so the price is fixed.”
Even more exciting to some, and worrying to others, is the idea that South African investors may be able to get in on the action too.
“SDiX is a global exchange, which means investors from South Africa will be able to invest, purchase and trade the Diamond Bullions as long as they instruct their trades via one of the broker members of SDiX,” said Vandenborre.
“The exchange currently has no stock or commodity broker in South Africa. London and Dubai are markets where South African investors can trade. But it would make sense to have some brokers from South Africa to solicit membership of the exchange.
“There is no current diamond investment platform on any exchange in South Africa that offers this type of investment opportunity,” said Sher.
“However, if an exchange around the world were to get it right, it is possible that this offering could come to South Africa. However, for the exchange to be successful, it would need to standardise and regulate diamonds across the whole world, the same as the gold standard.
“It will be interesting to see where the SDIX prices are feeding from, and the difference between the exchange price and what the underlying diamonds can actually be sold for!”
Sher added: “People in South Africa who want to invest in diamonds often buy an engagement ring, and that’s where we say ‘caution!’ There is a huge difference between wanting to trade in something like the Singapore Diamond Bullion and buying jewellery from a store.
“With the lack of standards and regulations in the current diamond and jewellery valuations market, we have seen how a potential buyer or investor can be misled.”
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