Diamond Futures: Worth The Risk?

In the age of cryptocurrencies and other technology-fueled investment vehicles, it's not always easy to choose an investment strategy that's going to pay off over the long term. A single look at the dire outlooks that advisory firms have about the cryptocurrency market alone is enough to illustrate this point. Of course, it's always a safe bet to shelter money in the bond markets, but even that's no sure thing these days.

All of the uncertainty has driven many investors into commodity markets, looking for opportunities to turn a decent profit. That market performed quite well in 2017, and investors are hoping that this year will be no different. Time will tell if they're right, but the end of 2017 saw a significant new addition to the commodities market that may present a unique chance for savvy investors to make some gains. The question is, is it worth the risk?

Diamonds As Investments

In August of last year, the world's first diamond futures exchange began trading operations in India. The opening of the exchange represented the first time that the precious gemstones themselves became available as a viable vehicle for investors. It's an interesting development in what is usually a stable and unchanging sector of the market.

The introduction of diamond futures into the global commodities market does raise some valid questions in the minds of investors, though. First of all, how can an industry that is 3000 years old by some estimates have taken this long to become available as a commercial investment vehicle? Second, can new money be made in such an established industry?

The Story So Far

The answers are pretty complicated. First of all, one reason that diamonds haven't been commoditized up to this point has to do with the fact that up until very recently, the diamond industry was considered something of a global monopoly. That meant that a single company could manipulate the prices in the diamond trade, which made a futures market an impossibility.

The second major reason that diamonds took so long to arrive in the commodities market was that investors, on the whole, were apathetic to them as an investment. There has been plenty written about the myriad reasons that individual investors shouldn't invest directly in diamonds, and there's a long history of diamond-centric stocks and ETFs failing due to lack of interest.

The Long-Term Outlook

Now that there is a functioning, regulated diamond futures market, interested investors need to get acquainted with the factors that shape today's diamond trade. As mentioned earlier in this article, the global diamond market is no longer under the control of a single company. That isn't to say that De Beers, the original monopolist, isn't still a force to be reckoned with in the industry. Today's reality is that the diamond industry is still a very centralized market, with De Beers leading a small handful of companies that control the lion's share of global diamond supply. That fact tends to keep prices stable, which isn't always a boon to futures traders.

There is another, more important factor that is changing the diamond industry today – the advent of lab-grown diamonds. Scientists have perfected processes that enable them to grow diamonds in a laboratory setting, and the resulting stones are all but identical to natural ones. They've become popular in the global market, and sell at a 30% to 40% discount compared to their mined counterparts. That is creating a headwind for natural diamond prices in the current market that isn't likely to go away soon.

Opportunities To Earn

The diamond futures market is still too new to make any concrete pronouncements as to long-term performance. That means that investors aren't likely to rush into these new commodity contracts anytime soon. That reality may be where savvy investors who are willing to incur some risks might be able to make a decent profit. The combined forces of the centralized diamond trade and the downward pressure exerted by lab-grown gems seem like a recipe for falling diamond prices over the long term. That means that there's a good chance that short-sellers might be able to make a killing in a fairly non-competitive market.

The key will be to analyze the uptick in sales of lab-grown stones and to invest accordingly in inverse proportion. With some luck, they'll be able to do well by betting that while diamonds may be forever, their high prices probably won't be.

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