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Physically-Backed Diamond Investment Vehicles Won't Work – PureFunds CEO

By Alex Létourneau of Kitco News
Tuesday October 22, 2013 12:45 PM

(Kitco News) -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.

Given the lack of diamond supply that is beginning to take shape and increased demand, namely powered by Asia, prices could shoot up.

“The question is how high can prices go before it begins to erode demand,” Zimnisky said. “Ultimately, I think the industry is more concerned with the elasticity of the diamonds because there’s definitely going to be a supply shortage, no question about it.

“It takes about 10 years to take a diamond mine from discovery to development and finally production, it’s so much longer than with gold, silver or copper,” he added. “It gives you a pretty good idea of what the supply picture will look like in 10 years, and, right now, there are only six projects in the world that are going to produce 1 million carats annually over the next 10 years.”

Russian petroleum giant LUKoil will be bringing its Grib mine to production shortly, with an expected 4 million carats of rough diamonds produced annually, and it is believed to hold 98 million carats.

Other projects down the line are Stornoway’s Renard project in northern Québec, as well as De Beers Canada Inc. and Mountain Province Diamonds Inc. joint-venture Gahcho Kue project in the Northwest Territories, Canada.

“It’s pretty much all Canada and Russia from where the new supply is coming from,” Zimnisky said.

The diamond-mining industry has shared the same misery as precious and base metals with a real lack of greenfield exploration, which could apply severe supply restraints in a decade.

And then there’s the wild cards.

“Then you have some of the more high conflict regions in Africa, like Congo and Zimbabwe, where it’s a little more difficult to calculate what’s in the ground and what’s being produced because there’s so much shady stuff going on over there,” Zimnisky said.

The Marange diamond fields are expected to produce roughly 17 million carats of diamonds this year, but, it could be as high as 40 million carats. But it’s near impossible to tell with the level of corruption and illegal activities taking place in the area.

To contact me regarding a story or feedback, please follow my Twitter account @alex_letourneau

By Alex Létourneau of Kitco News aletourneau@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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