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Summer 2007

There is a lot of talk today about diamond futures, including in the Financial Times and Bloomberg, but what many people don’t realize is the idea has been tried before.

In 1972, the West Coast Commodities Exchange started trading “diamond futures” contracts. An article printed in the Diamond Registry at that time noted that 194 contracts were traded with an aggregate value of $2.7 million. Each contract contained 20 carats of polished diamonds, with the clarity of the stones were VS1 or better and J color or better.

The idea didn’t last too long. According to Edward Jay Epstein, “diamond dealers began selling contracts on the exchange, and the price plummeted down to the limit allowed by the exchange for the next six days. The following week, the price was down more than 40 percent. The diamond dealers, who had offered the packets for sale at more than $600 a carat, made a vast profit within days on the falling prices. The speculators, who could not afford to keep putting up cash to meet the collapsing prices, lost everything. By the end of the second week, the West Coast Exchange ended trading in diamond futures.”

Epstein uses this as evidence that the price of diamonds cannot be established on the open market. Of course, today, we are in the post-cartel era, and certainly the market is a lot more open. Advocates see a futures market as a way to introduce more transparency to the market, and give the industry new sources of financing, now that it is over-extended with bank debt. But we can’t help but think that some of these traders are a little too optimistic about what they think can be accomplished.

For example, in one article, Charles Wyndham, the industry commentator, quotes a bank as saying that the size of the market could be between $150 and $200 billion. We find that hard to believe when there are only about $18 billion in diamonds sold each year, especially since these futures markets are dealing with a limited number of categories.

Martin Rapaport is also proposing to introduce a plan where future prices would be traded based on regular diamond tender. But traditional jewelers and diamond dealers have objections: Showing prices in the daily paper would hurt jewelers, whose profit margins are already being squeezed. It will make consumers less trusting of the price of diamonds as they see them go up and down.

In addition, diamonds may no longer be controlled by a cartel, but we can’t say their prices are not controlled. Martin Rapaport’s list controls polished prices in this industry to an extent unique in any other industry. Rapaport says his contracts will be based on bids, but the bids, will, inevitably, be based on his price list. If you buy orange juice futures, you are dependent on the weather, how farming goes, etc. Diamond prices are dependent on the list of Mr. Rapaport.

Also, watching a narrow range of diamonds doesn’t give you a picture of the category as a whole. If 1-carat stones are being used for investments, the price of that category will go up. But that doesn’t make all prices go up.

In addition, diamonds, like art, are not a standard commodity like gold. Two diamonds can have the same certificate and their price can vary widely, up to thirty percent within the same category. For example, just because a stone is VS, you still have to see it to determine the location, size and color of the inclusion.

Finally, if diamonds are going to be looked at solely as commodities, without any emotion whatsoever, then we might as well give just sell synthetic diamonds. In the end, a natural diamond’s value is because of the emotion it carries, and if we forget that, they will be worth nothing, future market or no.

We don’t say that a futures market for diamonds is impossible. Everything can be made a game for investors. During the investment craze in the seventies, there were no fewer than seven price lists in the Wall Street Journal going up and down (for a while they mostly up and then disappeared) But, by 1980, the trade and the investors ended up losing millions. We have to be careful futures don’t end up the same way. We believe diamonds should be sold as unique works of art, as the Diamond Registry has for over 45 years.

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