ETFs are securities certificates that mean average retail investors can gain direct exposure to price movements in commodities, such as agricultural products, industrial metals and precious metals. Currently ETF investors are unable to invest in precious gems as up-to-date diamond pricing is very inefficient.
The proposals are still under consideration, but some are unsure whether a diamond ETF would work, because the new fund would need to be backed by physical holdings in diamonds, similar to the gold ETFs.
But, whereas all gold is the same, every diamond is different. The greatest challenge in “commodifying” diamonds, therefore, is working out a standardized price; diamonds are categorized by the four C’s – cut, clarity, colour and carats.
Demand for the gems is rising, driven by the growing middle and upper classes in China and India who want to own formerly out-of-reach luxuries.
For decades the diamond industry was run by one company, De Beers, which controlled the supply to maintain prices. Since the 1980s the industry has undergone much reform – De Beers currently holds only 40% of the market – but it is still controlled by a few large players, and the true supply of diamonds is shrouded in secrecy.
If diamonds began to be bought on a large scale for investment, and not just romantic, purposes, demand would likely skyrocket, putting pressure on the already strained Kimberley Process. Currently used to stem the trade of conflict diamonds, the Kimberley Process has been facing mounting criticism for certifying mines in Zimbabwe: the NGO Global Witness withdrew from the process in December last year over abuses at the Marange mines.
Moreover, Zimbabwe, and corrupt Zimbabwean politicians, are increasingly reliant on diamonds for their income. In a recent presentation titled “Southern Africa: Economic Prospects 2012”, Professor Tony Hawkins from the University of Zimbabwe showed that Zimbabwe is becoming “increasingly resource-reliant with the share of GDP of agriculture and mining together now virtually double that of manufacturing”. As Zimbabwe has deindustrialised so the share of GDP swallowed up by primary exports has grown – and so have the number of scandals surrounding mining exports.
Dewa Mavhinga wrote in The Zimbabwean last week that Zimbabweans are not reaping the rewards from mining exports.
“Taking the other mining companies into account estimated annual sales from Marange diamond fields could be over $4 billion dollars a year…[But] finance minister Tendai Biti disclosed that in 2010 government only received $80 million,” Mavhinga wrote.
Where the rest of the profits are going is officially unknown, but take a cursory glance over independent Zimbabwean newspapers and it’s not hard to guess in whose hands the cash has ended up.
Post published in: Business