Diamonds make case for diversification
Technology and packaging are being utilised by the Singapore Diamond Mint Company to launch an investment product that it argues makes diamonds exchange tradable in a way that meets investor requirements.
Alain Vandenborre (pictured), chairman and founder of the Singapore Diamond Investment Exchange (SDiX) and director at the Singapore Diamond Mint Company, explains that Diamond Bullion – the trademarked name for the new way of packaging diamonds of a known quality and quantitity to make them tradable – means that investors for the first time are able to trade the stones in a way that is liquid and that provides real-time market pricing, unlike diamond exchanges in other parts of the world such as Amsterdam or Mumbai.
The Diamond Bullion proposed by the Mint constitutes a credit card-sized package of investment-grade diamonds in a tamper-resistant sintered zirconia case. In this case, investment grade means “Carat sizes of between 1 and 2 carats; Colour range of D, E and F; Clarity of VVS1, VVS2 and VS1; triple Excellent Cut (cut, polish and symmetry); and no fluorescence,” according to the Mint.
The case utilises an optical signature recognition system and serial number, which enable authentication using a secure mobile app. A proprietary technology sourced from De Beers Group’s International Institute for Diamond Grading and Research (IIDGR) is used to identify each diamond sealed in the Bullion case. This means each diamond can be authenticated.
The Bullion is traded on the SDiX, which features an electronic exchange, and which means investors can access real-time pricing data. Trades are recorded in an electronic central deposit, with blockchain set to be used to enable digital ledger services in future.
Units of Bullion can be obtained via broker members of SDiX, and additional distribution partners such as wealth managers and private banks. Once orders are fulfilled, Bullion units can be sent to the buyer or stored in vaults at the Singapore Freeport and other secure vaults available globally, including those run by banks and brokers.
On launch, the Bullion will be available in two denominations: ‘Silver’ and ‘Gold’, equivalent roughly to values of $100,000 and $200,000 respectively. The Silver Bullion soft launched on 2 October, and closed at $106,450 on 6 October on SDiX. The exchange operates as a “fully regulated exchange under the Commodity Trading Act” in Singapore. It is backed by investors including Temasek, the sovereign wealth fund of the jurisdiction.
Speaking to InvestmentEurope about the launch of the Bullion, Vandenborre said that the analogy for investors not used to the idea of exchange traded diamonds would be the London Metal Exchange (LME).
A similar ecosystem is in play, including electronic trading and a depositary system; while there is a place for diamonds to be physically located before electronic trading starts. Also, the brokers involved must be regulated by their local regulators, whether that is in places such as London, Mumbai, Dubai, Hong Kong or Singapore. There are also a settlement system in place. The difference from the LME is that rather than trading metals, the SDiX is trading diamonds.
The exchange nature on offer is significantly different from other diamond ‘exchanges’ as they have existed historically, Vandenborre adds. One feature is that the Bullion and the exchange are focused on what they define as ‘investment grade’ stones. And when compared to trading elsewhere – such as Mumbai – there is a completely different level of intermediation; Singapore’s is an electronic exchange, whereas in the Indian market there are literally tens of thousands of people involved in physical exchange, which means there is little transparency on pricing, and what trading takes place is not regulated in the same way as an exchange.
Vandenborre said the way the Diamond Bullion would be offered to investors would involve benefits when compared to that other key investment commodity: gold. For example, instead of investing, say, $1m, which would buy about two bars of gold weighing 12.5kg each, or about 25kg overall, the investor could acquire two Diamond Bullion cases weighing about 300g, thus making it a highly concentraded, highly portable asset.
Also like gold, while an investor can hold the Diamond Bullion in their hands, to trade it must go via a broker and be tested and held in secure physical storage for dealing to be done via one of the exchange’s linked brokers.
The benefits of trading diamonds this way is intended to be amplified by the deliberate distribution policy for the new Bullion. Initially launching through a select group, perhaps as little as three global private banks, the expectation is that this will spur demand among the bank’s clients looking for diversification, and that this in turn will spur secondary market trading of the Bullion on SDiX. The banks need to have trading, brokerage and market making capabilities – in case they need to engage in trading to buy back Bullion at some point in future.
Vandenborre likens this to the development of trading in gold: before bullion was widely used by investors, the primary buyers were central banks, then came a physical market of people buying coins, then the development of ETFs buying gold by the early 2000s. And investors are likely to be spurred by the existence of spot settlement prices generated via the exchange, Vandenborre added.
For investors, the existence of SDiX and the Diamond Bullion can now offer a similar hedge against volatility as gold, he argued, on the basis that diamonds have zero correlation to other asset classes, given that they historically were directed into the jewelry market. But with such a low penetration rate among investors’ portfolios, there is also an opportunity to take advantage of demand driving up prices. Thus, like gold, diamonds offer an uncorrelated hedging opportunity, Vandenborre argues.