Several listed gold miners in the United States lost one-fifth of their market value in 2021, as appeal waned as the dollar strengthened and higher bond yields impacted demand for the precious metal . With market risks such as the COVID-19 Delta variant scaring investors, traders and businesses, many are focusing on diversification with durable assets, like a safe reserve of wealth and a hedge against inflation.
Enter diamonds, a forgotten natural resource with a market value of $ 1.2 trillion – more than silver and platinum combined. Since last August, diamonds have risen 35%, closely matching the S&P 500 over the same period, while gold has fallen 11%. The challenge has always been with diamonds, can investors profitably tap the hidden potential of this gem?
That day may have come. Diamond Standard, a New York-based startup, has just launched the first diamond product approved by regulators. Its founder, Cormac Kinney, aimed to address the issues that prevent diamonds from being a productive asset – lack of price discovery, transparency and liquidity, and high transaction costs. There used to be too much friction for investors to invest in diamonds, but it looks like that is all about to change.
With a background in business and computer science, and innovations cited in nearly 4,000 US patents, Kinney is the founder of four software startups acquired by state-owned companies. As noted in a 1999 Forbes article titled “Hot Stuff,” Kinney invented heat maps, then designed over 100 institutional trading systems and was among the first to teach computers to read information for systematic trading. . He used algorithmic sentiment analysis to manage funds for Tudor and Millennium. For the past seven years, driven by his jewelry designer wife, Kinney has focused his quantitative skills on diamonds.
“Global investors own at least 15% of each precious metal, indicating pent-up demand for diamonds, if they are liquid and priced transparent to the market. We unlocked that potential by creating a regulator-approved, fungible, market-traded commodity that can be traded using an embedded blockchain token, ”Kinney said.
Over the past 40 years, there have been several attempts to launch a diamond investment product, typically based on an “index” of wholesale stocks, and a fund based solely on one carat D Flawless diamonds. The fund increased this particular diamond 15-fold, while all other diamonds were left behind. Not all index products have obtained regulatory approval because the index stocks were not tradable and investors could not buy and sell these stocks.
For the first time, Diamond Standard has made diamonds available as assets to investors and fund managers, which are marked-to-market daily. These commodities have already been approved to settle futures contracts listed on the CME Globex, and options listed on the MIAX Options Exchange, and a AND F is awaiting SEC approval for listing on the NYSE.
Crack the code
So how does it work? Unlike precious metals, diamonds are varied, with multiple factors such as carat weight, color and clarity. And the value of each combination of factors is difficult to predict and often subjective. Diamond Standard created the world’s first regulator-approved fungible diamond on a coin by ensuring that each coin has the same diamond value.
Diamonds are GIA graded and certificates and details of the diamond buying process are transparent and readily available to the coin owner and potential buyers. These GIA-classified diamonds are then re-inspected by another laboratory, the International Institute of Gemmology (IGI), which assembles the diamonds into pieces.
Using automated market making and statistical sampling, their purchase of diamonds forces the discovery of prices around 94 percent of the earth’s yield curve for natural diamonds. These diamonds are optimized into sets and assembled into a physical spot commodity traded in the market.
In the first quarter of 2021, Diamond Standard Coin spear at $ 5,000 a piece. Investors can take delivery of the coin, but if the commodity is safely in the vault of a depository, it can be traded instantly and around the world using a built-in blockchain token.
“Our Diamond Standard tokens are backed by a actually scarce and natural resource, unlike bitcoin. It cannot be hacked and is not vulnerable to the vagaries of ‘tech-bro’ speculation – it’s the world’s market. real value that determines the value of the diamond, “says Kinney.
A New Kind of Blockchain Asset
The digital token used to redeem the Diamond Standard Coin is unlike anything before. It is stored on a wireless computer chip sealed inside the merchandise, below the diamonds. With symbolic real-world assets such as gold, art, and real estate, trust is required for the asset to actually be there or secure and accessible.
The owners, via an exchange for example, actually exchange the key to the Coin token. This is essentially a safe deposit box receipt, authorizing the new owner to collect the goods from the safe. This creates a new unique asset. A physical commodity, which is also a blockchain-based digital asset.
The Diamond Standard Coin inherits the best characteristics of gold and bitcoin. A naturally rare commodity, traded in the market and a trustless digital asset that can be traded instantly and on a global scale. Many will be eager to look at this space for future applications of an asset that moves seamlessly between the familiar physical world and the emerging digital economy.
A commitment to sustainability
Diamond Standard only purchases ethically sourced stones and does not incorporate lab-grown diamonds, the price of which has fallen rapidly. Diamonds must follow a process overseen by regulators for supply, quality and value, and the company follows the Kimberly Process, to ban conflict diamonds.
To source diamonds, it formed the Diamond Standard Exchange, working with 100 of the world’s largest diamond sellers. However, given that no significant diamond mines have been discovered for more than 20 years, the company estimates that 75 percent of all diamonds are already in the hands of consumers. Over time, Diamond Standard believes that its biggest suppliers will be individuals who already own diamonds, so they created Diamond Standard Recycling, to buy back diamonds at attractive prices.
“Because we are regulated, our purchases are transparent and we require our suppliers to comply with ESG standards, adhere to fair labor practices and market rules. Beyond creating a new product with price transparency, we are cleaning up and modernizing the diamond supply chain, ”Kinney noted.
An investor’s best friend?
Kinney expects diamond prices to catch up with the 400% of gold and silver gains made by investors in the 15 years since the launch of the gold and silver ETFs. Depending on the imbalance between demand and supply, he expects diamond prices to rise even more significantly by the time investor allocations approach 15% of the supply level.
Diamond Standard imposes transparency and efficiency in a reluctant market, which will likely eliminate a multitude of middlemen. Diamonds are a global asset that are in demand and until now were simply not available to investors. As the pandemic continues and investors need the store of wealth and the benefits of hedging durable assets, diamonds may start to shine a little brighter.