That usually ends the discussion - politely for most. Of course, silver is not an investment in the conventional sense of the word. It is a store of value that can be used as a medium of exchange and as a unit of account.
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Diamonds are a crystalline form of carbon that acquires lustrous form under vast temperature and pressure conditions. Diamonds surface on earth due to seismic activity and are available in two formations: Alluvial formations along river bed or oceans and Kimberlite formation in stones. Diamonds were formed at least 990 million years ago, although some are estimated to be as old as 4.25 billion years.
African countries produce over 60 per cent of roughs in terms of value and over 50 per cent in terms of volume. Russia, Canada and Australia are the other three major players. Political pressure to generate more jobs in the sector is forcing governments in Africa to retain all aspects of diamonds in local jurisdiction.
In diamond industry, a cut refers to the proportions, finish, symmetry and polish. These factors determine the brilliance. Well-cut diamonds sell at a premium; poorly cut diamonds sell at discount. Though the cut of the diamond can be determined by use of Diamension system, a computerised method that takes accurate measurements, the traders here are hands-on.
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Carat is the unit of weight. A carat is further subdivided into 100 points (0.01 carat = l point). One Carat is equal to 0.20 gm. The value per Carat increases with size because larger rough diamonds occur less frequently. In other words, two half-Carat diamonds taken together will not cost as much as one one-Carat diamond, as a one-Carat stone is rarer.
Diamond is the only significant commodity that is not traded through commodity exchanges. For that matter there is difference of opinion on whether diamond is a `commodity’ because each piece is unique like a work of art? How can any worthwhile Futures contract be designed without the product having homogeneity and uniformity?
While the diamond industry is not much enthused about introducing Futures trading, Rapaport, the leading US-based diamond price and information provider is keen on introducing diamond futures trading by early 2009. They along with ICICI Bank, Indexonline and Polished Prices and supported by banks such as ABN Amro that has exposure to diamond markets would like the concept to become a reality.
Rapaport has started monthly online auctions in diamonds which will hopefully pave the way for Futures trading in exchanges after obtaining necessary regulatory approvals. According to Rapaport officials, tender offers are good ways to create an index for a futures market because they involve multiple buyers and sellers who are under no compulsion. The auctions will provide spot cash transaction prices, besides asking prices.
Indian diamonds have always attracted the world. India’s tryst with the precious stones dates back to at least 2000 years when India was the only source of diamonds, more from alluvial deposits. India’s historical diamond fields were in Andhra Pradesh, Chhattisgarh, Madhya Pradesh and Orissa. The richest was Golconda, which was actually the name of a fort near Khaiderabad, a city in south-central India. India’s alluvial diamond deposits were found on the beds of various rivers in Krishna valley, as well as in Penner, Karnool, Godavari and Makhnadi and in Panna fields.
Diamond: The Carat of Surat in India
Because of big campaigns, people in India are well-known to DTC, one of world’s biggest diamond traders, who sort, value and sell around 40% (by value) of all the uncut diamonds in the world. But very few know that another company — Argyle Diamonds — is the world’s largest supplier of diamonds, producing approximately 30 million carats each year from its operations in East Kimberley region, north of Western Australia. The company’s production accounts for approximately one-quarter of the world’s natural diamond production. Both DTC and Argyle send most of its roughs to Surat in Gujarat.
The diamonds collected from Argyle mine are prepared for sale by Rio Tinto Diamonds as an agent for Argyle Diamonds in Antwerp, Belgium.
A survey by leading resources publication — Resourcestocks — which covered 74 countries, ranked Botswana third in a list of 10 top countries with the least risk for resource sector investment. Finland was ranked first followed by Canada, Botswana and Australia.
The survey revealed that Southeast Asian countries rated poorly overall because of red-tapism, while African countries suffered because of poor infrastructure and sovereign risk issues. Since mining countries are discouraging sending its roughs to units outside, local firms are coming up in those countries, making it difficult for Indian firms to import roughs through auctions in Antwerp. To overcome the shortage, they procure roughs from spot markets with a premium as high as 10-15 per cent.
The diamantaires operate on twin currencies and often get hit by currency fluctuations also. Most of these businessmen acquire currency in advance and export proceeds repatriated later. But with the introduction of currency Futures, some of them are planning to take advantage of the increasing fluctuations.
The US is India’s most lucrative export market. Since 2006, India gained unenviable position when the Bush administration passed the US Anti-Money Laundering (AML) and Anti-Terrorist Financing (CFT) ‘Jewellery Rule’, which requires, among other things, retailers to implement an AML/CFT programme, unless they purchase only from domestic US parties. The smart Indian businessmen already had more than 4,000 offices outside India and 50 per cent of them are located in US. This turned out to be a big setback for businessmen from Israel and Belgium, who used to operate from their own countries.
No Futures for Diamond?
What is a diamond value and who determines it? More than 80 per cent of the diamond production was of industrial quality — which means its purity was lower. Only 20 per cent, which were considered as pure, were polished and marketed and this was beyond the reach of common people. Necessity is the mother of invention and so synthetic abrasives replaced natural diamonds and the price for natural industrial goods crashed.
De Beers was the first to realise that it can take advantage of huge Indian work force and cheap labour to turn what is known as junk diamonds to ‘near gems’ quality. That was the start of Indian diamond dominance. The irony is that at times the cutting costs of these junk diamonds exceed that of its rough value.
Only about a quarter of all diamonds mined are normally fit for jewellery; the rest are passed on to the makers of machine tools for cutting and grinding. Most industrial diamonds are small. So the diamond processing units in places like Surat have got into jewellery making. Sanghavi Exports bought Sanghini brand from DTC, knowing well how the symbol of love can work in India.
According to a KPMG report, the scope for diamonds making an impact will be highly dented due to various factors. Jewellery sales growth will be sluggish at a CAGR of 4.6 per cent at least till 2015, synthetic diamonds will gain acceptance and capture approximately 7 per cent of the polished diamond wholesale market by 2015 and availability of gold-backed investment products and penetration by palladium will lower gold consumption.
Why diamond industry is against Futures trading
The report further states that the structure of diamond processing industry will change radically with African countries accounting for 10 per cent of the world’s roughs (in value terms) by 2015 and that the rough diamond selling will become more fragmented, making the industry more demand sensitive.
In diamond industry, blood diamond — aka converted diamond, conflict diamond, hot diamond or a war diamond — refers to a diamond mined in a war zone, usually in Africa, and sold to finance an insurgency, invading army’s war efforts, or a warlord’s activity. Blood diamond became popular after release Hollywood movie ‘Blood Diamond’ starring Leonardo DiCaprio’s in 2006.
The movie became a box office hit across the world, and hit the industry hard. Diamond buyers started viewing the sparklers with suspicious eyes, and India’s diamond market also earned a bad name.