Derived from the Greek word adamas, meaning ‘indestructible’, diamonds have for thousands of years been revered for their aesthetic beauty, durability, and value.
The trade of diamonds also dates back to ancient times, but methods of doing so have remained largely unchanged until recently. A notoriously opaque industry, diamond trading is largely unregulated, usually taking place behind closed doors in marketplaces where trades are made manually and bilaterally. There is no price transparency, two-way liquidity or product fungibility, which means buyers typically negotiate from positions of weakness.
In the absence of a benchmark price, investors have no way to assess the value of diamonds as an asset and so few investors choose to include diamonds in their investment portfolio. Today only 3% of diamonds purchased annually, of an approximate $25 billion of polished stones, is for investment purposes – with the majority purchased for use as jewellery. Compare this with physical gold of which closer to half of all production is bought for the purpose of generating returns.
The Singapore Diamond Investment Exchange (SDiX) this year launched the world’s first electronic exchange for trading physically settled diamonds. SDiX aims to radically change how diamonds are traded, creating a transparent and regulated electronic market place for diamonds, and providing crucial pricing transparency that will enable investors to tap into this hugely under-utilized asset class. SDiX technology breaks down barriers to allow wider participation in the upstream diamond markets, and enables direct relationships between wholesale suppliers and end users, including investors.
SDiX has developed a unique settlement infrastructure using proven exchange technology designed by the architects and engineers of systems for other major stock exchanges including the Singapore Exchange (SGX).
SDiX is built on a fully integrated, regulation-ready ecosystem, including an industry-leading electronic trading platform, a depository that enables the physical settlement of diamonds, and a global network of service providers that support the Exchange and its members with grading, vaulting and settlement.
The platform gives financial markets participants immediate access to accurate, real time pricing information and a benchmark price to value diamonds as an asset, thus enabling the trade of diamonds with the same ease as other asset classes. Whereas previously, diamond traders relied on industry insiders to provide weekly tables of indicative pricing based on widely-ranging ‘best estimate’ methods, the SDiX platform enables prices to be determined by the market – the highest bid price and lowest selling price are reported in real time, based on real market activity.
This unlocks a new opportunity to trade in a uniquely attractive asset class. Diamonds have low to negative correlation with other financial assets and so offer an efficient portfolio diversification tool. Performance over a ten-year period show three- and five-carat diamonds yielding results less marginally only than gold and the NASDAQ with returns of 98.7% and 66.0% respectively.
SDiX believes there are significant opportunities for investors as the Exchange moves towards developing sophisticated investment products such as futures contracts, which will enable trading totalling many multiples of the underlying physical market. The annual trading volume of CMX gold derivatives contract is about $4 trillion, which is 44 times the $100 billion physical gold produced annually. SDiX believes diamonds will also see such multiplier effects in trading as investment demand increases.
SDiX guarantees the fungibility of the diamonds that investors trade on the platform, and provides end-to-end trading for global participants in immobilized single diamonds and stones in baskets, which are fungible collections of investment-grade diamonds in the top five grades of color and clarity. All baskets have an identical number of stones and total weight, and contain stones of identical cut, clarity and colour, which makes them standardized – much like a gold bar, which is exchangeable for any gold bar of the same category. Both single stones and baskets can be traded electronically on a price/time priority in a continuous market, and buyers can place indicative price bids by diamond category.
All stones traded on SDiX are verified and assembled by GIA and De Beers Grading Labs and stored in dedicated secure vaulting facilities operated by specialized custodians including Brinks and Malca-Amit, and the gems can either be stored for future trades or withdrawn.
A truly global exchange, SDiX allows diamonds to be traded through registered brokers in London, Singapore, Hong Kong and Dubai and has plans to onboard a New York based broker member in the near-term. With its established global network, SDiX continues to welcome more players from major wealth management centers and diamond trading hubs and is benefiting from considerable growth across emerging markets.
Following its successful launch, SDiX is looking beyond the development of a vibrant spot trading market and efforts are under way to continue building liquidity through on-boarding of intermediaries and direct participants.
In the future SDiX is planning to develop a fully warranted physically delivered diamond futures contract with multiple points of delivery, serving the risk management needs of diamond suppliers, rough and polish, who currently produce only what they have sold forward.
SDiX is backed by leading global investors, including Vertex Venture Holdings, one of the longest operating venture capital firms in Asia and a wholly-owned subsidiary of Temasek Holdings, Singapore’s sovereign wealth fund, as well as prominent Chinese entrepreneurs Sun Tong Yu, former president of Taobao and co-founder of Alibaba, and Cai Wensheng, founder of Meitu, one of the largest internet companies in China.