Kris Schellhas of the Investment Diamond Exchange talks about the hardest—and most up-and-coming—asset: diamonds.
[This interivew originally appeared on HardAssetsInvestor.com and is republished here with permission.]
Precious commodity investments have long been investors' safe haven when markets turn against them. But with gold prices in flux and massive outflows from gold exchange-traded products, it might be time for the gold standard of commodity investing to make way for a new poster child.
According to Kris Schellhas, managing partner at the Los Angeles-based Investment Diamond Exchange, diamonds are that poster child. IndexUniverse Staff Writer Hannah Tool recently spoke with Schellhas to talk market monopolies, the threat of synthetics and the highly anticipated, physically backed diamond ETF from Chicago-based finance firm GemShares.
IndexUniverse: What is the Investment Diamond Exchange?
Schellhas: Investment Diamond Exchange (IDX) is an internationally recognized diamond exchange located in Los Angeles. We offer individual investors a liquid and price-transparent market for one- through five-carat diamonds, round brilliant, GIA [Gemological Institute of America]-certified investment-grade diamonds.
IndexUniverse: Talk a little about the GemShares Physical Diamond Trust.
Schellhas: On Aug. 7, 2012, the U.S. government patented a process that classifies investment-grade diamonds for commercial trading and financial investments, the precursor for diamonds being a publicly traded asset class. As a result, GemShares has registered with the SEC to release a physically backed diamond ETF. The ETF is anticipated to be available on the Nasdaq by 2014.
IndexUniverse: Since it's physically backed, will shares be redeemable for physical diamonds as well?
Schellhas: The registration documents indicate that shares will indeed be redeemable for baskets of investment-grade diamonds; however, all of the details on redemption have yet to be released.
IndexUniverse: It's been nearly a decade since De Beers privatized and its monopoly on the diamond industry was vanquished. Why has it taken so long for a diamond ETF to arise out of that shift?
Schellhas: The introduction of a physically backed diamond ETF has been in the works for a number of years, but one wasn't going to be launched unless all of the challenges involved with creating a physically backed diamond ETF were overcome. You have to build a model that'll work with the idiosyncratic nature of different variations of diamonds, and that takes time.
IndexUniverse: What kind of challenges had to be overcome before this ETF could go into registration?
Schellhas: First of all, liberalization of the diamond industry had to occur before a diamond ETF could become a reality. De Beers was privatized in 2001, effectively ending a century-long monopoly. By the end of 2004, the De Beers stockpile was depleted, allowing diamond prices to trade on supply and demand fundamentals just like any other commodity.
De Beers' current market share is less than 35 percent, sharing production with Rio Tinto, Alrosa, Dominion Diamond Corp. [formerly known as Harry Winston], Petra Diamonds and several smaller players.
IndexUniverse: What about liquidity? Would a diamond ETF face liquidity issues?
Schellhas: It will be as liquid as any other publicly traded instrument. With the diamond ETF, investors are buying a share of a trust backed by physical diamonds.