The extremely variable pricing of diamonds has made them a historically difficult and unstable commodity to trade. However, recent advents in diamond technology have been patented, and industry insiders such as Martin Rapaport have suggested that diamonds will become akin to gold from an economic standpoint.
There is certain market resistance to the notion that diamonds could become an investable resource, largely due to the fact that it would create a more objective pricing scheme. It has been difficult to establish an investable market for diamonds due, in no small part, to their uniqueness. The price of diamonds is dependent not just on mass (like gold), but clarity, cut, and colour, as well. Even slight variations have drastic influences on the price of the gems. Additionally, unlike gold, diamonds decline in value when divided, and are in too short supply to be used as a currency, which has inhibited the creation of a spot market. However, it is important to note that only approximately 30% of mined diamonds are used for jewelry and sold as precious gems, with the remainder being used industrially.
In addition to the difficulties inherent in standardizing price based on gem quality, resistance from some within the industry has hindered the development of a standardized market. This is because the creation of such a market would increase transparency in pricing, protect against inflation, and open a narrow market to a large number of investors. However, individuals such as Rapaport have advocated for fair, efficient, transparent, and free diamond markets, as it would benefit the economy and the sociological and political issues surrounding diamond mining. Indeed, Rapaport’s efforts have led to the Kimberley Process, an international initiative to “clean up” the diamond market and reduce the trade of conflict diamonds.
Beyond politics, however, how do we get around the issue of variability in the gems to create a more open market for diamond trade? The answer may be within recent patents.
GemShares, an investment firm that declares diamonds to be the “last untamed commodity”, possesses a patent that details a process to create fungible diamonds. That is, they seek to create benchmark “baskets” of diamonds based on the quality indices, ultimately creating diamond securities through their patented formula of determining “investment grade” diamonds. Ultimately ten “layers” of quality/value would be created using the GemShares method to create such benchmarks, and it has been projected that these indices could create a diamond exchange-traded fund by mid-2013.
Scio Diamond Technology Corporation wants to take the process one step further. A producer of synthetic (lab-grown) diamonds, they have acquired patents on two processes that will allow them to produce single-crystal diamonds with identical chemical composition to those that are naturally occurring. Beyond this ability to create near perfect diamonds, Scio can mass-produce batches of identical, made-to-order diamonds through their now-patented use of plasma reactors for growth, and new throughputs for productivity. Indeed, earlier this month, Scio indicated that their first three months of production exceeded their expectations by 200%. It would seem that Scio’s patents have already begun to shape the budding diamond markets, and perhaps not in the way that economists may hope. By having one company hold patents for high-throughput production of museum-quality gems, it creates a different sort of monopoly. Moreover, if their production is as high as they indicate, it could reduce the value of existing diamond markets through oversaturation before a competitive market is even established. It is quite likely that both GemShares and Scio stand to make large profits as a result of their patents, but the sustainability of their prospective market remains to be seen.
Whether the standardization of diamonds is socially beneficial is more of an ideological debate, but one with economic implications. Of course, diamonds have long been coveted for their uniqueness, but that very uniqueness may be hindering an openly investable market. However, if such a market is developed based on the creation of uniform stones, will the allure of the stones still be as strong? Only time will tell…
Ryan Heighton is a JD Candidate at Osgoode Hall Law School.