Rapaport presents diamond-futures proposal
June 27, 2007
By Susan Thea Posnock
Amsterdam, the Netherlands—In presentations to the World Federation of Diamond Bourses (WFDB) and the International Diamond Manufacturers Association (IDMA) during the Presidents' Meeting, Rapaport Group
Chairman Martin Rapaport introduced his plan for a completely price-transparent diamond-futures market.
He said the basis of a diamonds-as-investments market would be monthly diamond tenders beginning Sept. 17. The cash tenders would include high-quality round brilliant diamonds from 1.01 to 1.19 carats that have diamond-grading reports from the Gemological Institute of America and HRD, further guaranteed by Rapaport. He stressed that his company would not buy or sell stones, but instead facilitate the process under the regulations of the U.S. Commodity Futures Trading Commission (CFTC). The process would be open to anyone to buy or sell, including consumers. Sellers will be charged 3 percent, and trade buyers or resellers wouldn't be charged to buy. Consumers who buy would be charged 5 percent.
"We're talking about inclusiveness, which means everybody in this industry. The smallest diamond dealer has got to be able to participate in the benefits this market can provide," he said. "And we're talking about complete transparency, including all the negative things that means."
Rapaport said the index would mean that diamond companies could sell goods based on a set price from the index.
"These tenders allow us to have a systematic way of discovering prices that's totally transparent. That means we can create a futures market based on the index from the CFTC," he said. "So the kind of futures market we're talking about is not one where on the day the futures contract is settled everybody runs around looking for those carat diamonds, and you're squeezed, and you can't get them."
Instead, he said a cash-settled index means, like the
Dow Jones index, that it's settled for cash each day.
"There's no risk of a run on the diamond market physically manipulating the situation," he said.
Among the benefits Rapaport cited for the industry would be cash-market liquidity and diamond-leasing programs, with the cost of inventory no longer borne by the diamond manufacturer. Another big bonus would be consumer confidence, he said.
Reaction to the idea at the meeting ranged from open to highly concerned over the possible impact.
For an industry founded on the symbolic aspects of diamonds—love, passion and romance—an effort to merge that message with the idea of diamonds as a commodity could be a scary thing with total price transparency likely to put even more pressure on profit margins.
"Can retailers survive in a world where everybody knows market prices," he questioned, but then noted that today's consumer essentially knows them already.
The idea of added value would be even more critical in an open-price environment.
"Added value is very real, but you're going to have to charge a fair price for it because the consumer can go to Blue Nile or every place else," he said. "Transparency is not an option, it's a fact."
He said the time is right for a diamond-futures market for a number of reasons, including interest from an investment community given the projected supply versus demand gap, especially for larger stones. As evidence of this interest, he noted the closed-end fund of $400 million for diamonds worth $1 million or more that was reported in the
Financial Times.
"They see an opportunity to make money with diamond derivatives," he said of the financial community.
He questioned whether or not the diamond industry is in control of the diamond markets today, and posited that in the case of the larger (3-carat-plus) stones, it's definitely not and is subject to likely price increases and volatility. Adding to that the $12 billion industry debt and factors such as changes in foreign currency, Rapaport argued there's a need for some kind of market.
"There's forces outside the industry and forces within the industry driving some kind of need for an organized market," he said.
In addition to the large-stone fund, there is also one from WWW International Diamond Consultants and ABN Amro that will be discussed at a meeting in Antwerp, Belgium, tomorrow. Rapaport is giving a presentation on the state of the industry and his futures proposal today in Antwerp.
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