Why Aren’t Diamonds an Exchange Traded Commodity?

The role of the commodity markets is to allow producers and users a method to hedge price risk.  Commodity producers/users use exchange traded commodities to lock in prices of items they will bring to market or purchase from the market at some point in the future. Commodities that are popular among hedgers, include, corn, soybeans, crude oil, gold, silver, livestock..etc.  The exchange transactions between producers and users, however, create a marketplace that makes it possible for speculators to trade these commodities, without the requirement of taking delivery of the physical commodity.  While new commodities are introduced periodically, individuals have been yearning for the creation of a diamond market.  So why has it not happened?

The diamond industry was largely a monopoly until the year 2000 controlled by the De Beers Family of Companies from the mid 1800s through 2000.  They controlled the supply of diamonds in an effort to control prices. After 2000, the monopoly was lifted, however, the diamond industry is still considered a “oligopoly,” with a few companies controlling the supply of most of the diamonds available. 

The biggest hurdle to creating an exchange traded diamond market is the lack of standardization within diamonds.  Unlike gold or silver, diamonds vary significantly from one stone to the next.  With variations in carats, cuts, and clarities, it would be difficult to standardize a product for the purposes of being traded on an exchange. Since most speculators in the derivatives market never actually take delivery of a physical commodity, this arrangement may be suitable, although delivering the appropriate diamonds may be a challenge should a buyer wish to receive them.

Whether diamonds eventually end up on an exchange is yet to be seen.  Despite numerous attempts in the past, there is still a large debate about whether diamonds are even a real “commodity.”  Unlike most other commodities, diamonds are rarely used in any industrial process, and their biggest use comes in the production of jewelry.  Besides jewelry manufacturers, what types of hedgers would even want to lock in prices of diamonds? Speculators look to benefit the most from a diamond derivative, as they would have an opportunity to trade diamonds without physically “trading” them.