Beyond gold...the new “Diamond Standard”

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The “Diamond Standard” Emerges

Along with gold, diamonds have been a compact store of value throughout human history. However, the natural variations in quality that affect value have prevented diamonds from functioning as a liquid asset.
 

Now modern technology — combined with an exciting innovation — promise to change that.

Diamonds could soon be an investor’s best friend.

I say that as someone who has made some money over the preceding decades in diamond exploration, as junior exploration companies chased an elusive mineral at the top of the valuation food chain.

The one thing that has eluded the vast, vast majority of investors, though, has been a way to profit from diamonds themselves.
 

The intricacies of and illiquidity of the diamond market have made it the playground of a precious few well-connected, expert operators.

All that could change soon, however.

The Diamond Standard:
The Culmination Of The Asset Financialization Trend

With inflation, interest rate volatility and global geopolitical uncertainty impacting mainstream markets, investors have long sought alternative investments that offer potential benefits such as diversification, higher return potential, reduced risk and inflation protection.

As you’re about to see, diamonds may well become the next alternative investment to offer these benefits.

The financialization of assets has historically led to great investment opportunities. We’ve seen these stories play out before.
 

When gold, coin grading, uranium and crypto all became financialized, standardized or made convenient for investment, these assets soon saw prices appreciate by significant multiples.

• In 1986, after coin grading and professional certification became standardized and more widely adopted in the numismatic world, the PCGS 3000 Index nearly tripled over just three years.
   
• Uranium saw an increase of 43% one year after the Sprott Uranium Trust allowed for greater accessibility so investors could now participate in the market.
   
• In terms of new asset classes, Coinbase created a simplified exchange increasing user adoption and participation for crypto investing. In 2017 multiple coins saw 1,000% returns in one year following their listings, later to become known as the Coinbase effect.

Gold may serve as the best roadmap for diamond financialization. Consider that gold appreciated by nearly 300% in the seven years following the launch of the first gold ETF, GLD. The compound annual growth rate for gold from 2004 to 2011 was an amazing 47%.
 

In short, the launch of GLD supported the financialization of gold, with investment allocations as a percentage of total demand increasing from 10% in 2004 to approximately 30% today.
 

The consequences of this can be seen both in terms of price appreciation as well as the impact on demand in the market. All alone, gold ETF investment demand represented about 9% of total gold demand between 2019 and 2021, and this is not inclusive of other forms of gold investment demand such as coin and bar demand.

Diamonds as it stands are remarkably under-allocated when compared to precious metal investment allocations. Investors hold 32% of gold, but only an estimated 2% of diamonds because of previous historical barriers to entry. Even silver stands at approximately 19%.
 

Why such small investment allocations? The answer lies in significant barriers such as no mark-to-market, standardized index, or a convenient or liquid way to gain exposure to diamonds as a commodity.
 

Now that seems about to change, as a group called “Diamond Standard” has created physical, fungible diamond “coins” and “bars.”

A Remarkable Innovation

The nonlinearity of diamonds for pricing and valuation had presented a problem so formidable that it required applications like statistical optimization, computer science, AI and automated market-making to allow for a solution to be created.
 

The result really is quite remarkable.
 

Each Diamond Standard coin or bar contains a statistically equivalent set of investment-grade diamonds, with the certifications and provenance of each commodity audited and authenticated on the blockchain.
 

Rather than heat to refine gold to a certain level of purity, math and statistics are used to reach a minimum approved percentage of 99.99%.
 

Each unit contains natural, investment-grade diamonds that follow a yield curve matching how diamonds naturally occur on the earth. This optimized set is drawn from a public, valid sample, acquired through transparent bidding.

Here’s the important part: Enabled by the first electronic diamond exchange and market maker, this ecosystem opens up a $1.2 trillion natural resource to investors and the financial world for the first time.

Thanks to these innovations, diamond commodities now exist along with a spot market, an electronic exchange for sourcing, and an index (DIAMINDX) available on Bloomberg and Refinitiv as the benchmark.
 

With more investment options in sight, a private fund was launched at the beginning of 2023 and futures, options, ETF, ETP and other revolutionary investment vehicles are now under development.
 

Additionally, the CME has approved the diamond commodity bar as “Good for Delivery,” just like the 400 oz gold bars refined to 99.99%.
 

Why does this matter?

If similar allocation levels develop from the financialization of diamonds, this will create a significant new source of demand to impact the limited market forces at play.

The diamond supply chain is constrained and tight, and has long operated near an equilibrium from only jewelry demand. Jewelry demand is forecast to continue to increase annually, reaching an estimated $125 billion in demand growth by 2029. Asia and the U.S. will contribute largely to this growth, adding an estimated $34 billion in diamond jewelry sales from 2021 to 2029.
 

On the supply side, exploration and mine discovery has been difficult. A new diamond mine has not been brought to production in the last 20 years, and a number of notable mines have closed or are scheduled to close due to forecasted mine exhaustion. Diamond analyst Paul Zimnisky projects that diamond mine production will decrease by 2.2% annually from 2022 through 2025.
 

Bank of America released a report in 2022 stating the supply of diamonds is now the lowest since the Great Financial Crisis of 2008.

It all adds up to tightening supplies...and potentially growing demand thanks to the new diamond investment innovations of Diamond Standard.

Diamond Standard is still in the early innings, but patents, regulatory approvals (including BMA, CFTC and TSX), along with breakthroughs in technology and trading innovations, have set a foundation with building blocks for diamonds to now be conveniently investable.
 

I don’t have any personal stake in Diamond Standard, but have found this innovation extremely interesting and potentially valuable, and urge you to give it a look.
 

Diamond Standard has extended an invitation for Golden Opportunities readers to learn more at diamondstandard.co/invite.

All the best,

Brien Lundin
Publisher, Gold Newsletter
CEO, the New Orleans Investment Conference