DIAMONDS: The Newest Asset Class

A serial entrepreneur is working to transform one-of-a-kind gems into a tradable commodity

BY ED MCKINLEY

Diamonds arrayed in resin have the same value in every Diamond Standard coin and bar, helping to establish a transparent price.

Diamonds may be forever, but only a few of the biggest, most precious examples have been taken seriously as an investment vehicle. The problem’s been that each one is unique—they aren’t a tradable, undifferentiated commodity like oil, gold, corn or pork bellies. Instead, they differ according to variables known as the 4Cs: cut, color, clarity and carat weight.

It’s why no one has been able to set a transparent price for diamonds—until now.

A former Twitter quantitative strategist-turned-diamond-maven has set out to turn the one-of-a-kind stones into a mass-market product and make them available to retail investors. Speaking by teleconference call from his Manhattan office 14 floors above the Diamond District, Cormac Kinney described his work at Diamond Standard, the company he formed to realize his gem-studded vision.

He’s in the midst of transforming diamonds into a financial instrument by creating technology that commodifies the stones, establishing an electronic market for buying and selling diamonds, starting a private fund based on diamonds, filing for regulatory approval for an exchange-traded fund (ETF) tied to diamonds, and offering what he describes as the first diamond options and the first diamond futures.

Kinney found his calling by chance. “My wife is a diamond dealer,” he said, “and I learned accidentally about the diamond market.” His initial lesson revealed the size of the market and made a profound impression.

“It’s a $1.2 trillion asset,” he noted. “I’m talking about the above-ground diamonds dug up for the last 100 years—what they’re all worth if you mark them to market today.”

Yet, investors really had no good way to take a position in those riches, so Kinney set about changing that. Eighteen months ago, he began manufacturing and selling diamond “coins” and “bars.” The former consist of eight or so diamonds embedded in a circle of resin several inches across, while the latter are larger resin rectangles housing diamonds with 10 times the value of a diamond coin.

Each coin contains a mix of diamonds with the size, clarity and color to make it equal in value to all of the other coins that Diamond Standard makes. The mix of every coin the company will ever manufacture will be equal to all of the other coins. Thus, as the company’s name suggests, it’s establishing a standard for diamonds that will never change, even if the coins are created decades apart.

Determining that each coin carries the same value required a computer-science breakthrough, according to Kinney. He’s a software engineer who has received 4,000 patents while starting four companies.

At his current company, he buys diamonds of every weight, color and clarity—every possible diamond except the most expensive, largest ones and the smallest available. Then the computer divides them up evenly to put them into the coins and bars.

Diamond Standard records that process in the blockchain and anyone can look it up to see how the eight or nine diamonds came together to match the standard. It’s not just a matter of averaging because diamonds increase in value exponentially as they approach flawlessness. But lookups should be easy because the coins carry QR codes like the ones restaurants use to digitize menus.

The coins also contain a computer chip that stores a blockchain token. Whoever owns the token, owns the coin. “We have the world’s only regulatory license for a commodity token,” Kinney noted.

But the superlatives don’t end there. “This is the world’s first-ever regulator-approved diamond commodity,” he said.

At press time, coins were worth $6,160. Their price had increased $1,160, or 23.2%, since the initial public offering in 2021. They were up $130, or just over 1%, for the year.

Diamond Standard has sold 3,000 coins, and about 90% of the buyers have chosen to store them in facilities operated by the Brink’s security company. Kinney arranged for Brink’s to store them for $36 a year. He compared the 10% who keep their coins at home with gold bugs who enjoy a physical connection with a precious commodity.

But investors don’t have to keep diamonds under lock and key at Brink’s or stashed in a safe in their home office to become involved in the market. Diamond Standard has started a private fund with its value based on coins and bars. It’s for accredited investors only and requires a minimum commitment of $25,000.

About 200 investors have subscribed to the private fund, including “several registered investment advisors who have given us pretty substantial allocations,” he said, noting that the fund had been available to investors for only a few weeks when he spoke to Luckbox.

Registered investment advisors account for about 80% ofthe fund, with 20% coming directly from high-net-worth individuals. Several retirement accounts have bought shares in the fund because they had been following Diamond Standard’s progress, Kinney said, noting that they couldn’t buy coins or bars because they’re prohibited from purchasing commodities. Most investors are trading through brokers who handle digital currencies.

Cormac Kinney is laboring to make diamonds an indistinguishable commodity like gold, silver or pork bellies.

The company is also building its own fee-free marketplace called the Diamond Standard Exchange. The exchange provides liquidity to earlier buyers and either a discount or faster delivery to subsequent buyers. It forces price discovery to create price transparency.

“I wanted to make it much more of a liquid spot market, so we built our own,” Kinney noted.

Diamond Standard started the exchange two years ago, and 150 of the world’s largest diamond vendors have joined. They list an average of a million diamonds a week. Kinney’s company uses the exchange to bid on every type of diamond. It’s fully automated and doesn’t rely on phones or traders.

The exchange vendors are all approved by the Gemological Institute of America, the authority that also grades every diamond before it’s offered on the exchange. Vendors sign agreements stipulating they will not manipulate prices or accept gems mined with child labor.

“We’re cleaning up the entire diamond supply chain because we’re regulated,” Kinney said of the exchange. “It has to be compliant with all of these standards that never existed.”

While all this was happening, Diamond Standard also recently won approval to list futures on the CME Globex. It’s also been approved to launch options and expects to establish enough liquidity to offer them by early next year.

Diamond Standard coins and bars have a smaller profile than hundred dollar bills but far more value.

There’s more to come, too. Another step for Diamond Standard will come as an ETF open to the general public. Investors will be able to add a position in diamonds to a portfolio of stocks, bonds and options.

Diamonds would bring diversification to any portfolio because they’re not correlated with other securities. In other words, they don’t rise or fall in value with other assets.

The company is awaiting approval from the U.S. Securities and Exchange Commission to start the ETF. But the regulatory agency hasn’t told the company when that approval might be forthcoming.

“The SEC asks you questions, and they don’t give any indications,” Kinney said. The date isn’t a matter of great importance, he maintained, because the private fund has been so successful. Still, the ETF should be operating in a year, he estimated.

Initially, investors in the ETF will probably pay a fee of three-quarters of 1%. That’s a little high, Kinney conceded, noting that it should come down as the fund grows. Besides, it will prove its worth as a convenient fund that retains custody of the diamonds and pays for auditing and third-party administration, he said.

Because there’s been no financialization of diamonds until now, their value has remained flat for 20 years and has even declined once inflation is factored into the equation. They’ve increased in value only 42%. In the same time period, gold and silver have returned 430% to 530%, while the S&P 500 has risen 400%, the Diamond Standard website said.

Diamonds have turned around in recent years. Since August 2020, diamonds have increased in price by 47.74%, while the S&P 500 went up by 22.8% and gold declined by 14.52%, the site said. The gains will continue, Kinney predicted.

Making diamonds a commodity will increase demand, he said, causing them to rise five-fold in price in the next five to seven years. According to his estimates, investors may buy about 15% of the world’s diamonds. Other factors favor diamonds as an investment, too, Kinney maintained.

Even at today’s prices, an ounce of diamonds is worth 10 times the price of an ounce of gold. That makes diamonds portable, Kinney said, noting that a tray containing a million dollars’ worth of coins and bars is the size of an iPad.

The coins and bars come with enough authentication to trade them face-to-face, and tokenization enables investors to trade them electronically with a minimum of friction, he said.

Eventually, diamonds will correlate with other assets, but for the next seven years, they’ll be in a one-time phase of position-building, Kinney said. One-sided demand will prevent them from rising or falling in tandem with other assets except when a severe market turndown brings down the price of nearly every security.

Diamonds are also a hard asset, unlike stocks or bonds that represent someone else’s liability. “It can’t default,” he said of diamonds. “You have it in your possession.”

Recent developments with uranium might provide clues about what could happen with diamonds, in Kinney’s view.

“What we’ve tried to do is plug into the whole familiar Wall Street commodities fund machine,” he said. “Something similar happened with uranium last year. For the first time, there were some uranium funds, and those funds ended up buying the [entire] available supply of uranium that’s liquid on the market and traded. They ended up driving up uranium 77% in seven months.”

Making Diamonds Fungible

FOR DIAMONDS to become a mainstream vehicle for active investors and traders, someonehas to turn them into an asset, makingthem interchangeable instead of one-of-akind,said Paul Zimnisky, a diamond jewelryindustry analyst. That would make diamondssomewhat akin to a commodity like gold.

“An ounce of gold is an ounce of gold,”Zimnisky noted. “It’s understood to be 99.99%pure, and we know what the market is 24/7.” Diamonds,on the other hand, fall into thousandsof categories with regard to size, quality andcolor—and then there’s rough and polished.

“So, there are all of these individual markets, thousands of them, and there are complications that come with that with regards to turning it into a liquid investable market,”Zimnisky said. But a company called DiamondStandard aims to make diamonds fungible by grouping them into fixed batches based on rarity and value, he continued, noting that the firm is taking an objective, technical approach.

“It’s the best attempt I have seen to makediamonds a mainstream investible product,”he said. “So far, the company has shown itselfto be very persistent in trying to make thisconcept work on a larger scale.”

Diamond Standard can succeed if it attractsenough investors, Zimnisky maintained, notingthat “liquidity would beget more liquidity,which would draw in more of the market.”