Big Picture. Diamonds are a choice for trading, too

Gifting diamonds is one of the best ways to appreciate the value of women. This is because diamonds are rare, precious and arguably the hardest substance on earth. As is in the case of precious metals such as gold, it would make great financial sense for you ladies to trade or invest in diamonds as a commodity, rather than going the traditional way of buying a piece of jewellery for yourself, for a slew of reasons. One, you don’t have to shell out a huge sum on irrecoverable charges (such as making and wastage charges). Two, the quality of the diamond is assured by the exchange and meets international trade standards, ensuring good value for your money.

In India, the Indian Commodity Exchange (ICEX) allows trading on diamond futures contracts, which is the world’s first such contract.

This contract has been running since November 2017. After seeing a healthy trade traction in the 1 Carat (CT) contract, the exchange launched contracts with smaller sizes, to help the jewellers — who use smaller-sized diamonds for engagement rings, earrings and bangles — hedge their positions. Currently, the exchange offers contracts of three different sizes — 1 carat (100 cents), 0.5 CT (50 cents) and 0.3 CT (30 cents). However, the 1CT contract, launched initially, has maintained its sheen and continues to be the most traded contract — catering to about 98-100 per cent of the quantity traded on the exchange.

To garner more retail participation, the trading lots have, however, been kept at one cent (2 mg).

From just 38,287 lots (average daily traded lots) traded in the launch year (2017), diamond futures contracts have now gained enough traction — with trading volume having multiplied by more than 10 times to 3,41,284 lots (average daily traded lots) in 2019. In the recent past, with COVID-19 affecting the markets globally, even the diamond contracts saw greater volatility — daily trade volumes crossed 4 lakh lots in most part of February 2020.

Features

The contracts are essentially monthly futures on different sized (100/50/30 cents) diamonds. At any given point in time, you can purchase contracts expiring in one/two/three months. The contract begins on the 6th of the launch month and expires on the 5th of the contract expiry month and is available for trade through the month.

Upon purchase, the quantity (cents) will be credited in your electronic account with ICEX. All contracts that are open until expiry have to be physically settled. That is, if you have bought a 0.3 CT future contract expiring June 2020, you will be entitled to receive 30 cents of diamonds, if you have accumulated 30 cents in the electronic account with ICEX. Once you have accumulated quantities to match the contract size, you can either continue to keep accumulating in the electronic form or ask for physical delivery of the stone.

 

You can also choose to sell the electronic units on the exchange and book profits. For those of you who wish to trade, the margin requirements would be 6 per cent of the contract value, initially. If you hold the contract up to the delivery period, you will have to chip in an additional 20 per cent of the contract value, before the beginning of the delivery period.

Quality

The seller in the contract will have to initiate delivery in the last five days of the contract, which would be from the 1st to the 5th of the expiry month. The delivery centre is at an exchange designated vault at Surat, Gujarat. The sellers of the contract must deposit the diamonds, physically to the exchange, which will be first verified and certified by the International Institute of Diamond Grading & Research (IIDGR), part of De-Beers group. Post this, the grading report and the diamond stones will have to be deposited with the exchange-accredited vault (Malca-Amit, vaulting agency).

Do note that the exchange only accepts diamonds of HSV2 grade and above, so as to ensure their tradability.

Upon receiving confirmation from the agency about the grade and size of diamonds, the exchange will reflect the same as electronic units of one cent each in the seller’s account with ICEX.

Price outlook

The spot prices for diamonds, which are based on a polling done in Surat, are available on the exchange’s website, in both rupee and dollar terms. Currently, the diamonds are trading at a spot price of around ₹3,547.75 (a cent). In the last one-and-a-half months, despite pressure in global financial markets due to coronavirus outbreak, ICEX diamond prices have appreciated by around 5 per cent. Manoj Kumar Jain, Director and Head of Commodity Research at India Nivesh Commodities, believes this is largely due the to weakness in the domestic currency against the US dollar.

He expects prices to rally in the near term on the back of weakening rupee. He says, “The medium-term view, however, remains weak for diamonds, given COVID-19’s plausible disruption in the demand for diamonds in the EU, which is one of the largest importers of Indian polished diamonds.”