Prices of stone have an inverse correlation with the rupee
ICEX became the first exchange in the world to launch diamond derivatives trading in August 2017. Diamond prices on ICEX have been slowly and steadily moving up till last October, but have been trading sideways with a negative bias for the past couple of months.
The Indian Commodity Exchange (ICEX) is Sebi regulated online commodity derivative exchange.
One carat diamond futures contract opened at Rs 3,223 in August 2017 when the contract was launched. Prices had moved up to Rs 37,00 per carat by the end of October 2018. In November and December prices have been consolidating around Rs 3,500 per carat.
“Diamond prices have an inverse correlation with the rupee. In the first half of 2018, diamond prices were seen moving up as the rupee was depreciating. But by the second half and more specifically by November we started seeing the rupee gaining strength and this led to weakness in diamond prices. Moreover, the demand in the US – the largest market determining the price movement of diamond – also was slow due to trade war with China,” said Ajay Kedia, managing director, Kedia Commodities.
In 2019, diamond prices are expected to drop 6-7 per cent as the US dollar may consolidate and the rupee would gain if a stable government takes charge after elections, he added.
However, on a long-term basis diamond prices
have witnessed better appreciation than gold. Between 2011 and 2017, diamond prices appreciated 18.01 per cent, while gold only 11 per cent. As far as diamond is concerned, lower level of volatility also is an added advantage.
According to Kedia, diamond futures in ICEX are slowly gaining traction in the past one-and-half year, but the participation has not significantly risen. “Due to its correlation with dollar, diamond can be a good hedge and this has led to increase in investor interest. But the interest among physical market participants has been growing slower,” he said.
According to ICEX, both physical market participants and investors are finding it advantageous to trade in the futures market. Physical participants like traders, manufacturers, investors and diamond jewelers find that the ICEX futures prices are more accurate and reliable as the trade results in actual delivery. Both seller and buyer can quote their prices. The futures contract helps the participants take buy or sell positions even with small margin money.
Other market participants like investors, arbitrageur and retailers provide liquidity to the market, enabling
easy entry and exit. Retail investors can accumulate
units of diamonds through staggered buying. Investors have the option of taking physical delivery, wearing it and re-selling it on ICEX when he/she wants to exit. Assured quality makes the market a good place to accumulate.
Buyers or investors, who have taken delivery from ICEX, have the flexibility to keep the diamond either in electronic form or as physical stone. ICEX also provides access to a bigger market, which includes sight holders, manufacturers, jewellers and retailers.
There are three contract sizes – one carat, 50 cents and 30 cents. ICEX diamond contract follows the price in Surat, excluding the goods and services tax (GST), and reflects wholesale market price. The gap between wholesale and retail price of polished diamond varies between 30 per cent and 40 per cent. Graded natural, untreated diamonds having no black inclusions are traded on the platform.
For all open positions, there is compulsory delivery on expiry of contract. Failure to give delivery by seller will result in a penalty of 3 per cent of the futures closing price on the delivery day(s) or DDR (spot rate on the last day of the delivery).
Additionally, the seller also has to pay the difference between spot and delivery rate. If the buyer is not taking delivery, he too has to pay a penalty of 3 per cent and the lots are auctioned. All buyers who are allocated delivery get electronic units of diamond in their account, which can be converted into physical diamond on their request. But he will have to maintain minimum holding in his electronic account.