Antwerp Facets newswire builds on the arguments I have outlined before in their post on on the advent of diamond derivatives.
Apparently Bankers are delighted that speculators will bear a stock-financing burden that has become too risky for them.
But I have other concerns too….
Introducing a futures market to enable speculation on something that has no material worth is a very dangerous game.
It is not just speculators who can lose out.
A spate of short selling on the futures market can have real world impact - not just on swanky jewellery firms and wealthy mining companies, but on the economies which rely on diamonds. Whereas Soros’s speculation against the pound merely hammered the UK economy, diamond speculators could impact fragile producer economies like Namibia.
Futures traders don’t care about the underlying value of assets; just in guessing right on market direction.
Any futures market based on a limited range is unlikely to be strong enough or liquid enough to avoid massive distortions.
We are living in dangerous times. The insurance companies must be rubbing their hands.
Bankers admit that the risk in lending to the participants diamond industry is too high at present and they would like to shift it away.
What the derivatives do is to offset the risk that the professional bankers who are extremely familiar with the trade do not wish to hold any longer - into the hand of speculators.
The power of derivatives, of course, is that irrespective of whether diamonds rise or fall, the speculators can make money. However the danger is in linking a future value indicator to a substance which has no intrinsic worth, and hence theoretically infinite volatility. We are living in dangerous times.
A spate of selling short in the rarified world of the futures market can have real knock-on effects on the ground - not just for miners and jewellers, but also for communities in Africa.
However, the fundamental problems of the industry will not be solved, only gain some time before the problem will rise again.
Tags: diamond futures, diamonds, luxury, rappaport