By Murray Coleman
The world's biggest diamond producer is considering creating an ETF to help boost demand in the market. Is this self-serving or could it have real investment potential?
On the surface, word that De Beers SA is thinking about entering the ETF market seems totally influenced by current events.
As first reported by the South African news site Business Day (see story here), the company is responding to a sharp sell-off in consumer purchases of jewelry that began last fall. With diamond production also down and few new mines expected to open in the future, the industry is seeking other ways to prop up prices.
For investors, De Beers is noting that while diamond prices have dropped around 15% since early last year and the end of Q1 2009, they've rallied around 5-6% lately. (The article has some other interesting numbers released by the firm about production levels and the financial plight of De Beers as a whole.)
Is there a contrarian view to be made here, though? Look at how speculators rushed into the U.S. Natural Gas Fund (NYSE: UNG), betting that depressed prices were a big-time opportunity.
Those thinking that markets are missing the boat and undervaluing natural gas at least have a good story line. After all, aren't alternative energy sources going to eventually move more into the forefront?
Of course, natural gas bulls must deal with regulatory issues as the government still hasn't given UNG permission to issue new creation units. (See related stories here.) But those are temporary, short-term hassles that don't diminish the longer-term fundamental picture for the market, right?
It seems like a more difficult leap to argue that vast numbers of consumers around the world are ready to start flocking back into jewelry anytime soon. Even if we see a rally in diamond prices in the short term, how sustainable could such a trend prove to be in coming years?
Still, a new ETF focused on diamonds appears to be on the way. As a pure trading vehicle, it would seem difficult to argue against opening access to a previously difficult-to-tap market.
Only the most hardy market technicians are likely to take the bait. Even if demand does rebound, a diamond ETF would seem at this point to be a dicey proposition. This is definitely not something anyone at home should be considering for a long-term-oriented portfolio. And I'd argue it's not even a good idea for someone to try on a tactical basis.
When a diamond ETF hits the market, let's leave it to the professional traders. They might want to try to squeeze a quick buck from it, but you and I could lose our shirts on something like this!