Who exactly wants diamond futures? From what I’ve seen so far, it’s been companies like Rapaport (National Jeweler has written about his ideas here) and Polished Prices, who don’t actually manufacture or hold any stock in diamonds. Supporting the idea is Chaim Even-Zohar, writing on Idexonline, which goes out of its way to say it doesn’t hold stock or trade in diamonds. Oh yes, one of the idea’s most fervent backers is Loet Kniphorst of ABN Amro Bank, a partner in the initiative launched by Polished Prices.

The actual diamond processing community doesn’t seem to think it’s such a great idea. Their fundamental question is – can anyone guarantee that an offer to sell a consignment of exactly specified diamonds will actually result in the delivery of a parcel? And the short answer to that question is “No”.

If you can’t guarantee the delivery of physical diamonds, you are going to build up a huge, speculative paper-trading edifice – including complicated derivatives – that could crash and burn at an instant’s notice.

I can understand companies like Rapaport, Polished Prices and Idexonline wanting to promote the idea. By offering electronic trading platforms that could host futures trading systems, they seek to remain relevant and develop a working business model for an increasingly uncertain future.

ABN Amro’s stand, I must confess, leaves me baffled. Kniphorst has said that the development of a futures trading system will allow other, non-bank financial systems to pour money into the diamond industry globally. This would make diamond-financing banks like his own ABN Amro, much more comfortable in increasing their exposure in an industry that he thinks already has an alarmingly high level of bank-indebtedness. He said that globally, ABN Amro had moved to reduce its exposure to diamonds. However, at the ‘Mines To Market’ conference that took place in Mumbai earlier this year, when Vasant Mehta, who is a vice president of the International Diamond Manufacturers Association (IDMA), specifically asked him, Kniphorst admitted that in India, the world’s largest diamond processing country by far, ABN Amro had increased its exposure.

Mehta told me that the international diamond manufacturing fraternity was unsure of the whole futures idea. A system that could guarantee physical delivery, he said, would be worthwhile, but the idea of a solely speculative paper-trading system left him nervous.

One of the fundamental problems with a polished diamond futures trading system is that unless there is a similar system for rough that guarantees manufacturers get assured supplies of raw material, the whole thing will remain a purely speculative system on paper. And that will bring about an extremely dangerous instability to the international diamond processing industry.

While the protagonists for a futures trading system trumpeted the development of other instruments like diamond-based investment funds as a consequence, Diamond Circle Capital, the first-ever such fund, failed to take off because investors refused to put their money into it. Check out the Financial Times report.

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