Diamond ETF: Great Way To Play The Hard Asset Sector

diamondAfter a rough patch in the first half of 2013, natural resources finally took off with the Fed deciding to postpone cuts to its stimulus program. Although the Fed may still taper soon, it is not yet final, so commodities may still have some room to run in this weak dollar environment.

This bodes well for commodity mining ETFs that depend on the price changes of their underlying assets. A good example of this is the precious metal and gemstone market, where asset demand has surged amid geopolitical concerns and worries over a government shutdown back in the U.S. (read:3 Mining ETFs Finally on the Upswing).

The improving China data is also playing a major role in driving commodity mining ETFs. Investors were naturally encouraged to pick precious commodities on hopes of higher returns. Leveraging the trend, SPDR S&P Metals & Mining ETF (NYSEARCA:XME), which was down about significantly to start the year, has really turned it around in the past few trading days, beating out the overall market.

In such a situation, investors seeking to tap a new form of hard assets can consider the overlooked option of diamonds. Along with gold and silver, diamonds are also compelling opportunities, and can benefit from the broader metal strength.

The return from The Diamond/Gemstone ETF (NYSEARCA:GEMS) from upstart PureFunds in the last one month breezed past commodity ETFs like (NYSEARCA:GLD), while it also beat out larger mining products like XME as well. Given this solid performance, some might be wondering what lies beneath this uptrend and whether it will continue.

Demand Outshines Supply

The demand-supply scenario is favorable for diamonds with global demand expected to increase 5.9% annually through 2020, but production likely to expand only about 2.7% annually over the same time period, as per market research firm Bain & Company.

Demand is trending higher especially in Asia, both in terms of jewelry and investment with India and China accounting for major chunks of global demand. Both markets are still in their nascent stages, indicating a wide runway for future growth (also read A Complete Guide to Mining ETFs).

Specifically, demand from India has recently seen a surge on increased import taxes on gold to cut dollar expenditure, which has hurt the yellow metal’s appeal in comparison to other metals. Moreover, imports of rough diamonds, which comprise almost 90% of all diamonds brought into India, do not attract any levy. Polished diamonds, however, charge a 2% import tax.

According to Bain & Company, the diamond industry was largely unscathed during global downturn, probably as this precious stone is purchased by high-end customers who were somewhat immune to recession. Moreover, the firm expects several new mines to come online by 2020.

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