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Singapore adds diamonds to its trading repertoire

The new exchange lets institutional investors trade physical diamonds on an electronic platform.

SINGAPORE -- A new electronic exchange for trading diamonds opened last week in Singapore, claiming to be the first of its kind to allow physical trading of the gems on an electronic platform. The hope is that the new exchange will be a game-changer that will bring in new traders to the traditionally closed diamond industry, and boost demand for the precious stone which is facing historically low prices amid plunging demand from big spenders such as the Chinese.

Backed by Singapore's state investor Temasek Holdings and investor Jim Rogers among others, Singapore Diamond Investment Exchange (SDiX) utilizes an electronic platform designed by engineers who previously created systems for major stock exchanges including the Singapore Exchange. The platform matches buyers and sellers at a speed of more than 500,000 transactions per second. Live prices will be available on the exchange's website. The trading hours will be between 2.30 p.m. and 6.30 p.m. Singapore and Hong Kong time.

The diamond market has traditionally been closed, with prices based on bilateral trading between buyers and sellers within the industry. "No marketplace existed for people who were not members of the diamond trade," said Alain Vandenborre, chairman and founder of SDiX, during an interview with the Nikkei Asian Review prior to the opening of the exchange. Vandenborre hopes to break this tradition with the new exchange.

"The important thing is that the baskets are standardized and fungible. It's like a gold bar; it's exchangeable for any other gold bar of the same category," Vandenborre said.

Investment-grade diamonds are categorized into groups based on their quality -- based on size, color and clarity -- as well as on whether they are being sold singly or in a basket of stones. Investors do not need to understand the numerous and complex criteria diamonds are usually assessed by; SDiX will do the categorization for them, allowing the investors to be "indifferent" towards the quality of each and every stone they invest in, according to Vandenborre.

By providing an exchange platform where prices will be determined on an anonymous basis, the new platform "will unlock diamonds as a financial asset," Vandenborre hopes. The idea is to attract participation from commodity traders and financial investors who can in turn provide investment products for retail investors, such as exchange-traded funds.

Leading up to the launch, SDiX brought in Standard Chartered Bank to provide cash settlement services, and UOB Kay Hian as its first broker. Late last month, SDiX welcomed Dubai-based commodity broker Richcomm Global Services as a buy-side member on the platform to provide high net-worth retail investors and institutional investors across the United Arab Emirates with access to the diamond market. "We see demand from the buy-side," said Vandenborre, adding that some European brokers have "already secured commitments" for diamond investment from some of their financial investor clients.

Going forward, SDiX expects more players from wealth management centers and diamond trading hubs including Switzerland, Hong Kong and Dubai. "We would like to think that the evolution of the diamond market could be similar to gold," said SDiX chief executive Linus Koh. He noted that around 40% of annual gold production is bought for investment, with an addition of $4 trillion worth of derivatives traded. In contrast, only 3% of diamonds produced in a year are bought for investment. "So the potential appears to be rather large," said Koh. SDiX hopes to launch derivative products and open the market to retail investors in the future.

Questions remain over whether now is a prime time to invest in diamonds, however. Prices for the gems have been languishing at historically low levels, as demand from wealthy Chinese slowed in line with the country's slowing economic growth. There have been signs of pick-up in recent months: major diamond miner De Beers last month reportedly upped the price of diamonds sold to manufacturers for the first time in a year, and its sales volumes have been on an upward trend since the end of last year.

SDiX is optimistic on the timing of the launch. "Prices appear to have bottomed out. But they are not yet red hot. This is a good time to launch," said Vandenborre. The original plan was to launch the exchange last September, but Vandenborre said the opening was delayed as regulatory clearance took longer than anticipated.

Although Singapore is not yet a hub for diamond trading, the city-state has attracted a number of high net-worth individuals willing to put their cash towards other glimmering options. In March, Singaporean precious metals bullion dealer GoldSilver Central announced a partnership with Australia's Perth Mint to provide an online precious metals depository program to its Southeast Asian clients. The program comes with a government-backed guarantee and lets investors trade on an online platform while reacting to live pricing of the precious metals.

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