Most people buy diamonds as an expression of love. But there’s frequently a side benefit to a diamond purchase: diamonds are an excellent store of monetary value. Because diamonds tend to hold or increase their value over time, many people think that diamonds are a good long-term financial investment.
That premise seems to be the impetus behind a plan to create a new way to invest in diamonds – one that doesn’t involve ring shopping. A financial firm near New York City recently announced its intention to establish an exchange traded fund (ETF) – a passively indexed kind of investment fund – tied to the value of diamonds. Investors would be able to buy and sell shares of the diamond fund much like they do any stock. The fund would hold a giant store of actual diamonds in a vault in Antwerp, Belgium.
Investment analysts seem intrigued by the idea of an ETF for diamonds. We’re intrigued, too, but for different reasons. As a leading provider of ethical origin diamond jewelry, our question is: what would the fund mean for efforts to build a more humane, ethical diamond industry?
Boom and Bust Cycles
We do have some concerns. For one, the new fund could give financial markets a greater role in setting the price of diamonds. Diamond prices could become more subject to market swings, potentially causing disruptions for the more than one million people in Africa who make their living by digging for diamonds.
The market for gold, another component of jewelry, provides a helpful illustration. Unlike diamonds, gold is already one of the most heavily-traded commodities. In recent years, investors spooked by the global economic downturn have plowed their money into gold, causing the price of gold to soar. The rising price of gold has persuaded hundreds of thousands of people in the developing world to take up artisanal gold mining – the type of gold mining in which people pan or dig for gold.
The explosion of gold mining in developing countries isn’t all bad news. The gold mining boom has expanded economic opportunities for many people. But the boom has been a very mixed blessing. All the labor and environmental abuses long associated with artisanal gold mining have only become worse and more difficult to control; these abuses include the widespread use of child labor and the spewing of toxic mercury into the environment. In addition, if gold prices were to crash, it could cause an economic calamity for people who have become dependent on gold mining.
It’s hard to say how the new investment fund will impact diamond prices, if at all. But if diamond prices do become more volatile, that may not be good for Africa’s diamond diggers. During boom cycles, labor and environmental abuses – and possibly violence – might become worse. During the busts, diamond diggers could suffer economically.
Ambiguous Ethical Standards
We have another concern about the new diamond investment fund. The firm planning to establish the fund, IndexIQ, hasn’t promised to avoid buying diamonds tainted by corruption and serious human rights abuses.
In a filing with the Securities and Exchange Commission, the firm promises to buy only “conflict free” diamonds – which it defines as “rough diamonds used in the past by rebel movements to finance their military activities, including attempts to overthrow legitimate governments.”
Sadly, IndexIQ’s filing relies on the same outdated definition of “conflict diamond” used by the Kimberley Process, the troubled international diamond certification scheme. That definition leaves out most of the serious ethical issues plaguing diamond mining today – including child labor, violence, and corruption.
Large portions of the diamond supply are tainted by abuses such as these. In both Angola and Zimbabwe, for instance, diamond mining recently has been plagued by killings, torture, rape, child labor, and corruption. Angolan and Zimbabwean diamonds, which make up 10 to 20 percent of the world diamond supply, nevertheless receive Kimberley Process certification.
IndexIQ should be clear. Will it buy diamonds from these countries? Will it purchase diamonds linked to grave human rights abuses? Or will it adopt a higher ethical standard than the one used by the Kimberley Process?
Here’s the good news: if IndexIQ is willing to show some leadership, it could perhaps have a very positive impact.
By choosing to buy only ethically-sourced diamonds, the firm could use its market leverage to encourage the diamond industry and national governments to raise ethical standards. This is one of the strategies that we, at Brilliant Earth, use to spur diamond industry reform.
Furthermore, the Kimberley Process is presently engaged in a debate about whether to broaden its definition of “conflict diamond” to include concerns like violence and corruption. Broadening this definition is absolutely critical to the Kimberley Process’s credibility. But when an established company like IndexIQ proceeds as if there is nothing wrong with the definition, it allows the Kimberley Process to continue evading responsibility.
However, by taking a firm stand against the worst abuses in diamond mining, by clarifying the diamonds it will and will not purchase, IndexIQ could subtly shift the Kimberley Process debate at a very important moment. We urge it to do so.
Like it or not, IndexIQ will become a major player in the diamond industry if it goes ahead and establishes a diamond ETF. We hope that as it enters the industry, the firm will join us in the fight to make diamond mining more ethical.