photo: Swamibu

This Sunday, the Red Carpet at the 83rd Annual Academy Awards (alright, the Oscars) will drip with diamonds from the likes of Fred Leighton and Neil Lane. Someone may even top the 7,645-diamond, nearly 1,400-carat L’Wren Scott necklace Nicole Kidman wore to the star-studded event three years ago. Diamonds are truly a girl’s best friend.

Diamonds can also be a good bet for investors, especially in a market fraught with geopolitical turmoil. Diamonds are considered by many to be a store of value similar to gold; as global demand for diamonds increases, prices will pick up. The IDEX Diamond Price Index has increased 10% over the past year, against reported shortages. According the latest IDEX market report, some diamond dealers are saying they are seeing the highest demands in a decade due to the lack of goods.

Though there is no diamond fund or ETF yet, word on the street is that diamond giant De Beers, owned by billionaire Nicky Oppenheimer and family, is considering offering ownership of its diamonds without physically taking receipt, similar to other physically-backed commodity ETFs. In the meantime, there are several opportunities to take part in the diamond dash.

At the Counter

To be clear, a diamond purchased at the store (be it Tiffany’s or your local independent jeweler) is far from an investment. Diamonds are meant to grace your fingers, wrists or neck, but don’t expect to recoup their value by reselling one you bought at the retail level. (They’ve been marked up one too many times by the time they reach the end customer.)

That said, there is opportunity for those looking to invest in diamond retailers themselves.

De Beers, which has been in the Oppenheimer family for over 80 years and controls about half of the world’s rough diamond supply, is looking for growth at the retail level where customer demand has been spiking, especially in emerging markets like India and China.

“Broad-based diamond and luxury sales [are] strong domestically and abroad as consumers, particularly if they are well-employed, breathed a sigh of relief and increased spending, often on small luxuries,” says Morningstar analyst Paul Swinand. He adds that this pent-up demand, along with an uptick in engagements, makes both high-end and low-end retailers attractive investment opportunities. (Note: Research from the University of Virginia’s National Marriage Project suggests that marriages decline in the mid-single digits during recessions, but rebound when the uncertainty resides.)

Well-known brand retailer Tiffany’s (TIF), is one of the publicly-traded diamond retailers (De Beers is private) benefiting from the boom. The company’s trademark little blue box enables it to charge a premium for his offerings; it also promotes its unique jewelry collections by famous designers, such as the Frank Gehry line. Also new and doing well: its collection of exclusive yellow diamonds. The stock is up 43% over the past year.

Swinand adds that on the other side of the price spectrum, Blue Nile (NILE), the online diamond retailer, is also benefiting from the engagement surge. The company is able to provide lower prices because of its diamond-sourcing model: it sells suppliers’ inventory without having to buy it first like traditional retailers. Blue Nile then passes on some of those savings to consumers.

Mining Diamonds

Jewelry is only one of the end applications for diamonds. Diamonds are also increasingly being used in industry. They have the hardness and conductivity to polish and cut any material; they are used in saws, abrasives, construction, computer chip production, lasers and surgical equipment – basically every industry that touches your life. Indeed, the majority of diamonds mined today are used for industrial purposes.

RBS Capital Markets analyst Des Kilalea says that the diamond mining world is small: four large producers account for about 90% of the world’s rough diamond production: privately-owned De Beers, Russian state diamond monopoly Alrosa, Rio Tinto (RIO) and BHP Billiton (BHP). Though the diamond mining industry is about one fifth the value of the gold mining industry, Kilalea says it is attractive because it is widely profitable, with over 80% net margins. In addition, existing mines are getting old and new supply takes time to ramp up, so shortages may drive rough diamond prices up.

Rio Tinto has interests in three diamond mines; it also has a relatively stable cash flow and lower operating risk than many of its mining peers, according to Morningstar, which expects the company to grow. Over the past year the stock price increased 35%. The other advantage: because Rio Tinto mines iron ore as well as other metals, the company is less susceptible to market imbalances than single-commodity producers.

The same is true for BHP Billiton, the world’s largest publicly traded mining conglomerate. With its proximity to China, the company is well positioned for future expansion, according to Morningstar. The company’s stock price has risen 25% over the past year. Even India’s mining billionaire Anil Agarwal has stated he plans to spend $9.6 billion to replicate the strategy of BHP Billiton for his own portfolio.

The End Game

To be sure, unless you have a sizable portfolio and feel comfortable investing in individual stocks, you may simply consider investing in a proxy such as sector specific iShares S&P Global Materials (MXI), which focuses on large global materials firms; 58% of the fund is comprised of metals and mining companies including Rio Tinto and BHP Billiton. However, because this exchange-traded fund is a concentrated bet on a very narrow segment of the market, investors should treat it as a tactical investment, suitable only “as a complementary satellite holding in a diversified portfolio,” writes Morningstar’s Robert Goldsborough in a recent report.

As always, diversification should remain a key part of your investment strategy. According to Morningstar, a 4%-10% total weighting for all direct commodities exposure is sufficient, any diamond exposure would be a subset of this. Many individual investors may be better off dedicating a smaller share to that – or any other — industry. Be sure to consult with your financial planner or adviser (if you have one) before making any radical portfolio moves.

Tatiana Serafin, a former staff writer at Forbes, now heads Global Markets and Ideas.

Soybean futures

Photo (Quezi)

As the basis of both soybean oil and soybean food products, soybeans are one of the most competitively traded commodities of all. According to About.com’s Soybean Futures Profile, soybeans trade at a contract size of 5,000 bushels spanning the months of January, March, May, July, August, September, and November. While 5,000 bushels sounds like a lot (and it is), a single soybean futures contract can be purchased for $12.50, or 1/4 of a cent per bushel.

Trading and prices are most volatile during summer months, rising on sunny skies and falling – sometimes plummeting – due to floods or droughts. Monthly crop reports are another major mover of soybean future prices, and About.com warns that, “…emotions can control the markets” at all of times of the year. (The same is generally true of other commodity markets).

Rubber

Photo (TK Yeoh)

Rubber is used in all walks of life, and its versatility has made it a hot commodity on the world markets. Grown from trees like those shown above, rubber (also known as natural latex) is produced primarily in countries like India, Thailand, Indonesia, Malaysia, and China, according to CRNIndia.com. Companies and investors wishing to trade in rubber futures typically do so on the Tokyo Commodity Exchange, the Singapore Commodity Exchange, or Bangkok’s Agriculture Futures Exchange. The physical purchase and acquisition of rubber as a commodity, however, usually occurs in New York, Kula Lampur, and London, according to CommodityOnline.com.

Pork bellies

Photo (Tokyo FoodCast)

One of the most volatile (and perhaps comical) commodities traded on the world market are pork bellies. As the name suggests, pork bellies literally come from the underside of hogs, which are cut into sections and flash frozen. Since pork serves as the basis for bacon products, pork belly futures are traded in a competitive world market and have been since 1961, when they debuted on the Chicago Mercantile Exchange. Trading pork bellies is not for the poor, or faint of heart however, as the smallest amount one can trade and take possession of at any given time is currently twenty tons.

Pork belly futures are known to rise or fall (sometimes suddenly and dramatically) in response to higher or lower demand for bacon. The volatile nature of pork belly futures are a common business joke. Regarding Robert Kiyosaki’s statement that his net worth is “$50-$100 million depending on the day”, Harvard MBA John T. Reed quipped, “what’s he invested in, pork belly futures?” Historically however, pork belly futures have risen in value the most during cold winter months when bacon is consumed most.

Palm oil

Photo (Nick Hobgood)

While not as newsworthy as crude oil (another commodity), palm oil is the world’s second most widely produced edible oil in the world. Over the years it has become an essential ingredient in such basic household products as margarine and soap, and has even been used as a biofuel in recent years. Recently, The Commonwealth Scientific and Industrial Research Organization found that using palm oil as a biofuel could reduce greenhouse gas emissions (though this claim has been somewhat controversial.)

All of these uses contribute to making palm oil – which BusinessStandard.com “expects to remain volatile this year” – a hotly traded commodity on the world markets.

Wool

Photo (Tambako)

Wool has been of immense value to society since the first farmer learned to shear a sheep’s coat. Used to make everything from clothing to blankets to noise absorbers, this valuable commodity is produced mainly in Australia and available for mass purchase on the Australian Wool Exchange in Sydney, Melbourne, Fremantle and Newcastle. Roughly 80 agents facilitate the trade of wool through the exchange, while those looking to purchase wool futures contracts must turn to the Tokyo Commodity Exchange.

Cocoa

Photo (Moonlight Bulb)

Vital to coffee brewers and chocolate makers, cocoa has a well-deserved reputation as what SeekingAlpha.com calls “a fickle plant.” As they elaborate in their article “Cocoa – The Last Commodity Standing”:

“Cocoa only grows within specific latitudes no greater than 10 degrees north and south of the equator; the top two cocoa countries are Ivory Coast and Ghana. Even in these perfect climates, however, cocoa is fickle: Extended dry spells can ruin the crop, and too much water breeds disease and lower yields. The worst culprit is something called black pod disease, which can lead to crop losses between 30 and 90%.”

Such unpredictable forces have the ability to send cocoa prices soaring, a major boon for those already possessing it via futures contracts. Starbucks and other coffee houses have been known to employ such contracts, which entail purchasing multiple metric tons, as hedges against cocoa price can cause occasional spikes.

Live cattle

Photo (John Morgan)

As the foundation of much of the world’s beef supply, live cattle find themselves traded daily and feverishly on the world markets. Live cattle (as opposed to feeder cattle, the other kind traded) is any cattle from calf to about 600-800 pounds. Raised mostly in California, Colorado, Kansas, Arizona, Nebraska and Texas, live cattle are then traded from 10:05AM-2:00PM in contract sizes of 40,000 pounds during February, April, June, August, October and December.

Major traders of this commodity include meat manufacturers, grocery chains, and certain restaurant chains, all of whom are affected significantly by rises or falls in the prices of beef.

Lean hogs

Photo (Dok)

Like live cattle, lean hogs are traded in contract sizes of 40,000 pounds and during the same months. Produced mostly in the Midwest (specifically Iowa, Minessota, North Carolina and Illinois), the average hog is raised for six months to roughly 250 pounds before being slaughtered and made available on the world markets according to TradeMeats.com, who also notes that the cost of hog feed greatly influences the supply of pork.

Traders are advised to follow the movements of day to day hog trading via the Hogs and Pigs Report, released quarterly, and the CMA Lean Hog Index, a two day average of prices. The United States is currently the world’s largest exporter of pork.

Sugar no. 11

Photo (Clif1066)

Sugar no. 11 is simply a distinction used by traders to denote raw cane sugar in its pure, unprocessed form (shown above.) Traded in contract sizes 0f fifty tons at roughly $11.20 per contract, Sucrose.com reports that sugarcane in this form is responsible for nearly 3/4 of all world sugar production, making it a commodity of tremendous importance to any business or industry dependent on sugar. In addition to the risk of poor harvests that confront all agricultural commodities, sugar trading has also become subject to political risks, like India’s recent banning of new futures contract trading.

Brazil is the world leader in sugar production at present, producing over fourteen million tons per year and exporting six million annually. Australia chips in with 5.5 million tons produced and 4.7 million exported.

For more on commodities, visit our commodities investing center.

A country’s economic worth can be measured in more ways than just its GDP and national debt. It is also important to consider the economic potential that lies in the harvesting of the natural resources within its borders. This map shows the top producing countries of each resource, or the proved reserves in the case of oil and natural gas. Each circle represents the percentage of the world’s total that the country produced in the last two years. Though some of the resources are renewable and some are not, it is interesting to see which parts of the world are rich in resources that are essential to our way of life, and to consider what this map might look like 10 or 100 years from now.

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