By Tom Zoellner Sunday, July 4, 2010
Diamonds, the ads say, are forever. Whether or not that's the case, diamond jewelry is a powerful symbol of status and love, and a $72 billion-a-year retail business worldwide. Diamonds can also be a key source of funding for violent conflicts in Africa. A series of wars bankrolled by "blood diamonds" in the 1990s prompted the United Nations to pressure De Beers and other jewelry industry giants to set up a program known as the Kimberley Process Certification Scheme to track the origins of each stone and assure customers that their diamonds are free of the stains of war and misery. But late last month, a four-day Kimberly Process meeting in Tel Aviv foundered over the question of whether to approve the export of diamonds from the Marange fields of Zimbabwe, where torture and murder go unpunished and profits fund the repressive party of President Robert Mugabe.
How did these glittering shards of compressed carbon become such a profitable business in the first place? The answer, it turns out, is complicated -- and many of the things we believe about diamonds aren't exactly true.
1. Diamonds are rare.
Although you won't stumble across a diamond while digging in your tomato garden, they are far more common than their cost suggests. The big gem companies aggressively control the supply that arrives at market, creating artificial scarcity and high prices.
This practice was born in the diamond fields of South Africa in the 1880s, when Cecil Rhodes, the chairman of De Beers Consolidated Mines, discovered that he could inflate prices at will simply by locking up the rights to every diamond mine he could find. His successor, Ernest Oppenheimer, developed a complex network of wholesalers that gave De Beers effective control of up to 90 percent of the world's rough-diamond trade through most of the 20th century, as the company hoarded stones in basement vaults and doled them out strategically.
The Oppenheimer family's iron grip on the global supply chain fell apart in the 1990s when Alrosa, a diamond company owned by the Russian government, and the Argyle Diamond Mine in Australia began to sell their stones independently. De Beers's share of the rough-diamond trade is now 40 percent and falling.
Interestingly, though, the end of the De Beers monopoly has not led to aggressive underbidding: Everyone involved seems to recognize that price wars could kill the diamond goose. And stockpiling still happens. Although a healthy 163 million carats or so are mined annually, a certain amount of that yield is withheld from the marketplace. Alrosa, in particular, sold a substantial percentage of its diamonds to a metals bank in 2009 rather than risk flooding the market in shaky economic times.
2. We've solved the problem of "blood diamonds."
Not really. The Kimberley Process has always been more like a low brick wall than a prison fence. It soothed the public and stopped the most timid criminals, but those who want to skirt it can easily find a way. The most frequent scam is to move diamonds across a border and have them relabeled. To take one example, the human rights group Partnership Africa Canada has shown that Guinea exports far more diamonds than it could hope to produce. The stones are coming from somewhere else, highlighting the strength of smuggling and money-laundering networks that could be used to transport blood diamonds should another war break out in the region.
In some cases in which smuggling was too blatant to ignore -- as in the Republic of Congo, the Ivory Coast and Venezuela -- the Kimberley committee took years to respond. When it finally investigated, it did so with an eye toward appeasing the host governments rather than cracking down on core problems.
Another weakness of the Kimberley Process is that it does not have a comprehensive definition of "conflict." It has thus ignored multiple outbreaks of violence and pillaging in African diamond fields because there was no "war" -- in the classic sense of one state fighting another or a state vs. organized rebels.
The Kimberley rules certainly never anticipated a situation like the one in Zimbabwe. The Marange diamond fields, containing some of the most plentiful deposits in the world, were discovered in 2006; soon afterward, Mugabe's soldiers moved in with helicopters. According to Human Rights Watch, they massacred at least 200 independent miners, then set up shop using conscripted laborers, including children. Because Kimberley has no provisions for what happens when a sovereign government kills its own citizens, it seems likely that "Mugabe diamonds" will be hiding in the global supply chain for some time.
3. Diamonds have long been symbols of love and marriage.
The tradition of the diamond engagement ring was largely concocted in the 1930s by De Beers's ad agency N.W. Ayer & Son -- the same Madison Avenue shop that would later craft the wildly successful slogan "A diamond is forever." Through magazine advertisements and Hollywood product placements, American customers were sold the idea that even a man of modest means must give a diamond to his betrothed, just as kings and aristocrats had done in several examples cherry-picked from European folklore.
In fact, diamonds historically served as tokens of statist privilege more than anything so frilly and ordinary as love. De Beers's appeal to royal fantasies (and, more subtly, male fears of inadequacy) nonetheless caught the American public's imagination, as did the notion that a groom is supposed to spend two months of his salary on a rock. This, too, was an invented custom. It was also flexible: In ad blitzes elsewhere, British customers were told to spend one month's salary, while the Japanese were told to spend three.
4. People will always buy diamonds.
Setting up a tollbooth at the gates of marriage was a brilliant move. But even so, history shows that diamond sales tend to mirror general consumer spending on luxuries. When hard times come along, diamonds are among the first items scratched from a shopping list. After the market spasms of 2008, diamonds had their worst year in decades, and even the resilient bridal market suffered. Total sales reportedly plunged 20 percent in the United States, and this spring, De Beers slowed work at its mines.
This isn't the first time that a recession spurred some reconsideration of the diamond ethos among consumers. The Asian currency crisis of 1997 tore a hole in the Japanese diamond market: Nearly every bride in that nation used to go to the altar wearing a diamond engagement ring. That's no longer the case today.
Bad press on humanitarian issues seems to have had a lesser effect, though. Even after the December 2006 release of the movie "Blood Diamond," a Leonardo DiCaprio action-adventure that paints a harrowing portrait of the African diamond trade, jewelers reported a reasonably good Christmas season.
5. The famous Four C's are the best markers for determining a diamond's value.
This handy mnemonic -- color, cut, clarity and carat -- was developed in the 1940s by the Gemological Institute of America, still the world's premier diamond-grading company.
Lore holds that every diamond is unique and a work of nature's art. But this idea was intimidating to American customers who wanted a firm readout of a diamond's worth before buying it. De Beers therefore loved the Four Cs, and the company sent speakers on a promotional tour to explain these standards as if they had been observed for centuries.
But when it comes to the most popular kind of diamond -- the round, brilliant-cut stone that is a staple of engagement solitaires -- a key factor embedded in the cut rating is likely to have a big impact on value. The "depth percentage," the relationship between the stone's top and the angle of its slanted sides, can make a diamond's glitter a little more spectacular thanks to the physics of light. The sweet spot? A ratio of 58 to 60 percent. Too many buyers of stones of less than two carats get hung up on minor gradients of color and clarity, which are invisible to the naked eye and meaningful only at the cash register.
For those who don't plan to routinely ogle their stone under a microscope, an easier formulation would be the Two S's: size and sparkle. The resale value of a diamond drops between 30 and 50 percent the moment you walk out of the store with it (a sixth myth is that they are good investments; they aren't) so you might as well enjoy its illusory light while you can.
Tom Zoellner is the author of "The Heartless Stone: A Journey Through the World of Diamonds, Deceit, and Desire."
Diamonds Are Bullshit - By Rohin Dhar
Yeah, they say three years’ salary. Michael Scott, The Office
American males enter adulthood through a peculiar rite of passage — they spend most of their savings on a shiny piece of rock. They could invest the money in assets that will compound over time and someday provide a nest egg. Instead, they trade that money for a diamond ring, which isn’t much of an asset at all. As soon as you leave the jeweler with a diamond, it loses over 50 percent of its value.
Americans exchange diamond rings as part of the engagement process, because in 1938 De Beers decided that they would like us to. Prior to a stunningly successful marketing campaign 1938, Americans occasionally exchanged engagement rings, but wasn’t a pervasive occurrence. Not only is the demand for diamonds a marketing invention, but diamonds aren’t actually that rare. Only by carefully restricting the supply has De Beers kept the price of a diamond high.
Countless American dudes will attest that the societal obligation to furnish a diamond engagement ring is both stressful and expensive. But here’s the thing — this obligation only exists because the company that stands to profit from it willed it into existence.
So here is a modest proposal: Let’s agree that diamonds are bullshit and reject their role in the marriage process. Let’s admit that as a society we got tricked for about a century into coveting sparkling pieces of carbon, but it’s time to end the nonsense.
The Concept of Intrinsic Value
In finance, there is concept called intrinsic value. An asset’s value is essentially driven by the (discounted) value of the future cash that asset will generate. For example, when Hertz buys a car, its value is the profit they get from renting it out and selling the car at the end of its life (the “terminal value”). For Hertz, a car is an investment. When you buy a car, unless you make money from it somehow, its value corresponds to its resale value. Since a car is a depreciating asset, the amount of value that the car loses over its lifetime is a very real expense you pay.
A diamond is a depreciating asset masquerading as an investment. There is a common misconception that jewelry and precious metals are assets that can store value, appreciate and hedge against inflation. That’s not wholly untrue.
Gold and silver are commodities that can be purchased on financial markets. They can appreciate and hold value in times of inflation. You can even hoard gold under your bed and buy gold coins and bullion (albeit at a ~10 percent premium to market rates). If you want to hoard gold jewelry however, there is typically a retail markup so that’s probably not a wise investment.
But with that caveat in mind, the market for gold is fairly liquid and gold is fungible — you can trade one large piece of gold for 10 smalls ones like you can a 10 dollar bill for 10 one dollar bills. These characteristics make it a feasible potential investment.
Diamonds, however, are not an investment. The market for them is neither liquid nor are they fungible.
The first test of a liquid market is whether you can resell a diamond. In a famous piece published by The Atlantic in 1982, Edward Epstein explains why you can’t sell used diamonds for anything but a pittance:
Retail jewelers, especially the prestigious Fifth Avenue stores, prefer not to buy back diamonds from customers, because the offer they would make would most likely be considered ridiculously low. The “keystone,” or markup, on a diamond and its setting may range from 100 to 200 percent, depending on the policy of the store; if it bought diamonds back from customers, it would have to buy them back at wholesale prices.
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Most jewelers would prefer not to make a customer an offer that might be deemed insulting and also might undercut the widely-held notion that diamonds go up in value. Moreover, since retailers generally receive their diamonds from wholesalers on consignment, and need not pay for them until they are sold, they would not readily risk their own cash to buy diamonds from customers.
When you buy a diamond, you buy it at retail, which is a 100 percent to 200 percent markup. If you want to resell it, you have to pay less than wholesale to incent a diamond buyer to risk their own capital on the purchase. Given the large markup, this will mean a substantial loss on your part. The same article puts some numbers around the dilemma:
Because of the steep markup on diamonds, individuals who buy retail and in effect sell wholesale often suffer enormous losses. For example, Brod estimates that a half-carat diamond ring, which might cost $2,000 at a retail jewelry store, could be sold for only $600 at Empire.
Some diamonds are perhaps investment grade, but you probably don’t own one, even if you spent a lot.
The appraisers at Empire Diamonds examine thousands of diamonds a month but rarely turn up a diamond of extraordinary quality. Almost all the diamonds they find are slightly flawed, off-color, commercial-grade diamonds. The chief appraiser says, “When most of these diamonds were purchased, American women were concerned with the size of the diamond, not its intrinsic quality.” He points out that the setting frequently conceals flaws, and adds, “The sort of flawless, investment-grade diamond one reads about is almost never found in jewelry.”
As with televisions and mattresses, the diamond classification scheme is extremely complicated. Diamonds are not fungible and can’t be easily exchanged with each other. Diamond professionals use the four C’s when classifying and pricing diamonds: carats, color, cut, and clarity. Due to the complexity of these four dimensions, it’s hard to make apples to apples comparisons between diamonds.
But even when looking at the value of one stone, professionals seem like they’re just making up diamond prices:
In 1977, for example, Jewelers’ Circular Keystone polled a large number of retail dealers and found a difference of over 100 percent in offers for the same quality of investment-grade diamonds.
So let’s be very clear, a diamond is not an investment. You might want one because it looks pretty or its status symbol to have a “massive rock,” but not because it will store value or appreciate in value.
But among all the pretty, shiny things out there - gold and silver, rubies and emeralds - why do Americans covet diamond engagement rings in the first place?
A Diamond is Forever a Measure of your Manhood
The reason you haven’t felt it is because it doesn’t exist. What you call love was invented by guys like me, to sell nylons. Don Draper, Mad Men
We like diamonds because Gerold M. Lauck told us to. Until the mid 20th century, diamond engagement rings were a small and dying industry in America. Nor had the concept really taken hold in Europe. Moreover, with Europe on the verge of war, it didn’t seem like a promising place to invest.
Not surprisingly, the American market for diamond engagement rings began to shrink during the Great Depression. Sales volume declined and the buyers that remained purchased increasingly smaller stones. But the US market for engagement rings was still 75 percent of De Beers’ sales. If De Beers was going to grow, it had to reverse the trend.
And so, in 1938, De Beers turned to Madison Avenue for help. They hired Gerold Lauck and the N. W. Ayer advertising agency, who commissioned a study with some astute observations. Men were the key to the market:
Since “young men buy over 90% of all engagement rings” it would be crucial to inculcate in them the idea that diamonds were a gift of love: the larger and finer the diamond, the greater the expression of love. Similarly, young women had to be encouraged to view diamonds as an integral part of any romantic courtship.
However, there was a dilemma. Many smart and prosperous women didn’t want diamond engagement rings. They wanted to be different.
The millions of brides and brides-to-be are subjected to at least two important pressures that work against the diamond engagement ring. Among the more prosperous, there is the sophisticated urge to be different as a means of being smart.... the lower-income groups would like to show more for the money than they can find in the diamond they can afford...
Lauck needed to sell a product that people either did not want or could not afford. His solution would haunt men for generations. He advised that De Beers market diamonds as a status symbol:
“The substantial diamond gift can be made a more widely sought symbol of personal and family success — an expression of socio-economic achievement.”
...
“Promote the diamond as one material object which can reflect, in a very personal way, a man’s ... success in life.”
The next time you look at a diamond, consider this. Nearly every American marriage begins with a diamond because a bunch of rich white men in the 1940s convinced everyone that its size determines your self worth. They created this convention — that unless a man purchases (an intrinsically useless) diamond, his life is a failure — while sitting in a room, racking their brains on how to sell diamonds that no one wanted.
With this insight, they began marketing diamonds as a symbol of status and love:
Movie idols, the paragons of romance for the mass audience, would be given diamonds to use as their symbols of indestructible love. In addition, the agency suggested offering stories and society photographs to selected magazines and newspapers which would reinforce the link between diamonds and romance. Stories would stress the size of diamonds that celebrities presented to their loved ones, and photographs would conspicuously show the glittering stone on the hand of a well-known woman.
Fashion designers would talk on radio programs about the “trend towards diamonds” that Ayer planned to start. The Ayer plan also envisioned using the British royal family to help foster the romantic allure of diamonds.
Even the royal family was in on the hoax! The campaign paid immediate dividends. Within three years, despite the Great Depression, diamond sales in the U.S. increased 55 percent! Twenty years later, an entire generation believed that an expensive diamond ring was a necessary step in the marriage process.
The De Beers marketing machine continued to churn out the hits. They circulated marketing materials suggesting, apropos of nothing, that a man should spend one month’s salary on a diamond ring. It worked so well that De Beers arbitrarily decided to increase the suggestion to two months salary. That’s why you think that you need to spend two month’s salary on a ring — because the suppliers of the product said so.
Today, over 80 percent of women in the U.S. receive diamond rings when they get engaged. The domination is complete.
A History of Market Manipulation
What, you might ask, could top institutionalizing demand for a useless product out of thin air? Monopolizing the supply of diamonds for over a century to make that useless product extremely expensive. You see, diamonds aren’t really even that rare.
Before 1870, diamonds were very rare. They typically ended up in a Maharaja’s crown or a royal necklace. In 1870, enormous deposits of diamonds were discovered in Kimberley, South Africa. As diamonds flooded the market, the financiers of the mines realized they were making their own investments worthless. As they mined more and more diamonds, they became less scarce and their price dropped.
The diamond market may have bottomed out were it not for an enterprising individual by the name of Cecil Rhodes. He began buying up mines in order to control the output and keep the price of diamonds high. By 1888, Rhodes controlled the entire South African diamond supply, and in turn, essentially the entire world supply. One of the companies he acquired was eponymously named after its founders, the De Beers brothers.
Building a diamond monopoly isn’t easy work. It requires a balance of ruthlessly punishing and cooperating with competitors, as well as a very long term view. For example, in 1902, prospectors discovered a massive mine in South Africa that contained as many diamonds as all of De Beers’ mines combined. The owners initially refused to join the De Beers cartel, joining three years later after new owner Ernest Oppenheimer recognized that a competitive market for diamonds would be disastrous for the industry:
Common sense tells us that the only way to increase the value of diamonds is to make them scarce, that is to reduce production.
Here’s how De Beers has controlled the diamond supply chain for most of the last century. De Beers owns most of the diamond mines. For mines that they don’t own, they have historically bought out all the diamonds, intimidating or co-opting any that think of resisting their monopoly. They then transfer all the diamonds over to the Central Selling Organization (CSO), which they own.
The CSO sorts through the diamonds, puts them in boxes and presents them to the 250 partners that they sell to. The price of the diamonds and quantity of diamonds are non-negotiable - it’s take it or leave it. Refuse your boxes and you’re out of the diamond industry.
For most of the 20th century, this system has controlled 90% of the diamond trade and been solely responsible for the inflated price of diamonds. However, as Oppenheimer took over leadership at De Beers, he keenly assessed the primary operational risk that the company faced:
Our only risk is the sudden discovery of new mines, which human nature will work recklessly to the detriment of us all.
Because diamonds are “valuable”, there will always be the risk of entrepreneurs finding new sources of diamonds. Although controlling the discoverers of new mines often actually meant working with communists. In 1957, the Soviet Union discovered a massive deposit of diamonds in Siberia. Though the diamonds were a bit on the smallish side, De Beers still had to swoop in and buy all of them from the Soviets, lest they risk the supply being unleashed on the world market.
Later, in Australia, a large supply of colored diamonds was discovered. When the mine refused to join the syndicate, De Beers retaliated by unloading massive amounts of colored diamonds that were similar to the Australian ones to drive down their price. Similarly, in the 1970s, some Israeli members of the CSO started stockpiling the diamonds they were allocated rather than reselling them. This made it difficult for De Beers to control the market price and would eventually cause a deflation in diamond prices when the hoarders released their stockpile. Eventually, these offending members were banned from the CSO, essentially shutting them out from the diamond business.
In 2000, De Beers announced that they were relinquishing their monopoly on the diamond business. They even settled a US Antitrust lawsuit related to price fixing industrial diamonds to the tune of $10 million (How generous! What is that, the price of one investment banker’s engagement ring?).
Today, De Beers’ hold on the industry supply chain is less strong. And yet, prices continue to rise as new deposits haven’t been found recently and demand for diamonds is increasing in India and China. For now, it’s less necessary that the company monopolize the supply chain because its lie that a diamond is a proxy for a man’s worth in life has infected the rest of the world.
Conclusion
I didn’t get a bathroom door that looks like a wall by being bad at business Jack Donaghy, 30 Rock
We covet diamonds in America for a simple reason: the company that stands to profit from diamond sales decided that we should. De Beers’ marketing campaign single handedly made diamond rings the measure of one’s success in America. Despite the diamond’s complete lack of inherent value, the company manufactured an image of diamonds as a status symbol. And to keep the price of diamonds high, despite the abundance of new diamond finds, De Beers executed the most effective monopoly of the 20th century. Ok, we get it De Beers, you guys are really good at business!
The purpose of this post was to point out that diamond engagement rings are a lie - they’re an invention of Madison Avenue and De Beers. This post has completely glossed over the sheer amount of human suffering that we’ve caused by believing this lie: conflict diamonds funding wars, supporting apartheid for decades with our money, and pillaging the earth to find shiny carbon. And while we’re on the subject, why is it that women need to be asked and presented with a ring in order to get married? Why can’t they ask and do the presenting?
Diamonds are not actually scarce, make a terrible investment, and are purely valuable as a status symbol.
Diamonds, to put it delicately, are bullshit.
This post was written by Rohin Dhar. He has a very patient wife
