Subscribe in a readerHave You Ever Tried to Sell a Diamond?Posted by ahc99 on October 28th, 2008
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One of my biggest frustrations is how much of the world doesn’t seem to realize the largest fraud that is going on right in front of its face:
Photo by Swamibu
The Diamond Cartel run by De Beers.
It is a house of cards that De Beers has masterfully built in order to make people believe, dare I say worship, the idea that diamonds are unique, rare, and intrinsically valuable when it is anything but. Diamonds can be found all over the world, from Australia to Germany and especially in Africa. Merchants used to be able to dig them up by the ton, and in some places they still do. However, the diamond industry knew that the price of diamonds would plummet if the public could get a hold of them, so they locked away any excess and took a stranglehold on the number of diamonds available to people.
I found a great article at TheAtlantic that details the entire diamond industry and the monopoly that De Beers has had over any diamonds that show up in the market. These sections from the article shown below completely summarize how the De Beers cartel was formed and their subsequent brainwashing of the masses into believing that diamonds are rare and expensive:
The diamond invention—the creation of the idea that diamonds are rare and valuable, and are essential signs of esteem—is a relatively recent development in the history of the diamond trade. Until the late nineteenth century, diamonds were found only in a few riverbeds in India and in the jungles of Brazil, and the entire world production of gem diamonds amounted to a few pounds a year. In 1870, however, huge diamond mines were discovered near the Orange River, in South Africa, where diamonds were soon being scooped out by the ton. Suddenly, the market was deluged with diamonds. The British financiers who had organized the South African mines quickly realized that their investment was endangered; diamonds had little intrinsic value—and their price depended almost entirely on their scarcity.
Except for those few stones that have been destroyed, every diamond that has been found and cut into a jewel still exists today and is literally in the public’s hands. Some hundred million women wear diamonds, while millions of others keep them in safe-deposit boxes or strongboxes as family heirlooms. It is conservatively estimated that the public holds more than 500 million carats of gem diamonds, which is more than fifty times the number of gem diamonds produced by the diamond cartel in any given year. Since the quantity of diamonds needed for engagement rings and other jewelry each year is satisfied by the production from the world’s mines, this half-billion-carat supply of diamonds must be prevented from ever being put on the market. The moment a significant portion of the public begins selling diamonds from this inventory, the price of diamonds cannot be sustained. For the diamond invention to survive, the public must be inhibited from ever parting with its diamonds.
The major investors in the diamond mines realized that they had no alternative but to merge their interests into a single entity that would be powerful enough to control production and perpetuate the illusion of scarcity of diamonds. The instrument they created, in 1888, was called De Beers Consolidated Mines, Ltd., incorporated in South Africa.
De Beers proved to be the most successful cartel arrangement in the annals of modern commerce. While other commodities, such as gold, silver, copper, rubber, and grains, fluctuated wildly in response to economic conditions, diamonds have continued, with few exceptions, to advance upward in price every year since the Depression. Indeed, the cartel seemed so superbly in control of prices — and unassailable — that, in the late 1970s, even speculators began buying diamonds as a guard against the vagaries of inflation and recession.
The diamond invention is far more than a monopoly for fixing diamond prices; it is a mechanism for converting tiny crystals of carbon into universally recognized tokens of wealth, power, and romance. To achieve this goal, De Beers had to control demand as well as supply. Both women and men had to be made to perceive diamonds not as marketable precious stones but as an inseparable part of courtship and married life. To stabilize the market, De Beers had to endow these stones with a sentiment that would inhibit the public from ever reselling them. The illusion had to be created that diamonds were forever — “forever” in the sense that they should never be resold.
De Beers needed a slogan for diamonds that expressed both the theme of romance and legitimacy. An N. W. Ayer copywriter came up with the caption “A Diamond Is Forever,” which was scrawled on the bottom of a picture of two young lovers on a honeymoon. Even though diamonds can in fact be shattered, chipped, discolored, or incinerated to ash, the concept of eternity perfectly captured the magical qualities that the advertising agency wanted to attribute to diamonds. Within a year, “A Diamond Is Forever” became the official motto of De Beers.
Toward the end of the 1950s, N. W. Ayer reported to De Beers that twenty years of advertisements and publicity had had a pronounced effect on the American psyche. “Since 1939 an entirely new generation of young people has grown to marriageable age,” it said. “To this new generation a diamond ring is considered a necessity to engagements by virtually everyone.” The message had been so successfully impressed on the minds of this generation that those who could not afford to buy a diamond at the time of their marriage would “defer the purchase” rather than forgo it.
By 1979, N. W. Ayer had helped De Beers expand its sales of diamonds in the United States to more than $2.1 billion, at the wholesale level, compared with a mere $23 million in 1939. In forty years, the value of its sales had increased nearly a hundredfold. The expenditure on advertisements, which began at a level of only $200,000 a year and gradually increased to $10 million, seemed a brilliant investment.
This article also goes into the illusion of price stability for diamonds and how very difficult it is to ever turn a profit on reselling the diamonds you buy from diamond dealers, hence the title of the article:
Selling individual diamonds at a profit, even those held over long periods of time, can be surprisingly difficult. For example, in 1970, the London-based consumer magazine Money Which? decided to test diamonds as a decade long investment. It bought two gem-quality diamonds, weighing approximately one-half carat apiece, from one of London’s most reputable diamond dealers, for £400 (then worth about a thousand dollars). For nearly nine years, it kept these two diamonds sealed in an envelope in its vault. During this same period, Great Britain experienced inflation that ran as high as 25 percent a year. For the diamonds to have kept pace with inflation, they would have had to increase in value at least 300 percent, making them worth some £400 pounds by 1978. But when the magazine’s editor, Dave Watts,tried to sell the diamonds in 1978, he found that neither jewelry stores nor wholesale dealers in London’s Hatton Garden district would pay anywhere near that price for the diamonds. Most of the stores refused to pay any cash for them; the highest bid Watts received was £500, which amounted to a profit of only £100 in over eight years, or less than 3 percent at a compound rate of interest. If the bid were calculated in 1970 pounds, it would amount to only £167. Dave Watts summed up the magazine’s experiment by saying, “As an 8-year investment the diamonds that we bought have proved to be very poor.” The problem was that the buyer, not the seller, determined the price.
The magazine conducted another experiment to determine the extent to which larger diamonds appreciate in value over a one-year period. In 1970, it bought a 1.42 carat diamond for £745. In 1971, the highest offer it received for the same gem was £568. Rather than sell it at such an enormous loss, Watts decided to extend the experiment until 1974, when he again made the round of the jewelers in Hatton Garden to have it appraised. During this tour of the diamond district, Watts found that the diamond had mysteriously shrunk in weight to 1.04 carats. One of the jewelers had apparently switched diamonds during the appraisal. In that same year, Watts, undaunted, bought another diamond, this one 1.4 carats, from a reputable London dealer. He paid £2,595. A week later, he decided to sell it. The maximum offer he received was £1,000.
Selling diamonds can also be an extraordinarily frustrating experience for private individuals. In 1978, for example, a wealthy woman in New York City decided to sell back a diamond ring she had bought from Tiffany two years earlier for $100,000 and use the proceeds toward a necklace of matched pearls that she fancied. She had read about the “diamond boom” in news magazines and hoped that she might make a profit on the diamond. Instead, the sales executive explained, with what she said seemed to be a touch of embarrassment, that Tiffany had “a strict policy against repurchasing diamonds.” He assured her, however, that the diamond was extremely valuable, and suggested another Fifth Avenue jewelry store. The woman went from one leading jeweler to another, attempting to sell her diamond. One store offered to swap it for another jewel, and two other jewelers offered to accept the diamond “on consignment” and pay her a percentage of what they sold it for, but none of the half-dozen jewelers she visited offered her cash for her $100,000 diamond. She finally gave up and kept the diamond.
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.”
To make a profit, investors must at some time find buyers who are willing to pay more for their diamonds than they did. Here, however, investors face the same problem as those attempting to sell their jewelry: there is no unified market in which to sell diamonds. Although dealers will quote the prices at which they are willing to sell investment-grade diamonds, they seldom give a set price at which they are willing to buy diamonds of the same grade. 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. Moreover, even though most investors buy their diamonds at or near retail price, they are forced to sell at wholesale prices. As Forbes magazine pointed out, in 1977, “Average investors, unfortunately, have little access to the wholesale market. Ask a jeweler to buy back a stone, and he’ll often begin by quoting a price 30% or more below wholesale.” Since the difference between wholesale and retail is usually at least 100 percent in investment diamonds, any gain from the appreciation of the diamonds will probably be lost in selling them.
“There’s going to come a day when all those doctors, lawyers, and other fools who bought diamonds over the phone take them out of their strongboxes, or wherever, and try to sell them,” one dealer predicted last year. Another gave a gloomy picture of what would happen if this accumulation of diamonds were suddenly sold by speculators. “Investment diamonds are bought for $30,000 a carat, not because any woman wants to wear them on her finger but because the investor believes they will be worth $50,000 a carat. He may borrow heavily to leverage his investment. When the price begins to decline, everyone will try to sell their diamonds at once. In the end, of course, there will be no buyers for diamonds at $30,000 a carat or even $15,000. At this point, there will be a stampede to sell investment diamonds, and the newspapers will begin writing stories about the great diamond crash. Investment diamonds constitute, of course, only a small fraction of the diamonds held by the public, but when women begin reading about a diamond crash, they will take their diamonds to retail jewelers to be appraised and find out that they are worth less than they paid for them. At that point, people will realize that diamonds are not forever, and jewelers will be flooded with customers trying to sell, not buy, diamonds. That will be the end of the diamond business.”
Truth be told, everyone around me believes that diamonds are valuable yet I have never met one person that has actually sold a diamond before. After reading that article, I cannot understand why anyone would still logically fall into the trap of buying diamonds. Maybe it isn’t logical and is just all psychological. I guess De Beers did their job too well. After all, diamonds are forever, until they get “shattered, chipped, discolored, or incinerated to ash” that is.
