The Stone-Cold Truth

By staff April 1, 2007

Magazines like this are filled with stunning images of beautiful diamonds, and the appeal of these gems is undeniable. I know, because for more than 25 years my lovely bride has bristled at my refusal to buy her a diamond engagement ring. Despite designer clothes, luxury cars, beautiful houses and whatever else I may have showered her with, I’ve been doomed to live the rest of my life as a cheapskate whose devotion will always be in doubt.

But now Leonardo DiCaprio has come to my rescue. DiCaprio plays a diamond smuggler in the recent movie, Blood Diamond. The film exposes the truth about so-called "conflict" diamonds, which are illegally mined by tortured slave workers and used to finance terrorist insurrections against legal African governments.

The movie shows, in horrific detail, why "conflict" gems should be avoided at all costs. Tens of thousands of people have been mutilated or killed by savage gangs in the quest for these stones. The Kimberly Process promulgated by the United Nations requires that all diamonds be certified by the legal government of the exporting country. This has helped, but as the movie demonstrates, diamonds can be easily smuggled from conflict areas to non-conflict countries, from which they can then be certified and placed into commerce. Efforts by one Canadian producer to laser-engrave ID numbers on all stones proved too expensive for general adoption. Much more must be done to keep "blood diamonds" out of circulation and thereby remove their value to terrorists and gun runners.

But what about the plain old legal diamonds that adorn the fingers of most brides in the United States and Japan—the two largest markets for gem-quality diamonds?

I object to those, too—but on financial rather than moral grounds. The price of diamonds is not set by rarity or the difficulty in finding them. Indeed, they are abundantly available. First found in India around the fourth century B.C., diamonds were discovered in Brazil in the 1700s and what is now South Africa in 1867. Today millions of carats of diamonds are produced in more than 25 countries on five continents.

And while diamonds can be chipped or shattered and even burned, nearly every diamond ever produced and cut into a gem still exists. Commercial-grade diamonds are frequently ground down to powder for use in cutting and polishing; however, gem stones last indefinitely in safe deposit boxes, private vaults, museums and jewelry boxes around the world. Warehouses in South Africa, Belgium, Israel, England, Russia and New York are bulging with raw and cut stones.

Diamonds are a commodity, like oil, gold, copper or pork bellies. Look at the Wall Street Journal any day and you’ll see a list of commodities and their prices for that day. You will not see diamonds listed. Almost all commodities fluctuate in value on a daily and sometimes hourly basis according to supply and demand. But diamond prices are controlled by a South African cartel, DeBeers Consolidated Mines and its subsidiaries, which has monopolized the diamond business since its founding in 1888. The DeBeers cartel not only sets the sale price for diamonds, it also controls the supply to maintain that price.

The famous DeBeers slogan, "A diamond is forever," really means that if you buy a diamond, you had better be prepared to keep it forever. There’s very little resale market for diamonds. Few retailers will buy back a diamond they’ve sold you, and if you find one that will, you’ll probably get less than half of what you paid.

The retail markup on diamonds is from 100 percent to 200 percent. A commercial buyer, if you can find one to buy your diamond, will usually pay somewhat less than the wholesale value.

For almost 100 years, DeBeers was able to tightly control the supply of new diamonds and thereby maintain the price and rarity. Controlling the diamonds that were already in the hands of consumers was another story, however. Something had to be done to assure that consumers would hold their diamonds off the market to protect the value of new stones being produced.

In 1938 DeBeers hired a New York advertising agency, N. W. Ayer, to create a new image for diamonds in the United States. The strategy exceeded all expectations. Diamonds were made to be synonymous with love and sentiment. The "engagement ring," almost always bought by a man for a woman, had to be a diamond. The bigger and better the diamond, the deeper the love. Who do you think devised the rule that an engagement diamond should cost at least two months’ earnings? I understand that, in view of the ever-increasing controlled price, the formula has recently been increased to three months’ salary.

Of course, because of the sentiment an engagement ring is now imbued with, eventually selling the stone would be unthinkable. Instead, diamonds are to be treasured and handed down through the family for generations. Thus the stones would be forever off the market and unable to compete with the controlled price of new stones. Every now and then, auction houses and even department stores have sales of "estate" jewelry. The diamonds in this category invariably sell for 20 to 50 percent less per carat than similar stones offered at retail. Diamonds are one of the few areas where "antique" means cheaper.

Until recently, diamonds were priced according to the four Cs: carat (weight), cut, clarity and color. Off-color stones were considered less desirable, as the color was the result of impurities in the stone. While some of the most famous and gigantic diamonds are colored (the famous Hope diamond, for example, is blue), for years, their sizes made up for the impurities. The diamond that sparks the drama in Blood Diamond is pink, but it’s also the size of a bird’s egg. Now marketers have succeeded in reversing the old stigma against colored diamonds and are vigorously—and successfully—promoting a new class of stone: the "fancy-color" diamond. Pink, blue, and varying shades of yellow are among the options commanding a premium price.

Science is also catching up with the cartel. Imitation diamonds have been around for centuries, from cheap rhinestones to the more recently developed cubic zirconium stones—which are indistinguishable from real diamonds except by experts with jeweler’s loupes. General Electric figured out how to grow small commercial diamonds years ago, but now at least one company, Gemesis Corporation, which is located in Sarasota, has invented a way to manufacture diamonds that are equivalent to natural stones even to most expert eyes. Gemesis calls their diamonds "laboratory-grown" to distinguish them from mined diamonds. They presently manufacture yellow to orange fancy-colored stones, but a company source says they also have the ability to manufacture clear stones. So far, Gemesis stones have not posed a threat to mined diamonds, but heightened consumer awareness, especially after Blood Diamond, might give them a push.

Meanwhile, DeBeers and its advertising agency have been busy. The three-stone pendant and diamond tennis bracelets have helped keep the mines humming. One of the newest products: the 25-stone eternity ring (necessary to use up the millions of small diamonds from Russia) to prove that we still love our spouses.

Will my marriage survive the lack of these critical signs of passion and devotion? I hope so, although my wife, despite everything I tell her about cartels, marketing and resale values, still sighs longingly when a friend displays a sparkling new piece of diamond jewelry. Maybe they are forever after all.

Before he retired to Sarasota, attorney Howard Tisch provided legal services to the Attorney General of the State of New York for the bureau of Consumer Fraud and Protection and served as Deputy Commissioner of Consumer Affairs for the City of New York.

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