Diamonds are virtually worthless.
Or at least, they are worth a lot less than you might imagine. The story of how the diamond came to be viewed as the rarest and most coveted of gemstones, found on the fingers of married women worldwide, is a story of insatiable greed, ruthless strong-arming, and most of all, brilliant marketing.
Today when a woman gets engaged in most of the developed nations of the world, she expects a diamond engagement ring and most likely will also have some sort of diamond setting on her wedding ring as well. After all, the diamond is the rarest of gems, and what better way to show a women exactly how much you love her than with the gift of a diamond. Right?
But this was not always the case. In fact, as recently as 100 years ago a woman whose husband-to-be could afford one was at least as likely to wear a ruby, sapphire, or emerald on her wedding ring as a diamond. Indeed, in countries as far apart as India and England, it was the ruby, not the diamond, that was exalted as the most beautiful and rarest of gemstones, and thus it is not surprising that in India, the word "lal" means "red," "ruby," and "beloved" as well. Indeed, statistically speaking, the ruby is the rarest of the major gemstones, followed by the emerald.
The Rise of De Beers
Enter a family of South African of Afrikaner heritage who in the early 1900s owned a small but productive diamond mine - The De Beers. Through a combination of business acumen, worker exploitation, and large quantities of luck, the De Beers corporation had become one of the world's biggest producers of diamonds by the 1930s. At first openly in the 1930s and then secretly during World War II, De Beers gained a leg up on the competition by selling industrial diamonds to a desperate Adolph Hitler, with whom other more principled diamond producers refused to deal.
By the 1950s De Beers controlled a majority of the Earth's diamond supply. Over the next three decades, the company went on a massive buying spree, acquiring mines in South America, the United States, India, and the rest of Africa, asserting one of the world's largest and most successful monopolies over one of its most coveted items.
With its monopoly power, De Beers has been able to control diamond prices worldwide by dumping or withholding diamonds in its private stockpile. As a privately owned company not traded on any stock market, De Beers is not required to divulge its assets, profits, or the size of its diamond hoard, although it has been estimated that even if all diamond production were ceased tomorrow, De Beers has enough diamonds secreted away to maintain current rates of diamond consumption for 15-20 years.
This stockpile has been the key to maintaining the De Beers monopoly. Whenever a new mine was discovered or a competitor attempted to undersell De Beers' inflated prices, the company would simply flood the market with diamonds, driving prices so low that its rivals would be brought to their knees, either forced to sell out to De Beers or to sign agreements agreeing to follow De Beers' orders on pricing.
Protecting the Prize
The simple fact is that diamonds are simply not as rare as De Beers would have you believe. Oh sure, at one time diamonds were fairly rare, but over the course of the 20th century thousands of new diamond lodes have been discovered and hundreds of new mines have been opened. Annual diamond production in 1988 was approximately 100 times what it was in 1900. In the 1980s, De Beers had to contend with huge new diamond finds in Australia and Russia, which it did by buying out the Australian mines (and promptly shutting them down) and signing an agreement with the Soviets that there would be no further exploitation of the largest diamond fields known to man - the Siberian Diamond Fields. It is estimated that a diamond that sells today for $100 would actually be worth about $2 in a reasonably competitive open market.
Moreover, in the late 1960s scientists had discovered a way to synthetically produce industrial grade diamonds. At first these artificial diamonds were no threat to De Beers because the company had largely abandoned the industrial sector to focus on the gemstone market, and because the first artificial diamonds could easily be detected with simple tests that exposed their inferior chemical structure. But when a team of General Electric scientists began perfecting a way to artificially synthesize flawless gem-quality diamonds indistinguishable from their natural counterparts, De Beers bought off the company executives and the project was abruptly terminated.
But even after eliminating alternative sources of diamond production, the company faced another, more fundamental problem. De Beers is in the business of selling diamonds. But while diamonds don't truly last forever, they do last an awfully long time. In selling a product that couldn't be burned, melted, crushed, or corroded away, De Beers had to find a way to prevent people from reselling their diamonds and thus undercutting the company's ability to set artificially high prices.
The De Beers' solution was to establish an ingenious distribution system whereby authorized De Beers dealers commission and actually own almost all the jewelry that people buy, and not the actual jewelry stores themselves. The stores showcase all but the least expensive items on loan from the authorized intermediary dealers, and only have to pay the dealers for the pieces they actually sell. The stores agree to the system because it minimizes they risk they have to assume, while the dealers agree not to sell directly to customers (and thus wrecking the system) because if they do, De Beers will cut off their supply of diamonds completely.
The end result is that it is virtually impossible to resell diamonds for anything close to their original purchase price. It does not make sense for stores to repurchase diamond pieces at full price when they can display as much as they want for free, and the dealers are forbidden to buy diamonds from anyone except De Beers. Customers are encouraged to think of diamonds as an investment, but in many cases they would be better off putting their money under the mattress. In the rare cases when people trying to resell diamond jewelry actually find an independent dealer willing to buy back their piece and are not offered "store credit," they can get only a tiny fraction of the price they paid. Smart thieves don't steal diamonds unless they can steal a massive hoard all at once, and they never, ever steal diamond jewelry - only unset diamonds, preferably uncut as well.
Winning Her Heart
But ruthless business practices account for only half of De Beers' astonishing success story. The other half is in the marketing. As mentioned, a century ago most women did not receive a diamond engagement ring from their husbands to be. In fact, most women did not receive an engagement ring at all - the wedding band itself was considered sufficient to appease the womanly craving for self adornment.
But beginning in the 1930s, De Beers and other diamond producers (who still existed, back then) began heavily pushing the diamond engagement ring as a required final step in the proper middle-class courtship. But advertisements might not have been enough, so De Beers reached the customer's psyche via one of their weakest spots - movies. De Beers began loaning expensive diamond jewelry to movie studios in the 30s (and continues to do so today), with the stipulation that the pieces be worn only by the biggest stars. If the jewelry was not worn enough or by the right people, De Beers would stop loaning the pieces (or even start loaning them to the studio's rival). This practice continues today and is especially noticeable at the Oscars, watched my millions worldwide, wherein most of the women in attendance are wearing borrowed diamond jewelry owned and loaned by authorized De Beers dealers.
In Britain, consumption of diamond jewelry, especially engagement rings, increased dramatically in the 1950s and 60s at the same time De Beers began loaning extravagant diamond jewelry to a young Queen Elizabeth. In the 60s and 70s De Beers introduced the ubiquitous A Diamond is Forever ad campaign, which for decades now has blatantly equated a man's love for his wife with whether he buys her a diamond or not. The campaign has to be considered one of the most successful in advertising history, considering that 90 percent of American women and 89 percent of British women receive diamond engagement rings up from about 55 percent in the 1950s. Even in a place like Japan, where traditionally there were no rings of any kind - wedding, engagement, or otherwise - a 1999 survey revealed that an astonishing 80 percent of Japanese women who marry receive a diamond engagement ring, whereas less than 5 percent received one as recently as 1967. And when the success of the engagement ring proved not enough to satisfy De Beers, they began introducing new concepts like the eternity ring and the 25th anniversary diamond.
Today De Beers controls about 70 percent of the world's supply of diamonds, still enough to control prices, but down from its 1980s heyday of 85 percent. And the sun may be beginning to set on the De Beers diamond empire. With the collapse of the Soviet Union the agreement not to exploit the Siberian fields was rendered moot, and indeed newly opened mines in Russia have accounted for the lion's share of the the decline in De Beer's marketshare. Moreover, small-scale diamond-mining operations in India and Southeast Asia have become more efficient and collectively competitive, while remaining too numerous and undocumented for De Beers to easily buy out, and new diamond fields continue to be discovered in Australia, Canada, and elsewhere. Already DeBeers has been forced to modify some of the most abusive of its trading practices. The final blow may come in the form of increasing efforts in recent years to create synthetic gem-quality diamonds, which De Beers is already trying to combat with various schemes such as "watermarking" its "true" diamonds.
Nevertheless it would be foolish to underestimate a company which has weathered so many storms with such ruthlessness and ingenuity. De Beers still remains a vastly wealthy and powerful company with a stockpile of diamonds that would still be worth millions even if diamonds were to become significantly devalued in the future. Suffice to say that even with its marketshare reduced to "only" 70 percent, the De Beers corporation is not going anywhere in the near future, nor will you or I be buying $2 diamond rings any time soon.
Not that any of this matters. The fact remains that when I get married, my wife is going to want a diamond engagement ring, and there is precious little I can do to change her mind. I know this. Maybe I am bitter?
PBS, BBC, and Australian Broadcasting. "The Diamond Empire." (90 min. television show)
Salon.com. "Not Forever." http://archive.salon.com/business/feature/2000/09/27/diamonds/index.html
The Atlantic Monthly. "Have You Ever Tried to Sell a Diamond?" http://www.theatlantic.com/issues/82feb/8202diamond1.htm
Wired Magazine. "The New Diamond Age". September 2003.