World Diamond Market Is a Scam

The New York Times has an article today on the diamond market and how Russia is loading up on supply and waiting for the economy to recover.

I find the world diamond market fascinating because it’s almost completely rigged. If the free market had its way, diamonds would be insanely cheap.

The diamond market used to be controlled by De Beers. They’re the ones who run those “diamonds are forever” ads. (Sure they’re forever, all carbon is.) I believe that diamond rings are a wedding staple only in the United States. Lately, De Beers has fallen on hard times and Russia is taking over the market.

The recession also coincided with a settlement with European Union antitrust authorities that ended a longtime De Beers policy of stockpiling diamonds, in cooperation with Alrosa, to keep prices up.

Though it is a major commodity producer, Russia has traditionally not embraced policies that artificially keep prices up. In oil, for example, Russia benefits from the oil cartel’s cuts in production, but does not participate in them.

Diamonds are an exception. “If you don’t support the price,” Andrei V. Polyakov, a spokesman for Alrosa, said, “a diamond becomes a mere piece of carbon.”

You know the song, “carbon is a girl’s best friend.”

Comments

[Market Sniper:]

Well put! Did not realize that Russian diamond production was gem quality. Thought they were mostly industrial diamonds.

May 12 02:25 PM

[yellowhoard:]

I sure wouldn't be interested in gold if it could be made synthetically.

May 12 02:34 PM

[Market Sniper:]

Yellowhoard! LOL! Diamonds seem to be a bit like fiat currency.

May 12 04:39 PM

[The Geoffster:]

Diamonds are neither rare nor a store of value. At most, you can get back what you paid for them. The diamond cartel controls their issuance and convinces a gullible public to buy them. I'll take CZ thank you. My wife will never know.

May 12 08:47 PM

[a.shzad:]

"Price" is whatever someone is willing to pay...
If people are buying diamonds at exuberant prices.. so be it.
We know that diamond is just carbon, and also that Hollywood stars are wearing just clothes on the red carpet. However; marketing, presentation and a little bit of price control make the carbon a diamond and clothes ,designer artwork. Most interesting part is when someone buys a diamond... they are not really interested in the shiny white rock but mostly interested in the marketing or the price control. Thats on with most of the luxurious brands.

Oil was never a luxury its price control was nonsensical.

May 13 01:28 AM

[ricardoRI:]

Diamonds should not be considered an investment since the spread between wholesale and retail is so great. This does not make it a scam. Fur coats and art bought at a gallery also have a huge spread between wholesale and retail - yet nobody considers them a scam (undesirable, perhaps, but not a scam).

Does a CZ have the same authenticity as a diamond? Does polyester or a reproduction print have the same cachet as the originals? Diamonds have a lot more value and rarity than a Gucci handbag, and last a lot monger, too.

May 13 02:33 PM

[cynicman:]

This has been known for years. Give De Beers credit. They used an ingenious marketing strategy to artificially create a demand, and having succeeded in that, they then restricted the supply.

P. T. Barnum was right!!!

May 13 04:52 PM

[capt Brian:]

Yup, put a sparkly on ur finger, and gold in the vault.

May 13 10:31 PM

[willy nilly:]

"Industrial diamonds" hardly exist any longer as a natural-stone market. Man-made diamonds are more uniform, more reliable and more easily ordered in bulk than industrial-quality natural diamonds. Most diamond mines throw away industrials because there aren't buyers for "found" industrial diamonds. They all come from factories. GE is a major producer.


On May 12 02:25 PM Market Sniper wrote:

> Well put! Did not realize that Russian diamond production was gem
> quality. Thought they were mostly industrial diamonds.

May 15 04:15 PM

[User 416639:]

I've been in the diamond industry for almost 8 years and I cannot disagree more with ALROSA/Mr. Polyakov's comments, as they are truly misleading. I especially disagree with Mr. Polyakov’s comments that without stockpiling, diamonds become mere carbon. These comments not only discount the magic and beauty of diamonds, but have moreover been blown out of proportion by the press.

The majority of diamond mines in this world are controlled by a handful of mining companies, including De Beers, ALROSA, BHP Billiton, Harry Winston, and Rio Tinto. Although these large miners control a large part of the market, they certainly do not represent the entire market, although they are the price leaders.

Demand for rough diamonds at the wholesale level has traditionally been very buoyant compared with other parts of the pipeline. Competition for rough diamonds has been increasingly intense over the past decade or so. There are literally thousands of players dealing in diamonds across the world. The wholesale diamond market could possibly represent one of the most inefficient distribution structures in existence. This means that there is a lot of markup of diamonds through to the consumer level as the diamonds simply change hands too many times before getting to consumers.

So, although the mining of diamonds is relatively in concentrated hands, further down the pipeline, there is very broad fragmentation with thousands of companies competing for the same product – unpolished diamonds.

Given this fact, it is impossible for diamond prices to be artificially sustained without actual consumer demand for diamonds.

Why? Polished diamonds eventually need to be sold to a consumer and without that continued demand from actual consumers, the vast majority of these thousands of diamond dealers would simply not survive. And due to this intense competition, price competition is in fact very fierce. If anything, the luxury/appeal of polished diamonds is being adversely affected because there is so much discounting of diamonds at the retail level.

The diamond industry has been moving towards greater transparency since 2000 with De Beers' launch of Supplier of Choice. Our industry is not there yet in terms of being fully transparent, but at the same time, it does not mean we are not an ethical industry. As with every industry, there are players that do the wrong thing or occasionally say the wrong thing.

Maybe I’ve been brainwashed by all the De Beers advertising I’ve been exposed to, but what else could a man who’s not especially poetic give a woman to express his love for her? Unfortunately, a toaster just won’t make the cut.

May 19 02:12 PM