21 May Diamonds are forever… right?
The following article comes off the back of a fascinating podcast by the Freakonomics author Stephen Dubner. A full link to the podcast is provided at the end.
Generally speaking, it is believed that diamonds are rare. In fact, within the US, diamonds are the second-most-common item amongst households. The most common is television sets, whilst children come in at a distant third.
When it comes to value, scarcity can play a significant role in the going price for an item. Edward Jay Epstein is an investigative reporter, and diamonds are one of his favourite subjects. He’s been writing about the diamond industry for decades, including a book called, The Rise and Fall of Diamonds. He once performed an experiment that might interest you.
Whilst writing his book, Epstein decided he would try and sell a diamond. To do this, he went out and purchased a loose diamond from New York’s diamond district (West 47th Street) and paid $2,000 for it.
A week later, he went back to the diamond dealers on the same very street. You would expect that he might have lost some of his capital, given that the dealers on the street need to make some margin on their product. To his surprise, the offers ranged $300 and $400. As an investment, that’s an 80% loss within a week.
Epstein learned the markup alone on diamonds was very substantial – meaning that they lost enormous value when sold in the secondary market.
His investigation into why and how diamonds came to be so expensive led him to some startling discoveries.
The tradition of gifting diamonds as an engagement gift only dates back to the 20th century (that’s just the last 115 years). Historically, diamonds were worn by kings and queens because they were considered precious, partly because they were so hard to find. Fast forward to late 19th century, in the city of Kimberley, South Africa, where geological formations called pipes were discovered that enabled miners to generate cheap and large supplies of diamonds. During the early 1990s and through the Great Depression, diamonds fell to $5 per carat. Not only were people not giving diamonds, but supply was as high as it had ever been in history. Today that price ranges between $3,000 and $27,000 depending on the quality.
At prices of $5 per carat, diamond miners were losing money hand over fist. They were concerned. What then ensued was the creation of a cartel, known as the De Beers Mining Company, which restricted supply via the hoarding of secret diamond stockpiles. When demand dried up, they even considered dumping them in the mid-Atlantic! It was the introduction of diamonds to Hollywood through the advertising agency and infamous ‘Mad Med’ N.W. Ayer that the diamond market was revived.
Beautiful as they may be, it is clear that diamonds are not quite ‘forever’. In order to ensure that diamond supplies remained limited, the brilliant marketing executed by De Beers convinced owners (past and present) that diamonds would always increase in value and that they were a safe investment, not just a physical representation of your love for another person. The reality however, is quite different. Diamonds are nice for engagement rings and dress jewelry. But as an investment? Forget it!
The full podcast is definitely worth listening to, I highly recommend it:
About Reuben Zelwer
Reuben Zelwer established Adapt Wealth Management in 2011 to help time poor clients achieve financial freedom. For over 15 years, Reuben has helped professionals, executives, business owner and those approaching retirement make the most of their circumstances by making good financial decisions. Reuben’s professional practice is complemented by substantial voluntary work, which has included setting up financial literacy and savings programs in the local community.