Is a diamond's price a true measure of its value?

September 3, 2004

Dear Cecil:

I have heard that diamond prices are held at an artificially high price by the De Beers company and that many Africans live a life of despair and poverty while mining diamonds. What is the truth about the diamond market? Most important, can I use it as an excuse for not buying diamond gifts for my wife?

Far be it from me to get involved in family arguments, but I bet if your wife knew the real story she'd prefer her next gift to be a nice socket-wrench set. Diamonds are a con, pure and simple. The topic is vast, so we won't discuss worker exploitation or for that matter "blood diamonds" used to finance African wars. Instead I'll focus on whether diamonds are worth the exorbitant sums charged for them. Answer: Of course not. Prices are kept high by a cynical cartel that preys on vanity and stupidity.

More than 20 years ago journalist Edward Jay Epstein wrote the definitive expose of the diamond business, initially published in the Atlantic Monthly in 1982 and subsequently as a book, The Rise and Fall of Diamonds. Epstein, it must be said, is a conspiracy buff, but his research on diamonds is pretty credible. His central contention is that diamonds have little inherent value; their perennially high price is solely a function of clever promotion and ruthless manipulation of the market. You ask: Isn't that true of any high-value product? Nope. Take gold, a true commodity in the sense that it's fungible, as the economists say--like quantities of gold are freely interchangeable. Gold's purity can be readily assayed and it's indestructible for practical purposes, making it a reliable store of value. Even now that the world has abandoned the gold standard, gold's price has held up well on the open market.

Not so with diamonds. Despite the hype, diamonds aren't forever; they can be damaged or destroyed. The value of diamonds varies widely depending on grade and, despite efforts at standardization, is basically arbitrary--experts often disagree sharply on the worth of a particular gem. Sure, the same can be said of paintings or other collectibles. The difference is that the world diamond market is largely controlled by a single private enterprise, the South Africa-based De Beers cartel. The geniuses behind De Beers recognized early on that a stable, profitable diamond industry depended on controlling both supply and demand. De Beers rarely discovers new sources of diamonds; rather, it focuses on controlling existing ones, limiting production, and if necessary buying up surplus gems and stockpiling them to prop up the market. It sets prices arbitrarily and cuts off supplies to dealers who buy through unauthorized channels. On the marketing side, De Beers hired advertising firms, starting with N.W. Ayer in the late 1930s, to render axiomatic the idea that diamonds = true love. De Beers and Ayer didn't invent diamond engagement rings but did rescue a fading concept--in 1932 worldwide diamond sales had been only $100,000. Ayer's ploys ranged from planting news stories about newly betrothed celebrities flaunting big rocks to positioning diamonds as heirlooms, preventing the market from being flooded with secondhand goods. (The market for used diamonds is dismal, by the way.) The campaign worked--U.S. wholesale diamond sales increased from $23 million in 1939 to $2.1 billion in 1979. The J. Walter Thompson agency performed a similar miracle in Japan in the 1960s, essentially creating a tradition of diamond engagement rings out of thin air.

Throughout all this De Beers has successfully fended off threats due to political upheaval, competing producers, and even the U.S. justice department (the firm recently paid a $10 million fine to settle an antitrust case). The big challenge today is synthetic diamonds. In a widely noted article last fall, Wired magazine reported on two start-up firms, one in Florida and the other in Boston, that had begun manufacturing gem-quality artificial diamonds. Synthetic diamonds have been available since the 1950s and are commonly used in industrial abrasives, but till now have made little headway in the gem market due to prohibitive manufacturing expense. Supposedly the new artificial diamonds, particularly those made by chemical vapor deposition (CVD), are both cheap to produce and, unlike knockoffs such as cubic zirconium, virtually indistinguishable from natural diamonds even in the lab.

So, the jig's up for De Beers, right? Maybe, maybe not. The last chapter of The Rise and Fall of Diamonds, entitled "The Coming Crash of 1983," described a scenario in which a concatenation of factors, including a flood of diamonds from new mines in Australia, would trigger "the final collapse of world diamond prices." It didn't happen (although De Beers did lose market share), and Epstein has omitted the chapter from the online version of his book. De Beers has dodged plenty of disasters in its history, and I'd hesitate to write the final pages yet.

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