Diamonds may be forever, just not necessarily at the same price.

Diamonds may be forever, just not necessarily at the same price

Business Insider today draws our attention to the persistent drop in the price of diamonds, (actually, compared to many share and commodity prices diamonds look like a model of stability). The diamond rarity / ‘diamonds are forever’ thing is of course, the result of the best marketing campaign ever conceived. Anyone who has ever tried to sell a diamond would concur. Until the end of the 19th century diamonds were found in only a few places in the world, mostly in India and Brazil. In 1870 though, huge diamond mines were discovered near the Orange River in South Africa and the market was quickly swamped. The mine owners quickly realised that the value of their shiny stones depended on their scarcity and in 1888 they formed de Beers to control production and supply to create an illusion of scarcity. It worked better than they could ever have hoped.

It was an advertising agency in New York called N.W.Ayer who in 1938, on behalf of the Oppenheimer’s following years of falling prices, cooked up an advertising strategy that accentuated movie idol glamour, romance and social exclusivity which has proved so enduring for subsequent generations; "We spread the word of diamonds worn by stars of screen and stage, by wives and daughters of political leaders, by any woman who can make the grocer's wife and the mechanic's sweetheart say 'I wish I had what she has.” The story is a fascinating one. Did you know for example that the so called Eternity Ring is an entirely N. W. Ayers invention to create a market for smaller sized Soviet diamonds which de Beers also controlled, to "illustrate gems as small as one-tenth of a carat and give them the same emotional importance as larger stones," by marketing them to older women along the theme of ‘recaptured love.’

The price is of course largely illusory, well unless you walk into a Bond Street store to buy one. De Beers still holds huge inventory but the biggest inventory is held in the safes and under the mattresses of hundreds of millions of women.. If they ever decided to sell the price would collapse. That’s why hardly any expensive jewellers will buy diamonds back from customers. They will lose goodwill because of the low prices offered and they risk structural damage to their own market. So, they cleverly increased demand while controlling and reducing supply and regardless of what your dear wife / fiancée / girlfriend / life partner may think, investment grade diamonds, the ‘Elizabeth Taylor’ ones that grab the headlines at Christies are of a purity hardly ever found in the sparklies that we are encouraged to buy with ‘2 months salary,’ (Life Tip – I would encourage you not to attempt to explain any of this logic to the aforementioned, your dear wife / fiancée / girlfriend / life partner; it may end in ruinous emotional, physical or financial consequences).

Sustained demand for diamonds depends on continually creating new markets, as with the Eternity ring thing. De Beers were very successful in selling the diamond concept to the Japanese in the seventies and eighties as a path to Western values and romance. The same is happening in China and India today. Yet, the Chinese slowdown is manifesting itself in exporting deflation through many different channels. I think the price of diamonds has further to fall.