Why diamonds may not be forever

Responding to the global recession, the De Beers diamond cartel has cut back production at its South African mines and reduced the price of its rough diamonds between 15 and 20 per cent.

Even so, industry sources in South Africa estimate that diamond prices could fall another "59-63 per cent." But the real fear of the diamond cartel is not just that retail prices will fall -- it has managed that problembefore -- but that the public will begin to sell its hoard of diamonds, or what is called at De Beers "the overhang."

At the heart of this concern is the reality that, except for those few stones that have been permanently lost, every diamond that has been found and cut into a gem since the beginning of time still exists today. This enormous inventory, which overhangs the market, is literally in -- or on -- the public's hands. Some hundred million women wear diamonds, while millions of others have it as family heirlooms.

De Beers executives estimate that the public holds more than 500 million carats of gem diamonds, over 50 times the number of gem diamonds produced by the cartel in any given year. The moment a significant portion of the public begins selling diamonds, the cartel would be unable to sustain the price of diamonds, or maintain the illusion that they are such a rare stone. Or as the ad slogan claims, "forever."

As Harry Oppenheimer, who headed the cartel for over 25 years pointed out, "wide fluctuations in price, which have, rightly or wrongly, been accepted as normal for most raw materials, would be destructive of public confidence in the case of a pure luxury such as gem diamonds, of which large stocks are held in the form of jewellery by the general public."

The genius of the cartel was creating this "confidence" in the myth that the value of diamonds was eternal. In developing a strategy for De Beers in 1952,advertising agency NW Ayer noted: "Diamonds do not wear out and are not consumed.

New diamonds add to the existing supply in trade channels and in the possession of the public. In our opinion old diamonds are in 'safe hands' only when widely dispersed and held by individuals as cherished possessions valued far above their market price."

In other words, for the diamond illusion to survive, the public must be psychologically inhibited from ever parting with their diamonds. The advertising agency's brief was to make women value diamonds as permanent possessions, not for their actual worth on the market. So it issued subtly designed advertisements to foster a sentimental attachment to diamonds.

Women were induced to think of diamonds as their "best friends."The diamond-holding public, including those who inherited diamonds, had to remain convinced that the gems retained their monetary value. If they attempted to take advantage of changing prices, the retail market would be chaotic.

Even during the Great Depression of the 1930s, there was only a limited overhang, since the mass-marketing of diamonds had begunageneration before the crash. De Beers, shut its mines and borrowed to buy up someindependent mines, andwas able to weather the crisis.

Today, however, with many generations of the diamonds it mass-marketed overhanging the market, and most of global diamond production in independent hands, it no longer is in a position to balancesupply and demand.

Adding to this situation, diamond cutters, manufacturers and dealers, have, as of 10 days ago,an estimated $40 to $50 billion worth of diamonds in mines in the pipeline that will intensify the downward spiral when the gems reach the market later this year. If falling prices shatter the carefully nurtured illusion that the value of diamonds is eternal, and the public begins selling even part of its hoard, De Beer's nightmare scenario would come true: The overhang would flood the market.

Source: http://www.dnaindia.com/