Tresumes From a diamond, to a ring on a finger or to a chain on a necklace, it depends on how sparkling it is. Its exact value is determined by how well the stone is cut, its color and size (also called “carat”), and whether it contains blemishes. The clearer, heavier, closer to colorless and more cut the rock, the better.
The appeal of diamonds to an investor is that, in addition to being beautiful to look at, they have historically provided a consistent return on investment. Due to the ambiguity of the market and the wide variety of gemstones available, long-term price data is scarce. But a paper by Luc Rennebaugh of Tilburg University, published in 2015, analyzed thousands of auctions each year and found that the average return between 1999 and 2012 rivaled those of stocks and real estate. Diamond holders would have received 8% or so annually.
But recently, these fixed returns have given way to huge volatility. De Beers, a consortium that has long held a monopoly on the supply of diamonds, has cut the price of 2- to 4-carat uncut stones — a popular category because they can be made into 1- to 2-carat engagement rings — by 40%. According to what was reported by Bloomberg News Agency. On September 13, the company announced that it would restart its popular “Diamonds are Forever” advertising campaign in an attempt to boost demand.
Stable returns in the past have been achieved in part due to steady demand. As with investing in gold, another rare and valuable commodity, the logic of holding diamonds tends to be stronger during periods of economic uncertainty. Meanwhile, the main use of diamonds is in jewelry, which means prices tended to rise well during boom periods as well.
But the most important factor was monopoly supply. For more than a century, De Beers has dominated gemstone production. This market structure facilitated steady price increases in two ways, Reinbaugh noted. First, by hoarding supplies, De Beers created scarcity of supplies. Second, the company has curbed speculation and the volatility it brings. Although De Beers controlled about 80% of the world’s diamond supply in the 1980s, its share has since been eaten up by rivals, including Alrosa, a Russian rival. The company now produces only a third of the world’s supply.
Another problem arises from laboratories. They produce synthetic gemstones, which are made by pressing carbon, rather than digging stones from the ground, and are identical to the naked eye. Such stones have been available since the 1980s, but until 2018 they made up a small portion of the market, by only a few percentage points. In the years since more lab-grown jewelry entered the market, its market share rose to about a tenth.
De Beers may have accidentally accelerated this shift. The company started selling lab-grown diamonds at very low prices in 2018, when the price of these stones reached about 80% of the price of mined stones. The goal was to distinguish between the two types of gemstones, in order to reduce the attractiveness of laboratory-grown stones. Clear Cut, a New York-based engagement ring retailer, has adopted guerrilla marketing tactics to make the same point. It offers customers who purchase a ring worth $10,000 or more a free lab-produced alternative, which can be used as a “travel ring” when visiting suspicious places. Many lab grown stones now fetch only 20-30% of the price of similar mined stones.
De Beers says that as the supply of lab-grown gemstones accelerates, the price gap between the two stone types will continue to widen, making new entrants unattractive for contracts. However, if recent price movements can be taken into account, this tactic is likely to backfire – after all, mine prices fall in the wake of lab-mined mine prices.
Admittedly, this may not be entirely the result of a structural shift in the market. American couples date for about three years before they get engaged, and thanks to the coronavirus, very few people are going out to meet potential husbands or wives in 2020. And there will likely be an unusually small number of people getting engaged this year.
However, this is the kind of volatility that the powerful diamond cartel could have mitigated by reducing supply. Instead, lower prices are a clear indicator of waning market power. This is good news for those looking to pop the question or get a new trinket. It is less attractive to those considering investing in gemstones. ■