Diamond Are What?

Are diamonds anything like an investor’s best friend?

Photo: ArielGold. Source: Wikipedia

Diamonds are an incredible instrument. They are so dense and transparent at the same time that light bends quite sharply when it enters or exits the gemstone. They’re incredibly hard, but can also be trimmed and formed. By cutting a gem into just the right shape with the ideal number of facets in just the right places, a diamond can seem to have “fire” inside it: the reflection and refraction of light entering and exiting, so it seems that the stone almost has its own internal light.

Diamonds have been used in jewelry and special occasions for millennia, with most of them coming from India, the “jewel in the British Crown.” The modern era of diamond mining and marketing began with their discovery in South Africa in the late 19th century. Many small mining companies were amalgamated into the De Beers company, which had a monopoly on the world’s diamond market from 1910 until 2005. De Beers was a classic monopoly, increasing the price of the gems by limiting their supply.

The “Big Hole” mine in South Africa. Photo: Rudolph Botha. Source: Wikipedia.

They also marketed diamonds to consumers to increase demand. A young copywriter working on a De Beers campaign coined the phrase, “A Diamond is Forever,” in 1947, one of the best advertising slogans ever. Between De Beers’ marketing success and the postwar boom in marriages and a booming economy and a few successful movies and popular songs, it suddenly became compulsory to begin marriage with a relatively common, depreciating piece of compressed carbon cut into odd shapes.

Economics can be delayed, though, but they won’t be denied. Diamonds aren’t scarce and they aren’t investments. The prices of old jewelry at an estate sale is typically a fraction of the retail price. Once they controlled virtually all of the inexpensive South African production, De Beers inflated prices by limiting supply. They only sold their rough diamonds through a syndicate, and only at specified times. They built up a surplus, and any time a small producer threatened their control, they flooded that market with supply to drive that producer out of business.

But artificially high prices invite more production. New mines opened in Russia, Australia, and Canada. One by one, diamond mines broke away from De Beers’ control. Eventually, members of De Beers’ controlling family ownership wanted to get out of the family business and they sold a majority ownership stake to a competing public company. And synthetic diamonds now cost significantly less to produce than natural stones.

And artificially high prices depress demand. Millennials don’t want what their parents and older friends have and don’t want what they’ve been told to have. They tend to be more concerned with sustainability and ethical production – the movie “Blood Diamond” was a hit – and more value conscious. And they’re marrying later.

Photo: Jeffrey Beall. Source: Flikr. CC-BY-2.0

So don’t be surprised when you hear about turmoil in the jewelry business. Diamonds aren’t forever. The only thing about consumer tastes that’s truly forever is that they forever

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2019-07-31T05:55:58-04:00July 31st, 2019|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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