Diamonds Are Forever, But is their Value?

Diamonds Are Forever, but is their Value?

            Written by Anne Johnson, Managing Director of MJ Gabel

 

Diamonds; they are the quintessential representation of value, wealth, luxury, strength, sparkle, and beauty. According to De Beers Consolidated Mines Company of South Africa, “A Diamond is Forever”(De Beers, 2011). These four words seem to have capsulated the retail diamond industry and are responsible for planting a misconceived idea of a diamond’s value.

Diamonds are one of the hardest natural materials found on earth, which makes them unique in their own right. Not to mention a rough diamond can be cut, faceted, and polished to give extraordinary light reflection that is difficult to match. Diamonds do in fact take millions of years to create, and thus a diamond really is forever.

During the 1940’s The DeBeers Company (the near-monopoly sized company who still dominates and controls the majority of the diamond market) cleverly linked the longevity and strength of a diamond as the never-ending symbol of love with its slogan “a diamond is forever” (Cockburn, 2002). The company was able to intertwine the product with an emotion, and create the ultimate idea of ever-lasting love and eternal value. This phrase intends the consumer to believe that a diamond will always hold its worth. What DeBeers and other diamond companies fail to mention is that while a diamond will never be worth nothing, it will also never be worth what you originally paid for it.

Diamonds do not come out of the mine looking as beautiful as they do in the jewelry store, and a lot of sweat goes into creating the sparkle defined in the stone. All of the costs that go into the mining, creation, distribution, marketing, transporting, and selling of these stones gets transferred onto the consumer. Take this as an example:

“The 120 million carats of rough diamonds extracted globally from the Earth every year weigh a total of just 24 tons, a single truckload, but those 24 tons are sold by the producers for about seven billion dollars. Since they cost less than two billion dollars to extract, the profits are already immense. By the time the diamonds reach the customers waiting at the far end of the pipeline, the truckload, set in jewelry, is worth over 50 billion dollars” (Cockburn, 2002).

Many insist that the extremely high inflation of diamonds is purely artificial and based solely on the jewelry company’s greed to make as much profit as possible, and not on traditional supply and demand (Cockburn, 2002).  A consumer must keep in mind that upon purchasing a diamond, you are not only paying for the stone itself, but also the profit of the seller.  The price of a diamond is directly related to what the market will bear, and the buyers, not the sellers, control the price.

If a customer will pay the seller 80%-150% profit, in addition to the diamond, then the seller can command that price. You will not buy a diamond, or other piece of fine jewelry from a jeweler and then sell it back to them for the same price—they will not give back their profit. This notion of the buyer controls the price still holds firm when you go to sell the ring back; the jeweler now becomes the buyer and will only buy a stone that he knows he can sell for more than he bought it for.

One way to think of reselling a diamond would be to match it to the resale of a car. Say a person bought a new car from the dealer for $15000. They drove it for a few years and then decided to sell it. You would think they were certifiably insane if you went to look at the car and they told you they wanted you to pay $14999 for it. As the buyer you would know that that original purchase price included the dealers profits, the manufacturer’s profits, the cost of making the vehicle, the parts, ect., and not to mention now the car is used. The same is true when reselling a diamond.

Many people take the plunge into an expensive diamond from a fancy jeweler because they think it is a wise investment (Christine & O’Donnell, n.d.). The reality is that they may be sorely disappointed if ever they need to sell that same diamond or use it to trade for a different one. As an investment, a diamond is not a wise one, unless you are of the understanding that you will take a large loss when it comes time to sell.

One word of imperative advice when venturing into the diamond market would be to always buy a diamond loose, and at a wholesale level. This way you are purposely and strategically avoiding the overhead costs, and large profit margins of traditional jewelry stores; in a sense outsmarting the profit driven industry at it’s own game.

References

Christine, Dugas, and O’Donnell Jayne. “To cut, color, carat and clarity, factor in cash to ..” USA Today n.d.: Academic Search Complete. Web. 17 Feb. 2012.

Cockburn, Andrew. “Diamonds: The Real Story.” National Geographic 201.3 (2002): 2. Academic Search Complete. Web. 17 Feb. 2012.

De Beers Jewellery. 2011. Web. 17 Feb. 2012. <http://www.debeers.com/&gt;.

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