Finance and economics | Buttonwood
Why diamonds are losing their allure
As an investment category, at least
Sep 13th 2023, image: satoshi kambayashi
The appeal of a diamond, for a ring on a finger or to string on a
necklace, rests on its sparkle. Its precise value is determined by
how well the stone is cut, its colour, its size (also called its
“carat”) and whether it contains flaws. The clearer, heavier,
closer to colourless and more perfectly cut the rock, the better.
The appeal of a diamond for an investor is that, in addition to
being nice to look at, it has historically oCered a steady return on
investment. Given the opacity of the market, and the broad
variety of gems that are available, long-run price data are scarce. But a paper by Luc Renneboog of Tilburg
University, which was published in 2015, analysed thousands of auctions each year, finding that the
average return between 1999 and 2012 rivalled those of stocks and property. Holders of diamonds would
have earned a handsome 8% or so a year.
Recently, though, these steady returns have given way to enormous volatility. De Beers, a consortium that
has long monopolised the supply of diamonds, has reduced the price of two-to-four carat uncut stones—
a popular category because they can be made into one-to-two carat engagement rings—by 40%, according
to Bloomberg, a news service. On September 13th the company announced that it would re-run its iconic
“a diamond is forever” advertising campaign in an attempt to boost demand.
Stable returns in the past were partly brought about by steady demand. Just as with the investment case
for gold, another rare and precious commodity, the logic for holding diamonds tends to be strongest during
periods of economic uncertainty. At the same time, the main use of diamonds is in jewellery, which means
that prices have tended to do well during periods of prosperity, too.
But the most important factor was monopolistic supply. For more than a century De Beers managed to
dominate the production of gems. This market structure facilitated steady price increases in two ways, as
Mr Renneboog has noted. First, by stockpiling supplies De Beers created scarcity. Second, the firm curbed
speculation, and the volatility it brings. Although De Beers controlled some 80% of the global supply of
diamonds in the 1980s, since then its share has been eaten into by competitors, which include Alrosa, a
Russian rival. The company now produces just a third of supply.
Another problem is emerging from laboratories. They are producing artificial gems, which are made by
applying pressure to carbon, rather than digging stones from the ground, and are identical to the naked
eye. Such stones have been available since the 1980s, but even as recently as 2018 made up a tiny fraction
of the market, at just a few percentage points. In the years since, more lab-grown jewels have entered the
market—and their market share has risen to around a tenth.
De Beers may have inadvertently hastened this transition. The company began to sell lab-grown diamonds
at rock-bottom prices in 2018, when such stones fetched about 80% of the price of mined ones. The goal
was to diCerentiate between the two types of gems, in order to diminish the appeal of lab-grown stones.
The Clear Cut, a New York-based purveyor of engagement rings, has adopted guerrilla marketing tactics to
make the same point. It oCers customers who buy a ring worth $10,000 or more a free lab-grown
alternative, which can be used as a “travel ring” when visiting dubious places. Many lab-grown stones now
fetch just 20-30% of the price of similar mined stones.
De Beers argues that, as the supply of lab-grown gems accelerates, the price gap between the two types
of stone will continue to widen, making the newcomers unappealing for engagements. If recent price
movements are anything to go by, though, the tactic appears likely to backfire—after all, mined prices are
plunging in the wake of lab-grown ones.
Admittedly, this may not be entirely the result of a structural shift in the market. American couples date for
about three years before getting engaged, and thanks to covid-19 very few people were out and about
meeting potential husbands or wives in 2020. An unusually small number of people are probably getting
engaged this year.
But this is the sort of fluctuation an all-powerful diamond cartel would have been able to smooth out by
reducing supply. Slashing prices instead is a clear indication of diminished market power. That is good
news for those looking to pop the question or acquire a new trinket. It is rather less appealing for those
considering investing in the gems. ■
COMPREHENSION QUESTIONS
1. What factors determine the value of a diamond, according to the passage?
2. What historical advantage did diamonds oCer as an investment, and what was the average return
mentioned in the text?
3. Describe the recent trend in diamond prices mentioned in the text. How has it aCected De Beers?
4. What were the key factors contributing to the stable returns of diamonds in the past?
5. How has the market share of De Beers changed over time, and what are the contributing factors?
6. Explain the emergence of artificial gems and their impact on the diamond market.
7. How did De Beers attempt to diCerentiate between lab-grown and mined diamonds, and what were the
results?
8. What argument does De Beers make regarding the future appeal of lab-grown gems for engagements?
9. How has the COVID-19 pandemic aCected the diamond market, according to the passage?
10. What does the passage suggest about the current market power of diamond cartels and its
implications for consumers and investors?
