Tuesday, September 17, 2013

Don't be the last fool to own a diamond

Diamonds are valuable - except for the last fool who owns it.

In a suite at a five-star Hong Kong hotel one Friday morning, a row of 64 pink, blue and red diamonds lay on display, each encased in individual boxes. A line of security guards outnumbering buyers eyeing the boxes, each guard appropriately armed with weapons that would bring down any one silly enough to think the unthinkable.

Chinese buyers wonder around the array of diamonds, each knowing that they share this honour with other privileged invited guests. By mid afternoon all 64 rocks are sold to a handful of buyers for an undisclosed amount of money.

China has the unenviable privilege of being the second largest diamond market in the world after America.

For a rock that has little or no intrinsic value and is in plentiful supply, it has created a US$80 billion industry in China, enough to buy the country of Kenya and mop up all the beautiful islands of Maldives at the same time.

If there is no intrinsic value and it is not scarce, then why are diamonds so valuable?

They are valuable simply because Gerold M. Lauck, from a New York advertising agency and Henry Oppenheimer from De Beers, told us so back in 1938.

Between Gerold and Henry, they invented the intrinsic value of diamonds.

The agency created one of the most powerful campaigns in the world successfully linking the value of love to the size of a rock. De Beers monopolised global production, the supply chain and severely restricted and controlled re-sell markets.

By mid to late 1940s the scene was set to price its products to whatever level the company deemed it to be.

Diamonds are indeed forever, as once bought you will not be able to re-sell it unless of course you can find a bigger fool to buy it from you. 

History is rigged with examples of individuals, companies and governments unsuccessfully selling their diamonds. The disastrous attempt by Israel to offload their US$850 million stockpile of investment-grade diamonds in 1970s was one example. After a long a exhaustive search, they found one buyer - De Beers themselves offering a steeply discounted price. Many dealers and investors fell into hard times as a result of this re-sell void.

Dealers all around the world have an unwritten rule not to buy diamonds from the public unless it is bought back at severely reduced price. Walk down Fifth Avenue New York with a diamond under your arms trying to sell it, would be a futile exercise as a London-based consumer magazine MoneyWatch found out with their decade long test diamond experiment. The magazine tried selling their gem-quality diamond bought 10 years earlier in London and New York, but no retailer nor dealer in either cities were willing to pay cash for it. One dealer was willing to do a diamond-to-diamond swap based on the dealer's valuation and the dealer was non-other than one of De Beers' own chains.

In short when you buy a diamond, you will never be able to realise the price you paid for initially. Many have tried selling and failed. Most simply resign to keeping their diamonds and live under the illusion that they have bought a valuable piece of junk. They have fallen into a value-trap that distills their love into a size of a 1gm rock and mortgaged part of their personal value systems to the whims of a multi-billion dollar conglomerate.

The diamond industry will make sure you do not sell your diamonds. They want you to keep it for good. Diamonds are indeed forever as there simply isn't a re-sell market. So buy diamonds by all means - just do not be the last fool to own it. 

1 comment:

Anonymous said...

Yes...In 1947 De Beers ran an enormously successful advertising campaign ‘A Diamond is Forever’ – voted the best advertising slogan of the century in 2000. Followed 2 years later by the Broadway musical "Diamonds are a girl's best friend" with marilyn monroe..and the rest is his/herstory..