The Emperor is Naked...

Posted by: Maarten de Witte in MyBlog on Aug 05, 2010 Print PDF

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Maarten de Witte

So said the boy, who remains unnamed in the classic fable The Emperor's New Clothes by Hans Christian Andersen.   We all remember the story about nobody wanting to speak up at the risk of appearing "stupid or incompetent".  Not even the Emperor himself could see his invisible cloak, because he so desperately wanted hang onto his fantasy rather than face the obvious truth.

How might this parable apply to the diamond business?

I've been listening to a never-ending litany of rationalizations and justifications for diamond price increases for years.  The logic to the wisdom of the marketplace is as follows...

Diamonds are a non-renewable resource.  As such their supply is limited by nature.  It takes more than a ton of diamond-bearing Earth to yield one mere carat of diamond - and that's not necessarily one stone, nor is it always gem quality.

The existing mines are being depleted as we speak.  New mines take approximately 10-20 years to reach capacity.  We already know about recent discoveries. They can't possibly keep up with the expected increase in demand - what with the Grand-babies of the Baby Boomers all getting engaged in the next 10 years and consumption increasing apace in India and China. 

So demand outstrips supply and prices go up!  Its a sure bet.

But "the Emperor is Naked", say I.  

The truth is that diamond is a virtually indestructible resource.  Just try cutting one and you'll agree with me.  Diamond doesn't depreciate over time.  It needs no maintenance or sustenance to continue to survive.  Every diamond mined from the ground ADDS to the supply of diamonds.  

Diamonds that have been sold into the US market since the beginning of the 20th century STILL EXIST.  In massive quantities!!!  Albeit in most cases they are held as "excess inventory" or "stockpiled" in consumers' individual jewelry boxes.  

The fact is that there is no difference between an "old diamond" and a "new diamond" - Mother Nature quit making them all millions of years ago.

Years ago I learned that nature abhors a vacuum.  Ultimately, I believe that when diamond prices get too high the market will respond.  A resale market WILL EMERGE.  It will be born from the "elephant in the room" that nobody seems to see.

What do you think?  Is there an opportunity rearing its head?  

Comments (7)Add Comment
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written by David Squires, August 09, 2010
Good point, Maarten. Absolutely agree with you on the rise of the resale market, which I think is probably already occurring. (As people emptyi their jewelry boxes to sell gold, it only makes sense that they will get what they can for their diamonds as well.)
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written by Maarten de Witte, August 09, 2010
For your information... check out the following http://www.idexonline.com/Diam...rivers.asp
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written by Need to be Anon, August 09, 2010
It's starting already. I am seeing more and more promotions offering to buy diamonds from the public. I would imagine there will be some resistance once folks realize how little they are offered vs. what they paid (unless it was decades earlier or they have an heirloom stone).

There isn't nearly enough space to quote here, but it would be worth finding an article written by Fred Cuellar on diamondcuttersintl.com which deals with what he refers to as "the Diamond Overhang." He goes through the scenario that Mr. DeWitte describes, but to the next level -- what would happen if suddenly there was a rush to sell existing diamonds in private hands? It's a sobering narrative, hopefully one we will never have to contend with. However, knowing this potential exists can help us understand the market forces that drive our industry.

By starting buyback outlets, the industry could be defusing some of that potential, so that would be a plus. Aftermarket diamond buying is in its infancy, but I have no doubt this will grow in the next 12 months. The question I would have is if the majors would be able to cut into this niche? They found their way into gold buying, so don't think it couldn't happen....
CORRECTION
written by Need to be Anon, August 09, 2010
The article is called "Chapter 22 -- The Great Overhang" and it was written by Edward Jay Epstein. My apologies to Mr. Epstein. He summarized his views in an editorial for the New York Times last year.
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written by Maarten de Witte, August 09, 2010
Yes Need to be Anon, Edward J Epstein was just a bit ahead of his time. Like 28 years! His book was authored in 1982. He was taken as a crank, because he also wrote a much acclaimed "conspiracy theory" book about the Kennedy assassination. Nevertheless, his analysis of the "great overhang" was prescient. However, DeBeers and the marketplace managed to weather the Soviet threat. And, the notion that "a diamond is forever" (hence not to be resold) has indeed persisted. Over all Epstein's book covered a lot of essential and familiar territory. But, his prediction in the last Chapter (23) of the Coming Crash of 1983 certainly didn't come to fruition.
PS What the Minors Have, that the Majors Don't...
written by Maarten de Witte, August 09, 2010
The success of an emerging resale market will depend on close working relations with the "end consumer". That is precisely the ace-in-the-hole held by savvy retailers.
Diamonds are abundant
written by Charlie B, August 18, 2010
I couldn't agree more with the author. Just yesterday I called an importer (I used to import, traveling to Antwerp and Ramat-Gan) who quoted me -30 on a NON-certed, decent make (not ideal) imperfect stone. Is he crazy? With all the re-selling going on, I was stuck on 125 cts of melee (up to .40ct) and about 30 cts of other larger goods....just DUMPED it. If you think large stone prices will come down even more, (I agree), how long do any of you think it will be before the low end melee market comes back? I currently advertise to buy diamonds or make loans to people against the stones as collateral. Problem is on the other end when looking to sell. The market is quite small and isn't about to get larger, any time soon.

When I imported and mrft'd, I built high end goods. Now that I am buying "off the street" I was amazed at the junk that is out there...probably 95% of what we see is garbage. How can stores sell such junk and call it jewelry?? I see BORT being called diamond.

Sorry to switch gears for a second, but if a green beryl comes in that is VERY light, we call it green beryl, NOT emerald. I think the industry should make some official distinction between gem quality diamonds and stuff that, literally, looks like rock salt. e.g.; if it has zero clear space, it's NOT acceptable for jewelry, and cannot be called "diamond".

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