A Gem That Lost Its Luster

By Alexander L. Taylor III

The precious stone looks better in a ring than on a balance sheet

The official opening two weeks ago of the Jwaneng diamond mine in Botswana, near the southern tip of Africa, should have been an occasion for celebration. After all, Harry Oppenheimer, 73, the chairman of De Beers, the cartel that controls the production and sale of most of the world's diamonds, has called the site "the most important primary deposit found anywhere in the world since the discovery at Kimberley more than a century ago." The rich ore of the Jwaneng mine is expected to produce 3 million carats of precious stones in 1982, and eventually 4.5 million carats annually, nearly one-quarter of De Beers' total output.

This year, however, many of the diamonds laboriously extracted from the arid Botswana earth will not be sold. They will instead be added to the growing De Beers stockpile of gems. The reason is that there is a worldwide glut of the precious gems. The vaults of diamond wholesalers are overflowing with rough as well as cut and polished stones, and the market for investment-grade diamonds has virtually collapsed. A rare one-carat D-flawless-grade stone that brought $62,000 at the peak of the market in 1980 is now worth only $15,000 or less, a decline of more than 75%. De Beers' sales arm, the Central Selling Organization, saw profits tumble 46% in 1981, and Oppenheimer says that an upturn is not yet in sight.

In an effort to put some sparkle back into the diamond industry, De Beers has launched a heavy, worldwide advertising campaign. Even before the famous slogan "A diamond is forever" was coined in 1948, ads linking the polished stones with romance and marriage were routinely used to boost sales. Through publicity in Japanese magazines, for example, De Beers has helped create a market for diamonds where none had existed for 1,500 years. As Edward Jay Epstein points out in his book The Rise and Fall of Diamonds: the Shattering of a Brilliant Illusion, which was published last May, the percentage of Japanese brides with diamond engagement rings has increased from less than 5% to 60% in just 13 years.

In the U.S. this year, De Beers will spend $26 million on advertising, up 75% from 1980. The budget for television commercials alone has quadrupled, to $10 million. To spur sales of larger, more profitable stones, a new slogan has been created: "A diamond of a carat or more is only one in a million." For less affluent buyers, De Beers is urging American parents to give their teen-age daughters small, heart-shaped diamond jewelry "for those special occasions ... as only a parent can."

While the price of diamond jewelry has remained relatively stable, the market for investment diamonds has collapsed because of speculation run amuck. In the late 1970s, dealers in Tel Aviv, one of the world's diamond-cutting centers, began buying bushels of stones on credit after the government subsidized interest rates at 6%. At the same time, global inflation was causing investors to dump paper assets like currency and stock, and buy tangible goods, particularly gold, real estate and gems. The cost of an investment-grade D-flawless diamond, which had risen from $1,250 in 1967 to $7,000 in 1976, suddenly soared. By early 1980, the price had reached an unsustainable $62,000.

As investors clamored for more stones, companies sprang up to meet the demand. Ignoring business practices that were transplanted from Europe a century ago, young salesmen began marketing the gems as investments, not jewelry. Some of the new firms used hard-sell, boiler-room techniques. Customers buying a stone were given a certificate that theoretically verified its worth by attesting to its color and brilliance. The largest firm in the field was International Diamond Corp., which in its six years of existence sold 250,000 stones. IDC buyers received a promise that the firm would help resell the stones and were told that no customer had ever lost any money this way.

Diamonds turned out to be a poor investment, largely because they are hard to sell. Experts commonly disagree about the exact characteristics of a given stone, which means that price quotations can vary widely. Moreover, there is no ready resale market for diamonds. After buying stones at retail, individuals usually find that they can be sold back to jewelers and diamond dealers only at the wholesale price, which is normally 50%--or even less than 50%--of retail. Says William Goldberg, president of the Diamond Dealers Club, the leading U.S. diamond traders association: "Diamonds are like real estate. My home is a terrific investment until I go to sell it.

Then I may have to drop the price and give the buyer a second mortgage."

As with other hard assets and collectibles, the end to the diamond-speculation boom began in 1980, when inflation started to level off and interest rates shot up. That made investments like money-market funds more valuable, and diamonds, gold and other hard assets less attractive. Despite its sharp price increase last week, gold is selling for only about $380 per oz., well below its January 1980 peak of $850. A portfolio of U.S. coins is now worth 15% less than it was a year ago.

International Diamond Corp. filed for reorganization under the Bankruptcy Act last February, after reselling only $30 million worth of stones for its customers. The Federal Trade Commission has accused the firm of improperly claiming that it was selling diamonds at wholesale prices and falsely portraying them as risk-free investments. One of the company's founders, Bernhard Dohrmann, and about 100 ex-salespeople have joined a new company called Diamond Resource International.

Even though the investment market for diamonds has soured, the stones appear to be just as popular as ever. American sales of diamond jewelry increased by 7% last year, to $5.5 billion. Among the most successful items are diamond stud earrings for young girls, which cost an average of $100 a pair. Americans seem to believe that a diamond is still a desirable piece of jewelry, even if it has not been a very good investment.

-- By Alexander L. Taylor III.

Reported by Peter Hawthorne/ Johannesburg and Jack E. White/ New York

With reporting by Peter Hawthorne, Jack E. White

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