Diamonds: How Much Do They Really Cost?

The economics of diamonds are a pretty complicated thing.  Although pretty amazing advances have been made in the past 20 years that allow diamonds to be created in a laboratory, almost all of them are mined from the Earth.  The effort and energy expended to dig them up, process them and get them to your local jewelry store is extraordinary.  The cost of that effort is reflected in the price you pay, but there is a lot more than money at stake here.

For diamonds to even exist in the first place, you need the right ingredients, incredible pressure and a lot of patience.  The right ingredients are simple.  For that crystal clear diamond, you really only need one ingredient, which is carbon.  And ideally, you want as little of anything else as possible.  Colored diamonds, such as blue, pink or green have trace amounts of other materials in them, but they are the exception, not the rule.  The pressure needed is pretty hard to explain without imagining the weight of a continental plate.  Patience is definitely a virtue, as they take a few million years to form.  Luckily, the Earth has been around for a while and has front loaded the materials, pressure and time and even had time to spare to push them up to the surface where human beings can get at them.  While nature has a knack for providing us with some pretty beautiful things without any additional contribution required from us, the brilliant princess cut that refracts light perfectly needed the spark of human ingenuity to make shine.  But the inclusion of human ingenuity can wait.

While diamonds have been found in many places, there are certain locations where they exist in decent enough concentrations to make it worth mining for them.  Several of these locations exist in places like Russia, Canada and India, but the biggest concentrations seem to lie in Africa.  Because there are relatively few locations where they can be mined, sole control of those locations would allow their owners to charge any price they choose.  Around the year 1880, when the industrial revolution was hitting its stride and deep mining operations became a possibility, a great deal of effort was spent to make that monopolistic dream a reality. Cecil Rhodes, who began his career renting water pumps and equipment to miners searching for diamonds, formed the De Beers corporation to begin his own mining future.  Not satisfied with working a single claim, he bought out his neighbors individually.  By 1902, the De Beers group controlled or owned 90% of the world’s diamond production, which meant if you wanted or needed diamonds, you were going through them.  Not satisfied with merely controlling the production (and incidentally, the price) of raw diamonds from the world’s mines, De Beers, which was beginning to make Rockafeller’s Standard Oil look like it was franchising a lemonade stand, moved to take control of the diamond cutting and wholesale cut diamond market.

As mentioned earlier, rough diamonds directly from the mine are prime examples of missed potential.  It is only when an artisan carves the uncut stone into specific geometric shapes that the true beauty and glistening shine comes through.  Each diamond is unique, regardless of its place of origin, and for hundreds of years, gem cutters have made a life of bringing the maximum glisten from each stone they work.  Prior to De Beers, gem cutters would acquire rough stones through miners directly or through travelling merchants, negotiating prices each transaction.  Control of the wholesale diamond market changed everything.  De Beers established a series of regularly scheduled diamond sales and forbade any merchants attending them from purchasing rough stones from any other provider; else they lose their admittance to the scheduled events.  Instead of allowing these distributors to bid individually on stones, they only allowed rough diamonds to be purchased in lots.  The cost of these lots were set by De Beers and were not negotiable.  Through restricting purchasing through any other provider and by making the price nonnegotiable, De Beers successfully cornered the market on diamonds worldwide.  When the economy was slow or demand was down, they artificially reduced the supply of stones sold at the scheduled events to fix the price wherever they wanted it.  With the success of each marketing campaign, demand increased.  Although gem cutters and jewelers were at the mercy of De Beers’s fixed pricing structure, there was more than enough margin on the finished products to ensure that everyone in the chain played ball.  These extreme margins that the gem cutters and jewelers enjoy not only keep them in business, it serves to control the secondary resale market for diamonds.

The highest markup on diamond jewelry is seen in the final link in the supply chain, which is between a jeweler and you.  It’s typical that the markup on a diamond you may purchase is at least 100%.  That 100% markup is not on the price you see on the tag, but the final price you actually paid after the long negotiations.  In a situation where you want to outright sell your diamond (not trade in your existing one for a larger stone), you can expect to be offered no more than 30% of your original purchase price from any reputable dealer, if they will agree to purchase it at all.  Jewelers can purchase newly cut diamonds for less than 50% of what they sold you your diamond for, why would they spend any more on one that they would need to spend time and money to prepare for resale?  When advertisements state that a diamond is forever, it may be because unless you’re willing to lose 75% of the original purchase price, you will own it forever.

While those individuals involved in the process of bringing rough diamonds to market manage to make a fair living off their trade, not everyone involved in diamond production does so well.  The process of mining diamonds is a grueling one.  Almost all of those places are in the third world, where the concept of labor laws or even an individual’s rights simply don’t exist.  Some of the most abundant mines in the world exist in Africa in total war zones, where even governments or corporations can’t establish a foothold and warlords and generals use slave labor to mine diamonds to fund their wars and regimes.  Even in countries where rule of law exists, individuals working in diamond mines don’t get to see any of the value of what they’re digging out of the ground or benefit from the incredible profit margins that come from their sale.  Their lives are spent in mine shafts, risking their lives so that a rock can be polished, put in a setting and sold to the highest bidder.

The question of whether or not a diamond is worth the cost is a personal one.  Just as in everything in life, there are upsides and downsides to all topics.  You may be comfortable with funding a monopoly or may see the greater good in participating in supplying many jobs to many people in different walks of life.  Some may be benefiting more than others, but working in a diamond mine could be the only way to put food on the table for one’s family.  I only ask that you take a moment to think about the bigger picture before you make the purchase.

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