| Responding
to the global recession in 2009, De Beers’ once mighty
diamond cartel shut down about half its global production.
Earlier this year, it closed Orapa Number 1 in Botswana,
the world’s biggest diamond mine, as well as smaller
ones in South Africa, Namibia, and Canada, and, in April,
ended its exploration operations in the mineral-rich Congo.
The immediate
problem was a nearly 25 percent drop in prices in December.
But De Beers’ fear is not just that retail prices
will continue to decline - it has managed that problem before
- but that the public will begin to sell its hoard of diamonds,
or what is called at De Beers "the overhang."
At the heart of this concern is the reality that, except
for those few stones that have been permanently lost, every
diamond that has been found and cut into a gem since the
beginning of time still exists today. This enormous inventory,
which overhangs the market, is literally in - or on - the
public's hands. Some hundred million women wear diamonds,
while millions of other
people keep them in safe deposit boxes as family heirlooms.
De Beers executives estimate that the public holds more
than 500 million carats of gem diamonds, which is more than
50 times the number of gem diamonds produced by the diamond
cartel in any given year. The moment a significant portion
of the public begins selling diamonds from this prodigious
inventory, the cartel would be unable to sustain the price
of diamonds, or maintain the illusion that they are such
a rare stone that their value is, as the ad slogan claims,
"forever."
As Harry Oppenheimer, who headed the cartel for more than
a quarter of a century, pointed out, "wide fluctuations
in price, which have, rightly or wrongly, been accepted
as normal in the case
of most raw materials, would be destructive of public confidence
in the case of a pure luxury such as gem diamonds, of which
large stocks are held in the form of jewelry by the general
public."
The genius of the cartel was creating this "confidence"
in the myth that the value of diamonds was eternal. In developing
a strategy for De Beers in 1952, the advertising agency
N.W. Ayer
noted in a report to De Beers: "Diamonds do not wear
out and are not consumed. New diamonds add to the existing
supply in trade channels and in the possession of the public.
In our opinion old diamonds are in 'safe hands' only when
widely dispersed and held by individuals as cherished
possessions valued far above their market price."
In other words, for the diamond illusion to survive, the
public must be psychologically inhibited from ever parting
with their diamonds. The advertising agency's basic assignment
was to make women value diamonds as permanent possessions,
not for their actual worth on the market. It set
out to accomplish this task by attempting through subtly
designed advertisements to foster a sentimental attachment
to diamonds that would make it difficult for a woman to
give them up.
Women were induced to think of diamonds as their "best
friends." This conditioning could not be attained solely
by magazine advertisements. The diamond-holding
public, which included individuals who inherited diamonds,
had to remain convinced that the gems retained their monetary
value. If they attempted to take advantage of changing prices,
the
retail market would be chaotic.
Even during the Great Depression of the 1930s, there was
only a limited overhang, since the mass-marketing of diamonds
had begun only a single generation before the crash. So
even though demand for diamonds almost completely abated,
De Beers, by shuttering all its mines and
borrowing money to buy up the production of the small number
of independent mines that still existed, was able to weather
the crisis.
Today, however, with many generations of the diamonds it
mass-marketed overhanging the market, and most of global
diamond production in independent hands, it no longer is
in a position to bring supply and demand into balance. Adding
to this precarious situation, diamond
cutters, manufacturers and dealers, have, as of Feb. 15,
an estimated $40 to $50 billion worth of
diamonds in mines in the pipeline that will intensify the
downward spiral when the gems reach the market later this
year.
If the current recession so deepens that the desperate need
for money trumps the tenacious grip of sentiment, and the
public begins selling even part of its hoard, it could finally
shatter the brilliantly nurtured illusion that the value
of the glittering stones kept on fingers, in jewel boxes,
and in vaults is eternal. As the overhang came pouring into
the market, De Beer's nightmare could become a reality.
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