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Responding to the global recession
in late February, De Beers’ once mighty diamond cartel
closed down about half its global production, including
Orapa in Botswana. the world’s biggest diamond producer.
The immediate problem was a nearly 25 percent drop
in prices in December. But the real fear of the diamond
cartel 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 maket, De Beer's nightmare could become a reality.
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