DON'T get me wrong. I too bought a diamond engagement ring when I proposed to my wife. But I wasn’t deluded into thinking that the diamond ring was a good investment and I most certainly didn’t spend two months of salary on it either.
The truth is, diamonds are a great gift, but they are neither rare, nor valuable, which makes it an over-hyped investment.
In a free market, price depends on two factors: supply and demand. If demand increases or supply is limited, the price will rise.
But here’s the little secret behind the supply of diamonds: these precious little gems are not as rare as advertising makes you believe.
Supply is artificially restricted by the heavily concentrated pack of miners, who severely limit the amount and types of diamonds that are released on the market.
The miners sit on an inventory of diamonds worth billions, which, if released on the market, would cause the price of diamonds to crash.
Before 1870, diamonds (or crystallised carbon as I will call them, because that’s what it is) were indeed rare, and only kings and queens would wear them.
But after 1870, large deposits of crystallised carbon were discovered. First in South-Africa, then all over the world.
As price is decided by bringing demand and supply into equilibrium, this enormous increase in supply should have led to a staggering price drop.
But the miners realised that by digging up all that crystallised carbon, they were making them worthless and driving the profitability of their operations to zero!
The only solution was to restrict supply and artificially create demand. British businessman Cecil Rhodes did both.
First, he forced all South African miners to merge or exclusively sell their crystallised carbon to him.
Later, the company he founded, known as De Beers, would repeat this on a global scale. He retaliated against miners who refused to sell to him by flooding the market with the same type of crystallised carbon the uncollaborative mine produced.
But it was the creation of demand for crystallised carbon that is truly the remarkable feat.
The stones by themselves are neither rare nor useful, and engagement rings with crystallised carbon were not an ancient tradition as some may have bene led to believe.
In fact, before the 1930s, they were rarely used for engagements.
That all changed thanks to a few decades of brainwashing campaigns by the ad men and their advertising agencies.
Nowadays, 75% of American brides wear an engagement ring with crystallized carbon. Slightly closer to home, in Japan, marketing campaigns were able to grow the percentage of brides with a crystallised carbon engagement ring from 5% in 1961 to 60% in 1981!
And in China, the percentage has increased from 1% to 31% between 1994 and 2010! And voila: demand was created.
The ad men were also the ones who told you the widely known and used “rule of thumb” about spending one month’s salary on your fiancée’s engagement ring. And they were also the ones who then decide to change it into two months’ worth of salary, in order to boost revenue.
The marketing campaigns were also able to effectively prevent the formation of a secondhand market with their slogan, “A Diamond is forever”.
Crystallised carbon is notoriously illiquid: if you try to sell them, you are either refused or offered a ridiculously low price.
Jewellery made out of gold, silver and crystallized carbon are not investments, but retail products. You typically buy them at 100% to 400% of their market value to account for manufacturing, design, marketing, distribution, sales costs, and of course a profit margin.
Truly flawless, investment-grade crystallised carbon is almost never found in jewellery.
Although De Beers’ market power is less dominant nowadays, the damage is done in the minds of everyone: A diamond is a girl’s best friend, a status symbol and a sign of true love. What a beautiful scam.
Mark Reijman is co-founder and managing director of https://www.comparehero.my/, dedicated to increasing financial literacy and to help you save time and money by comparing all credit cards, personal loans and broadband plans in Malaysia.
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