Episode 43.
Why Are Diamonds So Expensive

Question:

Key Points:

• We reviewed the takeaway from last week's episode on Supply and Demand
• Until the mid-1800s, there were not all that many diamonds in the world in general. This meant that only the super wealthy, usually only royalty, could afford a diamond. This was true for most gemstones, including diamonds
• The Cullinan Diamond weighed just over 3000 carats, which is roughly 1 pound
• In 1867, the Eureka Diamond was found in Cape Colony, South Africa. It was later named that because it was the first one found but within 20 years, massive amounts of diamond mines had been found in South Africa
• The Eureka diamond was purchased by Sir Philip Wodehouse, the governor of Cape Town, paid 500 pounds (as in the British Currency), which would be equal to about $70,000 today
• This started what was called the "Diamond Rush" to establish diamond mines which harvest rough diamonds.
• In 1888, De Beers Corp was founded and they attempted to consolidate all rough diamond production, i.e. mining
• By 1902, they were close to being successful, as they controlled over 90% of rough diamond production
• They started requiring their customers to sign a contract that they would only purchase diamonds from De Beers, which created a "single channel system"
• This essential monopoly allowed De Beers to increase the price on rough diamonds
• In 1919, Marcel Tolkowsky invented the "Brilliant Cut", which is essentially the shape most people think of when they think of diamonds
• By the 1940s, the Great Depression was essentially over, but diamond sales were still lower than in the roaring twenties
• De Beers started advertising to end consumers in order to shift demand to be higher
• De Beers targetted people who were getting married and convinced people that the only good engagement rings were diamond rings.
• In 1947, this was very successful in their "A Diamond is Forever" campaign
• After this, the 4-C concept became the standard in order to differentiate diamonds
  • Clarity: Does it have any inclusions
  • Carats: The bigger, the more expensive
  • Cut: Different cuts are more valuable than others
  • Color: We generally think of colorless diamonds, but there are blues, greens, yellows (which are less expensive) and pink (which are more expensive)
• Back in the 1950s, sythetic diamonds were first artificially made for industrial purposes
• By now, gem quality synthetic diamonds are a real thing. De Beers have run a successful campaign to convince people that there is a difference between synthetic diamonds and mined diamonds
• The price of diamonds has been going down because supply has been going up and demand has been going down
• The primary ways this has happened has been through synthetic diamonds, a bigger secondary market (which means selling diamonds that were previously purchased), and heirloom diamonds (re-using a diamond ring from a relative) have become a big thing