• Book Reviews
  • Slideshow Reviews
  • About Silash
  • Lessons from Fiction
  • Twitter Pics
  • Contact
  • Join Mailing List
Silash Ruparell

Edward Jay Epstein - Have you ever tried to sell a Diamond ? (And other investigations of the diamond trade) (2011)

9/26/2013

9 Comments

 
Picture
Licensed from Q Thomas Bower under Creative Commons License
My one liner: A thorough and informative historical analysis of the whole supply chain, from production to transport to processing to marketing to distribution. From a seasoned investigative journalist.

“Except for those few stones that have been destroyed, every diamond that has been found and cut into a jewel still exists today and is literally in the public's hands. Some hundred million women wear diamonds, while millions of others keep them in safe-deposit boxes or strongboxes as family heirlooms. It is conservatively estimated that the public holds more than 500 million carats of gem diamonds, which is more than fifty times the number of gem diamonds produced by the diamond cartel in any given year. Since the quantity of diamonds needed for engagement rings and other jewellery each year is satisfied by the production from the world's mines, this half-billion-carat supply of diamonds must be prevented from ever being put on the market.”
 
Edward Jay Epstein is an investigative journalist who has studied the history of
commercially-produced diamonds, and presents in this book a collection of his research, which he has been publishing in newspapers and journals since the 1980s.  Indeed you can read the early chapters on Mr Epstein’s website here.
 
Likewise therefore, some of the supporting data and anecdotes are old, but the more recent chapters bring the reader right up to the state of play as of 2011. The central thesis of Epstein’s analysis is that diamond dealers, or wholesalers, charge extraordinary markups to retail buyers of diamonds.  This markup, known as the “keystone”, can be between 100% and 200%. Hence, when you go back to a dealer to try and sell back a diamond, he may well have a slightly embarrassed look on his face, and will probably decline to quote a price, so as to preserve your dignity.

To give an example (my analysis, not from the book).
Picture
Anyone who has been involved in trading any item or asset or commodity will be familiar with this concept: the 13k is the dealer’s “bid-offer”, or “spread”, between what he is prepared to buy the asset for (bid) and his offer price to sell it (offer).  In the diamond market these spreads are, apparently, extremely wide.

So, take the following chart, which I pulled from a website called wealthymatters here (by the way, it’s a nice little blog written by a lady based in India). The price shown is the Average One Carat D Loupe Clean wholesale diamond prices in Antwerp. Current “price” $25,000.
Picture
Average One Carat D Loupe Clean wholesale diamond prices in Antwerp
What it doesn’t tell you is that if indeed that 65% bid-offer spread is correct then the price you would receive to sell your diamond would be $8,750, a level seen during the 1970s.  Now, I’m sure the reality is not that bad, and that sophisticated investors with market knowledge can make money as an investment, but its certainly food for thought.
 
Epstein takes us nicely through the modern history of diamonds going back to 1870, to show how the market has been controlled.  Until the late 19th century diamonds were found mostly in a few river beds in India, and in the jungles of Brazil. In 1870 however, a huge deposit was found in South Africa, near to the Orange River.  In order to protect their investment the British financiers of those mines had to prevent a glut hitting the market.  
 
Thus was created, in 1888, De Beers Consolidated Mines Ltd, incorporated in South Africa.  Epstein traces the history of De Beers through the decades.  
  
How it gained control of the whole supply chain, from production to transport to processing to marketing to distribution.

How networks were established in Europe (particularly the UK, Portugal, Belgium, Holland and Switzerland) and Israel.
 
Epstein provides us with vivid description of what he calls the “Diamond
Invention”:
 
“The diamond invention is far more than a monopoly for fixing diamond prices; it is a mechanism for converting tiny crystals of carbon into universally recognised tokens of wealth, power and romance. To achieve this goal De Beers had to control demand as well as supply.  Both men and women had to be made to perceive diamonds not as marketable precious stones, but as an inseparable part of courtship and marital life.”
 
As the American market grew to become the largest consumer market for diamonds, it was inevitably a New York-based advertising agency, N.W. Ayer, which helped De Beers create this illusion.  A huge marketing campaign was orchestrated in the post-war era to make diamonds be perceived as the only acceptable way for a man to court – and win – a woman’s affections.  Movie stars, celebrities, magazine editors, and even the British Royal Family were co-opted into the campaign. 
 
A campaign which still runs to this day.
 
From N.W. Ayer at the end of the 1950s:

“Since 1939, an entirely new generation of young people has grown to marriageable age.  To this new generation a diamond ring is considered a necessity to engagements by virtually everyone.”
 
And after the Second  World War new markets would open up, particularly Germany, Japan and Brazil.  Epstein leads us through the new productive players in the market: Australia (brought into the fold through the creation of the Rio Tinto Corporation), and the Soviet Union (with whom a cartel deal was done).  
 
We learn that the “blood diamonds” are, apparently, a construct to prevent the supply of “uncertified” diamonds from civil war-ridden countries like Angola and Sierra Leone.  The UN Security Council, no less, has pronounced on the illegality, thus institutionalising the absence from the mainstream markets of these “blood diamonds”.
 
Finally, the US Anti-Trust action which culminated in the break up of the De Beers cartel in 2001, and the eventual exit of the Oppenheimer family (the owners of De Beers since 1927) from the group a few years later.
 
All in all a fascinating read, and enough to give humble men-folk some pause for thought next time we traipse in to acquire the sparkling “diamond invention”.  
  
That said, try telling the story to the object of your affections, and see what she
says…

There is no Wikipedia link to the book.  However, as stated much of the content appears here. 
9 Comments
Rodney link
1/3/2014 07:17:24 am

I think you may underestimate the size of the markup. This can easily be checked by going to an (honest) auction house and buying, at auction, a small item of nice jewellery. Normally you will be bidding against people in the business who are interested in acquiring the piece for resale. So you will pay slightly more than (that is, one bid above) what they perceive, at the time of the auction, to be a fair wholesale price. Then, take the item you have bought to a jewellery store and ask them for a (free) appraisal for insurance purposes. I believe you will find, as I have, that you will be quoted a price that is four or five times what you paid for it. And this is in a situation where the appraiser has nothing to gain from exaggerating the value. The lessons: learn how to distinguish which auction houses are honest from those that are not; acquire jewellery only by inheritance or in an honest auction; preferably in the middle of, or in the couple of years after the end of a recession; and never regard the item as an investment, or even think about ever selling it.

Reply
Silash
1/3/2014 03:33:49 pm

Hi Rodney

Thanks very much for that piece of insight.

On reflection, I suppose its fair to say that as consumers we pay markups of several hundred percent on many things we buy, so if we succumb to the marketing and branding machines that are throwing the products at us, then we need to accept the consequences.

Reply
Rodney link
1/3/2014 11:35:40 pm

Yes. In the long run jewellery stores do not make huge profits. They have a lot of costs, and the owners and other employees do hope, like the rest of us, to earn a decent enough living to be able to feed their kids. The business is highly cyclical. In the several years following recessions small jewellery stores in malls often go broke, finding themselves selling perhaps only one piece a week, but still have all the related overhead costs. Then business booms approaching the tops of economic expansions so the business is viable for the most efficient, if they squirrel away the profits so as to still be around in the next boom.

Rodney link
1/3/2014 11:37:30 pm

Yes. In the long run jewellery stores do not make huge profits. They have a lot of costs, and the owners and other employees do hope, like the rest of us, to earn a decent enough living to be able to feed their kids. The business is highly cyclical. In the several years following recessions small jewellery stores in malls often go broke, finding themselves selling perhaps only one piece a week, but still have to pay all the related overhead costs. Then business booms approaching the tops of the economic cycle so the business is viable for the most efficient, if they squirrel away the profits so as to still be around in the next boom.

Martin JEMBA LBS
8/16/2015 02:35:07 am

Hi Silash, did you see the Freakanomics Radio podcast on exactly this topic? Very entertaining, and well worth a listen!

Reply
Silash Ruparell
8/16/2015 02:14:59 pm

Hi Martin, I just listened to it. Thank you !

It is an interesting phenomenon. Not just restricted to diamonds, of course. Forces us to ask ourselves a whole load of questions about the nature of brands and luxury, and where the intrinsic value lies.

Reply
Rodney link
10/1/2015 12:05:56 pm

So I see the diamond eventually sold on Ebay for $5,950. That was a pretty good price. Please note that in Jay Epstein's comments, he said he bought his diamond for $2000, and when he tried to sell it at, essentially, the exact same place - purchase and sale both at the New York Diamond District - he lost more than ***80%*** (assuming the sale price was midway between the $300 and $400 prices he mentions.) I had earlier noted that you are likely to find an insurance appraisal price will be between four or five times the price a jewelry item will cost at an honest auction. So Mr. Epstein's experience fits in well with that. Diamonds really are a very clever scam aimed at vulnerable and gullible people. Small diamonds are not expensive. I prefer emeralds, and don't mind a few tiny diamonds to help highlight the emerald. Nevertheless, the markups are similar for all itmes sold in jewelry stores. So buy at honest auction houses. I bought an emerald bracelet with a few small diamonds at auction for $600. The insurance appraisal was $4000.

Reply
Silash Ruparell
10/2/2015 10:35:05 am

Hi Rodney, I think during the 21st century we will see many such industries be exposed. The 20th century practice of filling the huge spread between cost and price by marketing and branding will be harder and harder to sustain because there is now full transparency in a large number of markets. Likewise much work is being put into the social costs of everyday products that are currently not accounted for in their pricing - VW being a recent topical example, but there are many others - that will eventually push the consumer away from buying socially harmful products and services.

Reply
Rodney link
10/2/2015 11:38:20 am

Hi Silash:

Yes, there are some industries with high markups that are supported by heavy marketing as the diamond industry is - the clothing fashion industry being a major example. But there is a huge difference between the diamond industry and pretty much all other industries (including clothing) because almost everywhere else there is fierce competition. In the case of diamonds it is a cartel that controls supply and so it can fix prices at ridiculous levels. In automobiles for sure there is intense competition. Several auto companies have gone broke in the past 50 years. So I am not sure I can agree with you that "many such industries will be exposed". The vast majority of companies do not make high enough profits to finance their capital expenditures. The most obvious evidence of that is that most companies for the past 70 years have been going ever deeper and deeper into debt. If they had been making very healthy profits they would have been able to finance their capital expenditures entirely from profits. But very few make high enough profits to do that. In order to make very healthy profits you have to be a lot smarter than all your competition. Apple is. But few other companies have shown themselves to be so much better at what they do than all their competitors.

Reply

Your comment will be posted after it is approved.


Leave a Reply.

    RSS Feed

    Silash Ruparell

    Reviews of books that I read in my spare time.  Enjoy.

    Archives

    November 2015
     - Ferdinand von Schirach: Crime & Guilt (2012) 

    October 2015
    - Fritjof Capra and Pier Luigi Luisi: The Systems View of Life - A Unifying Vision (2014)

    September 2015
     - Danny King: School for Scumbags (2012)

    August 2015 
    - Erich Maria Remarque: Arch of Triumph (1945)

    July 2015
     - W. Somerset Maugham - The Painted Veil

    June 2015
     - John Julius Norwich: Byzantium, The Early Centuries (1988)

    May 2015
     - Anthony Price: Other Paths to Glory (1975)

    April 2015
    - Richard Davidson and Sharon Begley: The Emotional Life of Your Brain (2012)

    February 2015
    - Charles Neider (Ed): The Autobiography of Mark Twain

    January 2015
    - Paul Torday: The Girl on the Landing (2009)

    November 2014
    - David Eagleman: Sum - Forty Tales of the Afterlife (2009)

    August 2014
    - Simon Winchester: Bomb, Book and Compass: Joseph Needham and the Great Secrets of China (2008)

    May 2014
    - Steven Strange & Jack Zupko (Eds): Stoicism - Traditions and Tranformations (2004)

    March 2014
      - Michael Dibdin: Vendetta (1990)

    January 2014
     - Matt Sinclair (Ed): The Fall - Tales from the Apocalypse (2012)

    September 2013
     - Edward Jay Epstein: Have you ever tried to sell a Diamond ? (And other
    investigations of the diamond trade) (2011)


    August 2013
     - Lessons from Fiction Part 3: The role of institutions in alleviating the poverty trap 

    April 2013
    - Emile Zola: L’Assommoir (The Drinking Den) 1877, Translation by Robin Buss (2004)

    March 2013
    - Margaret Atwood:Oryx & Crake  (2003)

    February 2013
     - Paul Auster: Sunset Park (2010)

    January 2013
     - Ernest Hemingway: The Old Man and the Sea (1951)

    December 2012
     - Lessons from Fiction Part 2 - How Societies adapt to Disruptive Change

    November 2012
     - James Barr: A Line in the Sand (2011). And a nod to "Information is Beautiful"

    October 2012
     - Voltaire (1749 translation): Zadig or the Book of Fate (1747)

    September 2012
     - Leigh Skene: The Impoverishment of Nations (2009)

    August 2012
     - Steven Roger Fischer: A History of Language (1999)

    July 2012
     - John Dickson Carr: He Who Whispers (1946)

    June 2012
     - Matthew May: The Shibumi Strategy (2011)
     - Trevanian: Shibumi (1979)

    May 2012
     - Lessons from Fiction: Part 1 - A beginner's guide to convicting an innocent man

    April 2012
     - H. Woody Brock: American Gridlock (Why the Right and Left are Both Wrong, Commonsense 101 Solutions for the Economic Crises) (2012)
    March 2012
      - Jane Jensen: Dante's Equation (2003)
    February 2012
    - Amartya Sen: The Idea of Justice (2009)
    January 2012
    - Ian Morris: Why the West Rules...For Now (2010)

    Categories

    All
    Actus Reus
    Adam Smith
    Afterlife
    Alcohol
    Amartya Sen
    American Literature
    Anthony Price
    Apocalypse
    Attila The Hun
    Aurelio Zen
    Autobiography
    Babylonia
    Balfour Declaration
    Basque Country
    Brad Pitt
    Brain
    Buddhism
    Byzantine Empire
    Calouste Gulbenkian
    Carl Gustav Jung
    Cartel
    Charlemagne
    Charles Darwin
    China
    Cholera
    Cicero
    Constantine The Great
    Constantinople
    Criminal Law
    Cuba
    Dalai Lama
    Danny King
    David Eagleman
    David Lloyd-George
    David Mccandless
    De Beers
    Decimation
    Descartes
    Destiny
    Detective
    Dialogue Of The Deaf
    Diamonds
    Donation Of Constantine
    Dr David Audley
    Dr Gideon Fell
    Economics
    Ecosystems
    Edward J Epstein
    Emile Zola
    Energy
    Epictetus
    Erich Maria Remarque
    Ernest Hemingway
    Fat Boy
    Fate
    Ferdinand Von Schirach
    Fiction
    Financial Crisis
    Fiscal Deficit
    Fishing
    Flanders
    Fractal Mathematics
    François-Marie Arouet
    Franz Bopp
    Freeman Dyson
    French Literature
    Fritjoft Capra
    Gafin Principle
    Gaia Theory
    Game Of Go
    Genomics
    Geo Politics
    Geo-politics
    German Literature
    Giallo
    Great Wyrley
    Happiness
    Havana
    Healthcare
    Herbert Henry Asquith
    Hindenburg Line
    History
    Holistics
    Huckleberry Finn
    Huguenot
    Humility
    H. Woody Brock
    Ian Morris
    Identity
    Infographics
    Information Is Beautiful
    International Relations
    International Space Station
    Investment
    Iraq
    Isaac Newton
    Israel
    Jack Zupko
    James Barr
    Jane Jensen
    Japan
    Japanese Aesthetics
    Jean De La Bruyère
    Joe Dimaggio
    John Dickson Carr
    John Julius Norwich
    John Maynard Keynes
    John Rawls
    Joseph Needham
    Julian Barnes
    Julian The Apostate
    Justice
    Kabbalah
    Karl Marx
    Kenneth Arrow
    King Feisal 1st
    Language
    Lawrence Becker
    Lebanon
    Leigh Skene
    Leverage
    Life Outcomes
    Linguistics
    Locked Room Mystery
    London
    Margaret Atwood
    Mark Twain
    Martha Nussbaum
    Martial Arts
    Matthew May
    Matt Sinclair
    Max Brooks
    Meditation
    Mens Rea
    Mesopotamia
    Michael Arditti
    Michael Dibdin
    Middle East
    Migration
    Miscarriage Of Justice
    Moliere
    Mordecai Kurz
    Mother Company
    Mr Five Percent
    Murder
    National Patrimony
    Natural Resources
    Neuroscience
    New York
    Non Fiction
    Non-Fiction
    Oil And Energy
    Oprah Winfrey
    Palestine
    Parcae
    Paris
    Parsi
    Paul Auster
    Paul Torday
    Percy Bysshe Shelley
    Persia
    Philippines
    Philosophy
    Pia De' Tolomei
    Pier Luigi Luisi
    Plato
    Pont De L'Alma
    Population
    Poverty
    Proto Indo-European
    Psychology
    Purgatorio
    Qalys
    Quantitative Easing
    Quantum Mechanics
    Recession
    Religion
    Richard Davidson
    Richard Easterlin
    Rodney William Whittaker
    Roman Empire
    Sanskrit
    Sardegna
    Satellites
    Science
    Science Fiction
    Sharon Begley
    Shibumi
    Short Stories
    Silash Ruparell
    Simon Winchester
    Sin
    Snooker; Pool; & Billiards
    Social Realisation
    Sociology
    Socrates
    Spy Novel
    Steven Roger Fischer
    Steven Strange
    Stoicism
    Supernatural
    Sykes-Picot Agreement
    Syria
    Systems View
    Terrorism
    The Somme
    Thomas Malthus
    Thriller
    Trevanian
    Vampires
    Voltaire
    Water
    What Can We Learn From Fiction
    Winston Churchill
    World War I
    World War II
    W. Somerset Maugham
    Yin And Yang
    Zionism
    Zombie Banks
    Zombies

Powered by Create your own unique website with customizable templates.