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jerryguru69 (93.35)

Diamonds (no, not those diamonds) An Investors Worst Friend ?

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September 21, 2009 – Comments (7)

Last week, Bloomberg had an article about diamonds. I clicked the link thinking it was the ETF. It turned out to be an article about diamond polishers. The more I read, the more interesting it became, and the more worried I became. The article is here:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=adeU_YHAT0uQ

You know those itty-bitty diamonds, where you think the labor has got to be worth more than the diamond itself? Well, those things are polished in India. The Bloomberg story is about thousands of these folks being laid off. Then it detailed about Zales and Ben Bridges (owned by the Oracle of Omaha) closing stores. One diamond wholesaler was worried about his stores closing and his entire route disappearing. It then said that De Beers was cutting back on diamond production.

The part that really stuck with me was the diamond trade changes. I saw a PBS program about the diamond trade in NY. All it took was a handshake to sell a $100K flawless diamond in a super-secured building. Now, so many people were not paying up, that this whole system has disappeared.

Whoa.

Consumer spending is like 60 or 70% of the economy, and it supposedly always leads us out of recession. That is why the Michigan consumer sentiment survey is a big deal. Besides: rich people are more or less insulated from economic downturns, so they always supposedly buy luxury goods like high-end cars and jewelry. I wonder if this diamond story is the beginning of a major change in consumer habits. Add to the mix that consumer credit (HELOC, plastic) is being dramatically cut back.

Uh-oh.

 

7 Comments – Post Your Own

#1) On September 21, 2009 at 11:12 PM, guiron (24.18) wrote:

The gemstone diamond market is entirely propped up with artificial scarcity, which has been in control by DeBeers for a long time now. There are far more stones being held out of the market to keep prices high than are being sold, which is easy if you own the distribution and the mines, as DeBeers did for most of a century (along with a long history of human rights abuses). Russia is in the market now, and the playing field is a bit different. But the real problem for the future of the gemstone part of the industry is that a flawless diamond can now be produced artificially, and one which cannot be distinguished by professionals from a naturally occurring one. This whole market was created by DeBeers at the tail end of the Depression. Diamonds were never considered a marriage stone before then. It's a bit of a joke when you think about it. We're supposedly honoring these traditions, when really we're supporting a decades-long marketing campaign. Seeing it fade away is not occasion for sadness.

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#2) On September 21, 2009 at 11:26 PM, chiragpatnaik (< 20) wrote:

DeBeers does not cut back on production. It merely controls the flow of diamonds into the market.

After huge diamond finds in Africa, the price of small diamonds should have fallen through the floor. But in steps the Debeers cartel.

Synthetic Diamonds have been around for several years now (search wired for the story), eroding the value of diamonds. In countries like India, Thailand parts of Europe and LatAm,  retailers routinely pass of synthetics as real diamonds (how is the consumer to know), further eroding the value of the diamond.

So going forward you can expect that Diamonds are headed only one way.

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#3) On September 21, 2009 at 11:28 PM, chiragpatnaik (< 20) wrote:

@ guiron:

Oops almost identical posts. I started typing and then went had breakfast and then came back to finish it.

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#4) On September 22, 2009 at 5:38 AM, TMFUltraLong (99.96) wrote:

Ok.... manifesto time....

I will more than gladly admit that I am someone who knows a little bit about a lot of things, but there are a few areas I can guarantee you I know a LOT about, and the jewelry industry and diamond markets are something I know a LOT about.

What we've seen over the last two years with regards to the slowing economy and correction in the industry was greatly needed and long overdue. The drama that the media has brought into the sector recently is something that wasn't.

The article above mentions some absolutely awful retailers that got themselves into insurmountable debt obligations. Finlay Enterprises, Whitehall, Robbins Brothers in LA and to some extent even Zales and Signet have been absolutely atrocious at managing their debt levels over the years. Many of these companies relied heavily on memoed merchandise and bought on credit or consignment which is frankly a piss poor way to a run a jewelry company. Ben Bridge on the other hand is a practically debt-free company that owns nearly all of its merchandise and is practically memo-free. It has the financial backing of Berkshire Hathaway and the three stores that were closed over the past 12 months were actually due to unfavorable lease rates and lease expirations. This article couldn't have been more misleading in that aspect.

Declining credit available to consumers seen as a downfall? Well to some extent yes, but the problem here is that a majority of the poor retailers dealt with outside banks rather than lending their own in-house credit. In continuing loss environments, those outside banks can change the terms with those business and theres not a thing they can do about it. Bad debt from an in-house lend is considerably easier to deal with and doesn't immediately threaten business stability and integrity.

Now onto India...the diamond cutting capital of the world. Based on sheer volume India accounts for roughly 91% of all diamonds cut each year yet that only amounts to 34% of the total weight roughage. Simply speaking, India is responsible for cutting melee. Melee are in layman's terms... small diamonds, typically under 0.19 carats. What does this mean? This means that India is not known for cutting larger diamonds and quite frankly smaller diamonds require less skill and training in order to cut. Plenty of diamonds that come out of India are single cut diamonds which have 17 or 18 facets rather than 57 or 58 as we see in standard round brilliant these days. Single cut diamonds between .005ct to 0.02ct melee require little training to cut. I'm not saying India's workers are skill-less by any means, but I'm trying to point out just how inflated the article makes India's cutting industry appears. New York, Tel Aviv and a few other cities have become considerably more important cutting centers for larger stones over the years.

Not only that, but India gets the majority of its stones from the Argyle mine in Australia. Although the Argyle has produced some marvelous colored stones in the past, its most known for producing near-colorless to brown, lower quality, smaller diamonds. Flat out, India has become the mass producer of pave-like melee which DOES serve an important part in the diamond industry, but is nowhere near paramount to its success as this article would make it seem. Is the plight therefore in India not real? Well it absolutely is...but will it cripple the diamond industry? Not in the least...

And DeBeers... operating under the DeBeers Trading Company wing, they are nowhere near the monopoly the company once was. In Depression Era days the company controlled up to 75-80% of all diamond rough being purchased and sold in the world. I've seen estimates ranging currently from 33-35% of all production is still controlled through the DTC, but with increasing competition from Rio Tinto and even new finds within Russia and Canada, there is little doubt that DeBeers is no longer a monopoly. Can DeBeers still exert pricing pressure? Well yes, to some extent. Diamond rough will absolutely be controlled by current economic conditions and rise or fall in accordance with that. If DeBeers holds back the selling of rough to stabilize prices who's to say Russia doesn't step in to fill that void? I've seen it happen and it will happen again.

And synthetic/simulant diamonds.... Simulants are easy as dirt to spot because they are merely stones posing as a diamond without the same chemical structure. They have markedly different fire, luster and usually are cut poorly. Synthetics admittedly can be difficult to spot. This is true that a layman who has no knowledge of diamonds is going to have a very difficult time spotting a synthetic but personally I can think of a few methods that can be used. In addition, its the jewelers responsibility to inform that customer how to identify a fake and he/she should have a few ways to test the integrity of a stone to identify it as a genuine or synthetic stone. Diamond testers which send a quick heat impulse into the stone are usually great and inexpensive ways to test this. Diamonds dissipate heat very well, synthetics and simulants do not and most diamond and moissanite testers cost less than $129. Every jewelry store you walk into has one, so once again, the media just drumming everything up.

And diamonds as a measure of value.... you tell me where you can find something that is the hardest material on earth that is at the youngest 20 million years old, that can be polished and fashioned into a gem which can give you some of the greatest sparkle around. Diamonds are worth every penny!

Literally I could go on all day about this article but I'm going to cut myself off there....for now

UltraLong

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#5) On September 22, 2009 at 8:50 AM, Gemini846 (88.80) wrote:

Why wouldn't a Synthetic pass the Diamond Tester? Most of the ones I'm familiar with do pass. Maybe its the process used. The only synthetics I've seen are 1.5+ carots in designer yellows and pinks.

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#6) On September 22, 2009 at 9:14 AM, lemoneater (87.47) wrote:

#4 Fantastic answer! Very informative. I wouldn't write off the value of diamonds yet. What I like is that there are so many beautiful cuts nowadays that capitalize on what light can do to a diamond. I'm not an expert, but I have seen the difference in fire, bigger is not always better if bigger is dull and even cloudy. 

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#7) On September 22, 2009 at 4:07 PM, TMFUltraLong (99.96) wrote:

Gemini846,

Synthetic diamonds have different heat dissipation properties than naturally occuring diamonds. Moissanite for instance won't dissipate heat at the same rate as a natural diamond despite its identical chemical properties and that mainly has to do with the growth of its crystalline structure. This is also why most reputable retailers will carry two testers, one for diamond and one for moissanite because moissanite can mask moderately well as a diamond.

And I've personally seen synthetic diamond as small as 1/10th of a carat

UltraLong

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