Can blockchain save diamonds from a global price decrease?
Blockchain conquers the world, engaging every sphere possible, including those far from being or striving to be decentralized. Recently the technology was implemented to service a monopolized diamond industry: “The Russian group of diamond mining companies Alrosa joined the pilot blockchain project of De Beers corporation called Tracr”. The company's official statement claims that it's a matter of “increasing transparency in the supply chain” and “avoiding trafficking of counterfeit gems”. But what if the diamond market is on the verge of collapse and a blockchain is just another way to delay it? Things are not going well with the cartel lately. Ten years ago De Beers significantly reduced volumes of production, stopped paying dividends to investors and for the third time in history changed the owner, that had led to a loss of a single leading position. What happens in the diamond industry today? To answer this, we need to start from afar.
The Legend of Diamonds
Bet that first association with a diamond that comes to your mind is an engagement ring, a marriage proposal and the exchange of rings at a wedding. It is surprisingly, that despite many beautiful gems existing in the world, not ruby or emerald has become a symbol of love and marriage. Why a diamond? Due to the limited-supply strategy that diamond cartel launched a century and a half ago.
The story begins in 1870s, when teams, explorating diamond mines in South Africa, discovered reserves exceeding the most optimistic forecasts. There were so many diamonds that British investors were afraid that the market would not withstand the influx, prices would go down, which would results in a huge losses for all participants. Investors have come to understanding that a high production rate and competition are ineffective for business. This is how the legend that diamonds are extremely rare and valuable was born.
Investors have united in a company called De Beers, named after farmers who sold their ranch without knowing how valuable their land was. The company's strategy, developed by chairman Cecil Rhodes, was to produce a little less stones than a year number of weddings in Europe and America. The limitation of supply allowed De Beers to regularly raise prices.
This continued until 1921, when the first major collapse hit the diamond market. Large diamonds deposits were found in Angola and Congo. An uncontrolled flow crushed the prices, cutters and jewelers started to buy large amounts of cheap diamonds just to find out they can't sell them. Low prices had scared off the majority of buyers. Stocks of De Beers Mines Consolidated Ltd. had declined along with the diamonds and the company was bought by Sir Ernest Oppenheimer, whose grandsons owned the company until 2009. Oppenheimer's ambitions was to make the diamond empire great again. All he needed to do was just to buy the rivals. And one more little thing: people all over the world had to be believe that a diamond is forever.
The strategy proposed by the famous New York advertising agency NW Ayer had an almost elusive goal. It was about changing the perception of diamonds by the public. Before 1921 the diamond buyers were mainly representatives of elite and the new ad campaign was aimed at middle class. The popular ad channels of that time, first of all, cinema, were used to make diamonds a markers of love. The campaign also affected newspapers and magazines, where status of a successful person was underlined by a fashionable diamond accessory. Fashion houses started to talk about the “diamond trend”, and even Queen Elizabeth took part in campaign, having visited the mines in South Africa, where she received a luxurious gem as a gift.
After nearly twenty years, De Beers was celebrating staggering success. The campaign made a powerful impact not only on Americans, but also on Europeans and Asians. In a statement issued in the late 1950s, the monopolist announced: “Since 1939, a completely new generation of young people has reached the marriage age and diamond ring is considered a necessity for them”. Diamonds were so much on everyone's mind that people who couldn't afford to buy it would rather delay the marriage than buy some other ring.
The problems came from where they weren’t expected: the Soviet Union discovered huge diamond deposits in Siberia. This threatened the cartel with loss of control over the supply, while open competition with the USSR was fraught with significant price fluctuations. This cartel could not allow, since the public could guess that diamonds are not as expensive as they were sold. Breaking the laws, De Beers have concluded an agreement with the Soviet Union on forming a single sales channel to retain business as it was.
However, an unexpected partnership made its own adjustments to the business. The diamonds from Siberia were predominantly small, so the market makers had to convince the world that the size of a diamond doesn't correlate with a depth of feelings. Images of two-carat diamond rings were replaced with quarter-carat ones in movies and magazines. The new accents highlighted the importance of cut, clarity and color.
How easy is to sell a diamond?
Over the past century, people around the world have purchased hundreds of millions of carats, which is hundreds times more than the amount of diamonds have been mined by the cartel in any year. Cartel' greatest fear is that at one point diamond holders decide to sell their gems. For the legend of diamonds to continue to exist, people must not do this, they must believe that diamonds retain their value forever. Only this maintains the illusion of price stability and is the main reason why the diamond market is a very inclosed one.
Studies on how good diamonds are for investing have been conducted more than once, including reputable magazines’ researches like Money Which. The experiment lasted for a decade. Having bought two diamonds of the highest quality weighing about half a carat from one of the largest dealers, the magazine have tried to sell them ten years later. Despite inflation and retail price growth of 300%, their profit amounted to only 3%. And this wasn’t the worst result. In 1976 Dutch Consumer Association have bought a perfect gem weighing more than a carat and have tried to sell it eight months later. To their surprise, nineteen leading dealers of the country refused to buy it and the twentieth offered only part of the initial price. There is another story about a wealthy woman, who decided to sell back a diamond necklace bought in Tiffany in New York for $100 000. The woman knew that diamonds have been a good investment and have continually increased in value. However, the boutique manager politely refused to buy out the necklace, stating that the company was pursuing a “strict policy regarding the redemption of diamonds”.
Why selling a diamond is so difficult? This is due to the fact, that a buyer indicates the price, not the seller, as it happens on any other commodity market. The main problem of diamond holders who would like to sell their diamonds is the lack of an open market. As long as jewelers, purchasing gems from monopolists, are the only ones to buy back the diamonds, a gem will never be a profitable long-term investment.
Blockchain and Diamonds
A recent attempt to consolidate diamonds on the blockchain, served by monopolists as a move to transparency, in fact pursues the same old goal - to limit the supply of diamonds and create a new category of “blockchain-stones”, where technology is being used for increasing the elitism of gems. However, the blockchain can be used differently if instead of marking the selected stones, someone starts to verify every stone put for sale. It is obvious, that cartel will never use blockchain technology for this purposes. After all, this will sharply lower prices and give the control over diamonds in the hands of people.
So retail prices keep being inflated. How long can this last? For sure, not forever. What if predictions of the “double global recession”, due to which, according to rumors, the Oppenheimers sold De Beers, will prove to be true? Previous attempts to keep the prices stable had given only temporary effect. For example, in the late seventies, De Beers offered large jewelry houses to buy diamonds with fixed price certificates. Needless to say these price tags didn't last long.
An open diamond market is being built by the entire decentralized community today. For example, Diamond Open Market, which name reflects the needs, Cedex, Diamond Network and many others. Thanks to the emergence of such platforms, thousands of individual buyers and sellers today may form a brand new transparent market, allowing everyone to use diamonds as a long-term investment or as a trading asset for every day. However, one must not forget that nature diamonds are naturally limited, that makes diamonds price always head up. But the growth should also be natural, only this can assure real stability.
Source: Have You Ever Tried To Sell A Diamond? by E.J. Epstein