THE diamond market had to be further
restructured in the mid-1960s to accomodate a surfeit of
minute diamonds, which De Beers undertook to market for
the Soviets. They had discovered diamond mines in Siberia,
after intensive exploration, in the late 1950s: De Beers
and its allies no longer controlled the diamond supply,
and realized that open competition with the Soviets would
inevitably lead, as Harry Oppenheimer gingerly put it, to
"price fluctuations,"which would weaken the carefully cultivated
confidence of the public in the value of diamonds. Oppenheimer,
assuming that neither party could afford risking the destruction
of the diamond invention, offered the Soviets a straightforward
deal -- "a single channel" for controlling the world supply
of diamonds. In accepting this arrangement, the Soviets
became partners in the cartel, and co-protectors of the
diamond invention.
Almost all of the Soviet diamonds were
under half a carat in their uncut form, and there was no
ready retail outlet for millions of such tiny diamonds.
When it made its secret deal with the Soviet Union, De Beers
had expected production from the Siberian mines to decrease
gradually. Instead, production accelerated at an incredible
pace, and De Beers was forced to reconsider its sales strategy.
De Beers ordered N. W. Ayer to reverse one of its themes:
women were no longer to be led to equate the status and
emotional commitment to an engagement with the sheer size
of the diamond. A "strategy for small diamond sales" was
outlined, stressing the "importance of quality, color and
cut" over size. Pictures of "one quarter carat" rings would
replace pictures of "up to 2 carat" rings. Moreover, the
advertising agency began in its international campaign to
"illustrate gems as small as one-tenth of a carat and give
them the same emotional importance as larger stones." The
news releases also made clear that women should think of
diamonds, regardless of size, as objects of perfection:
a small diamond could be as perfect as a large diamond.
DeBeers devised the "eternity ring,"
made up of as many as twenty-five tiny Soviet diamonds,
which could be sold to an entirely new market of older married
women. The advertising campaign was based on the theme of
recaptured love. Again, sentiments were born out of necessity:
older American women received a ring of miniature diamonds
because of the needs of a South African corporation to accommodate
the Soviet Union.
The new campaign met with considerable
success. The average size of diamonds sold fell from one
carat in 1939 to .28 of a carat in 1976, which coincided
almost exactly with the average size of the Siberian diamonds
De Beers was distributing. However, as American consumers
became accustomed to the idea of buying smaller diamonds,
they began to perceive larger diamonds as ostentatious.
By the mid-1970s, the advertising campaign for smaller diamonds
was beginning to seem too successful. In its 1978 strategy
report, N. W. Ayer said, "a supply problem has developed
... that has had a significant effect on diamond pricing"
-- a problem caused by the long-term campaign to stimulate
the sale of small diamonds. "Owing to successful pricing,
distribution and advertising policies over the last 16 years,
demand for small diamonds now appears to have significantly
exceeded supply even though supply, in absolute terms, has
been increasing steadily." Whereas there was not a sufficient
supply of small diamonds to meet the demands of consumers,
N. W. Ayer reported that "large stone sales (1 carat and
up) ... have maintained the sluggish pace of the last three
years." Because of this, the memorandum continued, "large
stones are being .. discounted by as much as 20%."
The shortage of small diamonds proved
temporary. As Soviet diamonds continued to flow into London
at an ever-increasing rate, De Beers's strategists came
to the conclusion that this production could not be entirely
absorbed by "eternity rings" or other new concepts in jewelry,
and began looking for markets for miniature diamonds outside
the United States. Even though De Beers had met with enormous
success in creating an instant diamond "tradition" in Japan,
it was unable to create a similar tradition in Brazil, Germany,
Austria, or Italy. By paying the high cost involved in absorbing
this flood of Soviet diamonds each year, De Beers prevented
-- at least temporarily -- the Soviet Union from taking
any precipitous actions that might cause diamonds to start
glutting the market. N. W. Ayer argued that "small stone
jewelry advertising" could not be totally abandoned: "Serious
trade relationship problems would ensue if, after15 years
of stressing 'affordable' small stone jewelry, we were to
drop all of these programs."
Instead, the agency suggested a change
in emphasis in presenting diamonds to the American public.
In the advertisements to appear in 1978, it planned to substitute
photographs of one-carat-and-over stones for photographs
of smaller diamonds, and to resume both an "informative
advertising campaign" and an "emotive program" that would
serve to "reorient consumer tastes and price perspectives
towards acceptance of solitaire [single-stone] jewelry rather
than multi-stone pieces." Other "strategic refinements"
it recommended were designed to restore the status of the
large diamond. "In fact, this [campaign] will be the exact
opposite of the small stone informative program that ran
from 1965 to 1970 that popularized the 'beauty in miniature'
concept...." With an advertising budget of some $9.69 million,
N. W. Ayer appeared confident that it could bring about
this "reorientation."
N. W. Ayer learned from an opinion poll
it commissioned from the firm of Daniel Yankelovich, Inc.
that the gift of a diamond contained an important element
of surprise. "Approximately half of all diamond jewelry
that the men have given and the women have received were
given with zero participation or knowledge on the part of
the woman recipient," the study pointed out. N. W Ayer analyzed
this "surprise factor":
Women are in unanimous agreement that
they want to be surprised with gifts.... They want, of
course, to be surprised for the thrill of it. However,
a deeper, more important reason lies behind this desire....
"freedom from guilt." Some of the women pointed out that
if their husbands enlisted their help in purchasing a
gift (like diamond jewelry), their practical nature would
come to the fore and they would be compelled to object
to the purchase.
Women were not totally surprised by diamond
gifts: some 84 percent of the men in the study "knew somehow"
that the women wanted diamond jewelry. The study suggested
a two-step "gift-process continuum": first, "the man 'learns'
diamonds are o.k." fom the woman; then, "at some later point
in time, he makes the diamond purchase decision" to surprise
the woman.
Through a series of "projective" psychological
questions, meant "to draw out a respondent's innermost feelings
about diamond jewelry," the study attempted to examine further
the semi-passive role played by women in receiving diamonds.
The male-female roles seemed to resemble closely the sex
relations in a Victorian novel. "Man plays the dominant,
active role in the gift process. Woman's role is more subtle,
more oblique, more enigmatic...." The woman seemed to believe
there was something improper about receiving a diamond gift.
Women spoke in interviews about large diamonds as "flashy,
gaudy, overdone" and otherwise inappropriate. Yet the study
found that "Buried in the negative attitudes ... lies what
is probably the primary driving force for acquiring them.
Diamonds are a traditional and conspicuous signal of achievement,
status and success." It noted, for example, "A woman can
easily feel that diamonds are 'vulgar' and still be highly
enthusiastic about receiving diamond jewelry." The element
of surprise, even if it is feigned, plays the same role
of accommodating dissonance in accepting a diamond gift
as it does in prime sexual seductions: it permits the woman
to pretend that she has not actively participated in the
decision. She thus retains both her innocence -- and the
diamond.
For advertising diamonds in the late
1970s, the implications of this research were clear. To
induce men to buy diamonds for women, advertising should
focus on the emotional impact of the "surprise" gift transaction.
In the final analysis, a man was moved to part with earnings
not by the value, aesthetics, or tradition of diamonds but
by the expectation that a "gift of love" would enhance his
standing in the eyes of a woman. On the other hand, a woman
accepted the gift as a tangible symbol of her status and
achievements.
By 1979, N. W. Ayer had helped De Beers
expand its sales of diamonds in the United States to more
than $2.1 billion, at the wholesale level, compared with
a mere $23 million in 1939. In forty years, the value of
its sales had increased nearly a hundredfold. The expenditure
on advertisements, which began at a level of only $200,000
a year and gradually increased to $10 million, seemed a
brilliant investment.
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 jewelry 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.
The moment a significant portion of the public begins selling
diamonds from this inventory, the price of diamonds cannot
be sustained. For the diamond invention to survive, the
public must be inhibited from ever parting with its diamonds.
In developing a strategy for De Beers
in 1953, N. W. Ayer said: "In our opinion old diamonds are
in 'safe hands' only when widely dispersed and held by individuals
as cherished possessions valued far above their market price."
As far as De Beers and N. W. Ayer were concerned, "safe
hands" belonged to those women psychologically conditioned
never to sell their diamonds. This conditioning could not
be attained solely by placing advertisements in magazines.
The diamond-holding public, which includes people who inherit
diamonds, had to remain convinced that diamonds retained
their monetary value. If it saw price fluctuations in the
diamond market and attempted to dispose of diamonds to take
advantage of changing prices, the retail market would become
chaotic. It was therefore essential that De Beers maintain
at least the illusion of price stability.
In the 1971 De Beers annual report, Harry
Oppenheimer explained the unique situation of diamonds in
the following terms: "A degree of control is necessary for
the well-being of the industry, not because production is
excessive or demand is falling, but simply because wide
fluctuations in price, which have, rightly or wrongly, been
accepted as normal in the case of most raw materials, would
be destructive of public confidence in the case of a pure
luxury such as gem diamonds, of which large stocks are held
in the form of jewelry by the general public." During the
periods when production from the mines temporarily exceeds
the consumption of diamonds -- the balance is determined
mainly by the number of impending marriages in the United
States and Japan -- the cartel can preserve the illusion
of price stability by either cutting back the distribution
of diamonds at its London "sights," where, ten times a year,
it allots the world's supply of diamonds to about 300 hand-chosen
dealers, called "sight-holders," or by itself buying back
diamonds at the wholesale level. The underlying assumption
is that as long as the general public never sees the price
of diamonds fall, it will not become nervous and begin selling
its diamonds. If this huge inventory should ever reach the
market, even De Beers and all the Oppenheimer resources
could not prevent the price of diamonds from plummeting.
Selling individual diamonds at a profit,
even those held over long periods of time, can be surprisingly
difficult. For example, in 1970, the London-based consumer
magazine Money Which? decided to test diamonds as a decade
long investment. It bought two gem-quality diamonds, weighing
approximately one-half carat apiece, from one of London's
most reputable diamond dealers, for £400 (then worth about
a thousand dollars). For nearly nine years, it kept these
two diamonds sealed in an envelope in its vault. During
this same period, Great Britain experienced inflation that
ran as high as 25 percent a year. For the diamonds to have
kept pace with inflation, they would have had to increase
in value at least 300 percent, making them worth some £400
pounds by 1978. But when the magazine's editor, Dave Watts,tried
to sell the diamonds in 1978, he found that neither jewelry
stores nor wholesale dealers in London's Hatton Garden district
would pay anywhere near that price for the diamonds. Most
of the stores refused to pay any cash for them; the highest
bid Watts received was £500, which amounted to a profit
of only £100 in over eight years, or less than 3 percent
at a compound rate of interest. If the bid were calculated
in 1970 pounds, it would amount to only £167. Dave Watts
summed up the magazine's experiment by saying, "As an 8-year
investment the diamonds that we bought have proved to be
very poor." The problem was that the buyer, not the seller,
determined the price.
The magazine conducted another experiment
to determine the extent to which larger diamonds appreciate
in value over a one-year period. In 1970, it bought a 1.42
carat diamond for £745. In 1971, the highest offer it received
for the same gem was £568. Rather than sell it at such an
enormous loss, Watts decided to extend the experiment until
1974, when he again made the round of the jewelers in Hatton
Garden to have it appraised. During this tour of the diamond
district, Watts found that the diamond had mysteriously
shrunk in weight to 1.04 carats. One of the jewelers had
apparently switched diamonds during the appraisal. In that
same year, Watts, undaunted, bought another diamond, this
one 1.4 carats, from a reputable London dealer. He paid
£2,595. A week later, he decided to sell it. The maximum
offer he received was £1,000.
In 1976, the Dutch Consumer Association
also tried to test the price appreciation of diamonds by
buying a perfect diamond of over one carat in Amsterdam,
holding it for eight months, and then offering it for sale
to the twenty leading dealers in Amsterdam. Nineteen refused
to buy it, and the twentieth dealer offered only a fraction
of the purchase price.
Selling diamonds can also be an extraordinarily
frustrating experience for private individuals. In 1978,
for example, a wealthy woman in New York City decided to
sell back a diamond ring she had bought from Tiffany two
years earlier for $100,000 and use the proceeds toward a
necklace of matched pearls that she fancied. She had read
about the "diamond boom" in news magazines and hoped that
she might make a profit on the diamond. Instead, the sales
executive explained, with what she said seemed to be a touch
of embarrassment, that Tiffany had "a strict policy against
repurchasing diamonds." He assured her, however, that the
diamond was extremely valuable, and suggested another Fifth
Avenue jewelry store. The woman went from one leading jeweler
to another, attempting to sell her diamond. One store offered
to swap it for another jewel, and two other jewelers offered
to accept the diamond "on consignment" and pay her a percentage
of what they sold it for, but none of the half-dozen jewelers
she visited offered her cash for her $100,000 diamond. She
finally gave up and kept the diamond.
Retail jewelers, especially the prestigious
Fifth Avenue stores, prefer not to buy back diamonds from
customers, because the offer they would make would most
likely be considered ridiculously low. The "keystone," or
markup, on a diamond and its setting may range from 100
to 200 percent, depending on the policy of the store; if
it bought diamonds back from customers, it would have to
buy them back at wholesale prices. Most jewelers would prefer
not to make a customer an offer that might be deemed insulting
and also might undercut the widely held notion that diamonds
go up in value. Moreover, since retailers generally receive
their diamonds from wholesalers on consignment, and need
not pay for them until they are sold, they would not readily
risk their own cash to buy diamonds from customers. Rather
than offer customers a fraction of what they paid for diamonds,
retail jewelers almost invariably recommend to their clients
firms that specialize in buying diamonds "retail."
The firm perhaps most frequently recommended
by New York jewelry shops is Empire Diamonds Corporation,
which is situated on the sixty-sixth floor of the Empire
State Building, in midtown Manhattan. Empire's reception
room, which resembles a doctor's office, is usually crowded
with elderly women who sit nervously in plastic chairs waiting
for their names to be called. One by one, they are ushered
into a small examining room, where an appraiser scrutinizes
their diamonds and makes them a cash offer. "We usually
can't pay more than a maximum of 90 percent of the current
wholesale price," says Jack Brod, president of Empire Diamonds.
"In most cases we have to pay less, since the setting has
to be discarded, and we have to leave a margin for error
in our evaluation -- especially if the diamond is mounted
in a setting." Empire removes the diamonds from their settings,
which are sold as scrap, and resells them to wholesalers.
Because of the steep markup on diamonds, individuals who
buy retail and in effect sell wholesale often suffer enormous
losses. For example, Brod estimates that a half-carat diamond
ring, which might cost $2,000 at a retail jewelry store,
could be sold for only $600 at Empire.
The appraisers at Empire Diamonds examine
thousands of diamonds a month but rarely turn up a diamond
of extraordinary quality. Almost all the diamonds they find
are slightly flawed, off-color, commercial-grade diamonds.
The chief appraiser says, "When most of these diamonds were
purchased, American women were concerned with the size of
the diamond, not its intrinsic quality." He points out that
the setting frequently conceals flaws, and adds, "The sort
of flawless, investment-grade diamond one reads about is
almost never found in jewelry."
Many of the elderly women who bring their
jewelry to Empire Diamonds and other buying services have
been victims of burglaries or muggings and fear further
attempts. Thieves, however, have an even more difficult
time selling diamonds than their victims. When suspicious-looking
characters turn up at Empire Diamonds, they are asked to
wait in the reception room, and the police are called in.
In January of 1980, for example, a disheveled youth came
into Empire with a bag full of jewelry that he called "family
heirlooms." When Brod pointed out that a few pieces were
imitations, the youth casually tossed them into the wastepaper
basket. Brod buzzed for the police.
When thieves bring diamonds to underworld
"fences," they usually get only a pittance for them. In
1979, for example, New York City police recovere stolen
diamonds with an insured value of $50,000 which had been
sold to a 'fence' for only $200. According to the assistant
district attorney who handled the case, the fence was unable
to dispose of the diamonds on 47th Street, and he was eventually
turned in by one of the diamond dealers he contacted.
While those who attempt to sell diamonds
often experience disappointment at the low price they are
offered, stories in gossip columns suggest that diamonds
are resold at enormous profits. This is because the column
items are not about the typical diamond ring that a woman
desperately attempts to peddle to small stores and diamond
buying services like Empire but about truly extraordinary
diamonds that movie stars sell, or claim to sell, in a publicity-charged
atmosphere. The legend created around the so-called "Elizabeth
Taylor" diamond is a case in point. This pear-shaped diamond,
which weighed 69.42 carats after it had been cut and polished,
was the fifty-sixth largest diamond in the world and one
of the few large-cut diamonds in private hands. Except that
it was a diamond, it had little in common with the millions
of small stones that are mass-marketed each year in engagement
rings and other jewelry.
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