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A serious threat to the Stability of
the diamond invention came in the late 1970s from the sale
of "investment" diamonds to speculators in the United States.
A large number of fraudulent investment firms, most of them
in Arizona, began telephoning prospective clients drawn
from various lists of professionals and investors who had
recently sold stock. "Boiler-room operators," many of them
former radio and television announcers, persuaded strangers
to buy mail-order diamonds as investments that were supposedly
much safer than stocks or bonds. Many of the newly created
firms also held "diamond-investment seminars" in expensive
resort hotels, where they presented impressive graphs and
data. Typically assisted by a few well-rehearsed shills
in the audience, the seminar leaders sold sealed packets
of diamonds to the audience. The leaders often played on
the fear of elderly investors that their relatives might
try to seize their cash assets and commit them to nursing
homes. They suggested that the investors could stymie such
attempts by putting their money into diamonds and hiding
them.
The sealed packets distributed at these
seminars and through the mail included certificates guaranteeing
the quality of the diamonds -- as long as the packets remained
sealed. Customers who broke the seal often learned from
independent appraisers that their diamonds were of a quality
inferior to that stated. Many were worthless. Complaints
proliferated so fast that, in 1978, the attorney general
of New York created a "diamond task force" to investigate
the hundreds of allegations of fraud.
Some of the entrepreneurs were relative
newcomers to the diamond business. Rayburne Martin, who
went from De Beers Diamond Investments, Ltd. (no relation
to the De Beers cartel) to Tel-Aviv Diamond Investments,
Ltd. -- both in Scottsdale, Arizona -- had a record of embezzlement
and securities law violations in Arkansas, and was a fugitive
from justice during most of his tenure in the diamond trade.
Harold S. McClintock, also known as Harold Sager, had been
convicted of stock fraud in Chicago and involved in a silver-bullion-selling
caper in 1974 before he helped organize DeBeers Diamond
Investments, Ltd. Don Jay Shure, who arranged to set up
another DeBeers Diamond Investments, Ltd., in Irvine, California,
had also formerly been convicted of fraud. Bernhard Dohrmann,
the "marketing director" of the International Diamond Corporation,
had served time in jail for security fraud in 1976. Donald
Nixon, the nephew of former President Richard M. Nixon,
and fugitive financier Robert L. Vesco were, according to
the New York State attorney general, participating in the
late 1970s in a high-pressure telephone campaign to sell
"overvalued or worthless diamonds" by employing "a battery
of silken-voiced radio and television announcers." Among
the diamond salesmen were also a wide array of former commodity
and stock brokers who specialized in attempting to sell
sealed diamonds to pension funds and retirement plans.
In London, the real De Beers, unable
to stifle all the bogus entrepreneurs using its name, decided
to explore the potential market for investment gems. It
announced in March of 1978 a highly unusual sort of "diamond
fellowship" for selected retail jewelers. Each jeweler who
participated would pay a $2,000 fellowship fee. In return,
he would receive a set of certificates for investment-grade
diamonds, contractual forms for "buy-back" guarantees, promotional
material, and training in how to sell these unmounted diamonds
to an entirely new category of customers. The selected retailers
would then sell loose stones rather than fine jewels, with
certificates guaranteeing their value at $4,000 to $6,000.
De Beers's modest move into the investment-diamond
business caused a tremor of concern in the trade. De Beers
had always strongly opposed retailers selling "investment"
diamonds, on the grounds that because customers had no sentimental
attachment to such diamonds, they would eventually attempt
to resell them and cause sharp price fluctuations.
If De Beers had changed its policy toward
investment diamonds, it was not because it wanted to encourage
the speculative fever that was sweeping America and Europe.
De Beers had "little choice but to get involved," as one
De Beers executive explained. Many established diamond dealers
had rushed into the investment field to sell diamonds to
financial institutions, pension plans, and private investors.
It soon became apparent in the Diamond Exchange in New York
that selling unmounted diamonds to investors was far more
profitable than selling them to jewelry shops. By early
1980, David Birnbaum, a leading dealer in New York, estimated
that nearly a third of all diamond sales in the United States
were, in terms of dollar value, of these unmounted investment
diamonds. "Only five years earlier, investment diamonds
were only an insignificant part of the business," he said.
Even if De Beers did not approve of this new market in diamonds,
it could hardly ignore a third of the American diamond trade.
To make a profit, investors must at some
time find buyers who are willing to pay more for their diamonds
than they did. Here, however, investors face the same problem
as those attempting to sell their jewelry: there is no unified
market in which to sell diamonds. Although dealers will
quote the prices at which they are willing to sell investment-grade
diamonds, they seldom give a set price at which they are
willing to buy diamonds of the same grade. In 1977, for
example, Jewelers' Circular Keystone polled a large number
of retail dealers and found a difference of over 100 percent
in offers for the same quality of investment-grade diamonds.
Moreover, even though most investors buy their diamonds
at or near retail price, they are forced to sell at wholesale
prices. As Forbes magazine pointed out, in 1977, "Average
investors, unfortunately, have little access to the wholesale
market. Ask a jeweler to buy back a stone, and he'll often
begin by quoting a price 30% or more below wholesale." Since
the difference between wholesale and retail is usually at
least 100 percent in investment diamonds, any gain from
the appreciation of the diamonds will probably be lost in
selling them.
"There's going to come a day when all
those doctors, lawyers, and other fools who bought diamonds
over the phone take them out of their strongboxes, or wherever,
and try to sell them," one dealer predicted last year. Another
gave a gloomy picture of what would happen if this accumulation
of diamonds were suddenly sold by speculators. "Investment
diamonds are bought for $30,000 a carat, not because any
woman wants to wear them on her finger but because the investor
believes they will be worth $50,000 a carat. He may borrow
heavily to leverage his investment. When the price begins
to decline, everyone will try to sell their diamonds at
once. In the end, of course, there will be no buyers for
diamonds at $30,000 a carat or even $15,000. At this point,
there will be a stampede to sell investment diamonds, and
the newspapers will begin writing stories about the great
diamond crash. Investment diamonds constitute, of course,
only a small fraction of the diamonds held by the public,
but when women begin reading about a diamond crash, they
will take their diamonds to retail jewelers to be appraised
and find out that they are worth less than they paid for
them. At that point, people will realize that diamonds are
not forever, and jewelers will be flooded with customers
trying to sell, not buy, diamonds. That will be the end
of the diamond business."
BUT a panic on the part of investors
is not the only event that could end the diamond business.
De Beers is at this writing losing control of several sources
of diamonds that might flood the market at any time, deflating
forever the price of diamonds.
In the winter of 1978, diamond dealers
in New York City were becoming increasingly concerned about
the possibility of a serious rupture, or even collapse,
of the "pipeline" through which De Beers's diamonds flow
from the cutting centers in Europe to the main retail markets
in America and Japan. This pipeline, a crucial component
of the diamond invention, is made up of a network of brokers,
diamond cutters, bankers, distributors, jewelry manufacturers,
wholesalers, and diamond buyers for retail establishments.
Most of the people in this pipeline are Jewish, and virtually
all are closely interconnected, through family ties or long-standing
business relationships.
An important part of the pipeline goes
from London to diamond-cutting factories in Tel Aviv to
New York; but in Israel, diamond dealers were stockpiling
supplies of diamonds rather than processing and passing
them through the pipeline to New York. Since the early 1970s,
when diamond prices were rapidly increasing and Israeli
currency was depreciating by more than 50 percent a year,
it had been more profitable for Israeli dealers to keep
the diamonds they received from London than to cut and sell
them. As more and more diamonds were taken out of circulation
in Tel Aviv, an acute shortage began in New York, driving
prices up.
In early 1977, Sir Philip Oppenheimer
dispatched his son Anthony to Tel Aviv, accompanied by other
De Beers executives, to announce that De Beers intended
to cut the Israeli quota of diamonds by at least 20 percent
during the coming year. This warning had the opposite effect
of what he intended. Rather than paring down production
to conform to this quota, Israeli manufacturers and dealers
began building up their own stockpiles of diamonds, paying
a premium of 100 percent or more for the unopened boxes
of diamonds that De Beers shipped to Belgian and American
dealers. (By selling their diamonds to the Israelis, the
De Beers clients could instantly double their money without
taking any risks.) Israeli buyers also moved into Africa
and began buying directly from smugglers. The Intercontinental
Hotel in Liberia, then the center for the sale of smuggled
goods, became a sort of extension of the Israeli bourse.
After the Israeli dealers purchased the diamonds, either
from De Beers clients or from smugglers, they received 80
percent of the amount they had paid in the form of a loan
from Israeli banks. Because of government pressure to help
the diamond industry, the banks charged only 6 percent interest
on these loans, well below the rate of inflation in Israel.
By 1978, the banks had extended $850 million in credit to
diamond dealers, an amount equal to some 5 percent of the
entire gross national product of Israel. The only collateral
the banks had for these loans was uncut diamonds.
De Beers estimated that the Israeli stockpile
was more than 6 million carats in 1977, and growing at a
rate of almost half a million carats a month. At that rate,
it would be only a matter of months before the Israeli stockpile
would exceed the cartel's in London. If Israel controlled
such an enormous quantity of diamonds, the cartel could
no longer fix the price of diamonds with impunity. At any
time, the Israelis could be forced to pour these diamonds
onto the world market. The cartel decided that it had no
alternative but to force liquidation of the Israeli stockpile.
If De Beers wanted to bring the diamond
speculation under control, it would have to clamp down on
the banks, which were financing diamond purchases with artificially
low interest rates. De Beers announced that it was adopting
a new strategy of imposing "surcharges" on diamonds. Since
these "surcharges," which might be as much as 40 percent
of the value of the diamonds, were effectively a temporary
price increase, they could pose a risk to banks extending
credit to diamond dealers. For example, with a 40 percent
surcharge, a diamond dealer would have to pay $1,400 rather
than $1,000 for a small lot of diamonds; however, if the
surcharge was withdrawn, the diamonds would be worth only
a thousand dollars. The Israeli banks could not afford to
advance 80 percent of a purchase price that included the
so-called surcharge; they therefore required additional
collateral from dealers and speculators. Further, they began,
under pressure from De Beers, to raise interest rates on
outstanding loans.
Within a matter of weeks in the summer
of 1978, interest rates on loans to purchase diamonds went
up 50 percent. Moreover, instead of lending money based
on what Israeli dealers paid for diamonds, the banks began
basing their loans on the official De Beers price for diamonds.
If a dealer paid more than the De Beers price for diamonds
-- and most Israeli dealers were paying at least double
the price -- he would have to finance the increment with
his own funds.
To tighten the squeeze on Israel, De
Beers abruptly cut off shipments of diamonds to forty of
its clients who had been selling large portions of their
consignments to Israeli dealers. As Israeli dealers found
it increasingly difficult either to buy or finance diamonds,
they were forced to sell diamonds from the stockpiles they
had accumulated. Israeli diamonds poured onto the market,
and prices at the wholesale level began to fall. This decline
led the Israeli banks to put further pressure on dealers
to liquidate their stocks to repay their loans. Hundreds
of Israeli dealers, unable to meet their commitments, went
bankrupt as prices continued to plunge. The banks inherited
the diamonds.
Last spring, executives of the Diamond
Trading Company made an emergency trip to Tel Aviv. They
had been informed that three Israeli banks were holding
$1.5 billion worth of diamonds in their vaults -- an amount
equal to nearly the annual production of all the diamond
mines in the world -- and were threatening to dump the hoard
of diamonds onto an already depressed market. When the banks
had investigated the possibilities of reselling the diamonds
in Europe or the United States, they found little interest.
The world diamond market was already choked with uncut and
unsold diamonds. The only alternative to dumping their diamonds
on the market was reselling them to De Beers itself.
De Beers, however, is in no position
to absorb such a huge cache of diamonds. During the recession
of the mid-970s, it had to use a large portion of its cash
reserve to buy diamonds from Russia and from newly independent
countries in Africa, in order to preserve the cartel arrangement.
As it added diamonds to its stockpile, De Beers depleted
its cash reserves. Furthermore, in 1980, De Beers found
it necessary to buy back diamonds on the wholesale markets
in Antwerp to prevent a complete collapse in diamond prices.
When the Israeli banks approached De Beers about the possibility
of buying back the diamonds, De Beers, possibly for the
first time since the depression of the 1930s, found itself
severely strapped for cash. It could, of course, borrow
the $1.5 billion necessary to bail out the Israeli banks,
but this would strain the financial structure of the entire
Oppenheimer empire.
Sir Philip Oppenheimer, Monty Charles,
Michael Grantham, and other top executives from De Beers
and its subsidiaries attempted to prevent the Israeli banks
from dumping their hoard of diamonds. Despite their best
efforts, however, the situation worsened. Last September,
Israel's major banks quietly informed the Israeli government
that they faced losses of disastrous proportions from defaulted
accounts almost entirely collateralized with diamonds. Three
of Israel's largest banks -- the Union Bank of Israel, the
Israel Discount Bank, and Barclays Discount Bank -- had
loans of some $660 million outstanding to diamond dealers,
which constituted a significant portion of the bank debt
in Israel. To be sure, not all of these loans were in jeopardy;
but, according to bank estimates, defaults in diamond accounts
rose to 20 percent of their loan portfolios. The crisis
had to be resolved either by selling the diamonds that had
been put up as collateral, which might precipitate a worldwide
selling panic, or by some sort of outside assistance from
the Israeli government or De Beers or both. The negotiations
provided only stopgap assistance: De Beers would buy back
a small proportion of the diamonds, and the Israeli government
would not force the banks to conform to banking regulations
that would result in the liquidation of the stockpile.
"Nobody took into account that diamonds,
like any other commodity, can drop in value," Mark Mosevics,
chairman of First International Bank of Israel, explained
to The New York Times. According to industry estimates,
the average one-carat flawless diamond had fallen in value
by 50 percent since January of 1980. In March of 1980, for
example, the benchmark value for such a diamond was $63,000;
in September of 1981, it was only $23,000. This collapse
of prices forced Israeli banks to sell diamonds from their
stockpile at enormous discounts. One Israeli bank reportedly
liquidated diamonds valued at $6 million for $4 million
in cash in late 1981. It became clear to the diamond trade
that a major stockpile of large diamonds was out of De Beers's
control.
THE most serious threat to De Beers is
yet another source of diamonds that it does not control
-- a source so far untapped. Since Cecil Rhodes and the
group of European bankers assembled the components of the
diamond invention at the end of the nineteenth century,
managers of the diamond cartel have shared a common nightmare
-- that a giant new source of diamonds would be discovered
outside their purview. Sir Ernest Oppenheimer, using all
the colonial connections of the British Empire, succeeded
in weaving the later discoveries of diamonds in Africa into
the fabric of the cartel; Harry Oppenheimer managed to negotiate
a secret agreement that effectively brought the Soviet Union
into the cartel. However, these brilliant efforts did not
end the nightmare. In the late 1970s, vast deposits of diamonds
were discovered in the Argyle region of Western Australia,
near the town of Kimberley (coincidentally named after Kimberley,
South Africa). Test drillings last year indicated that these
pipe mines could produce up to 50 million carats of diamonds
a year -- more than the entire production of the De Beers
cartel in 1981. Although only a small percentage of these
diamonds are of gem quality, the total number produced would
still be sufficient to change the world geography of diamonds.
Either this 50 million carats would be brought under control
or the diamond invention would be destroyed.
De Beers rapidly moved to get a stranglehold
on the Australian diamonds. It began by acquiring a small,
indirect interest in Conzinc Riotinto of Australia, Ltd.
(CRA), the company that controlled most of the mining rights.
In 1980, it offered a secret deal to CRA through which it
would market the total output of Australian production.
This agreement might have ended the Australian threat if
Northern Mining Corporation, a minority partner in the venture,
had accepted the deal. Instead, Northern Mining leaked the
terms of the deal to a leading Australian newspaper, which
reported that De Beers planned to pay the Australian consortium
80 percent less than the existing market price for the diamonds.
This led to a furor in Australia. The opposition Labour
Party charged not only that De Beers was seeking to cheat
Australians out of the true value of the diamonds but that
the deal with De Beers would support the policy of apartheid
in South Africa. It demanded that the government impose
export controls on the diamonds rather than allow them to
be controlled by a South African corporation. Prime Minister
Malcolm Fraser, faced with a storm of public protest, said
that he saw no advantage in "arrangements in which Australian
diamond discoveries only serve to strengthen a South African
monopoly." He left the final decision on marketing, however,
to the Western Australia state government and the mining
companies, which may or may not decide to make an arrangement
with De Beers.
De Beers also faces a crumbling empire
in Zaire. Sir Ernest Oppenheimer had concluded, more than
fifty years ago, that control over the diamond mines in
Zaire (then called the Belgian Congo) was the key to the
cartel's control of world production. De Beers, together
with its Belgian partners, had instituted mining and sorting
procedures that would maximize the production of industrial
(rather than gem) diamonds. Since there was no other ready
customer for the enormous quantities of industrial diamonds
the Zairian mines produced, De Beers remained their only
outlet. In June of last year, however, President Mobuto
abruptly announced that his country's exclusive contract
with a De Beers subsidiary would not be renewed. Mobuto
was reportedly influenced by offers he received for Zaire's
diamond production from both Indian and American manufacturers.
According to one New York diamond dealer, "Mobuto simply
wants a more lucrative deal." Whatever his motives, the
sudden withdrawal of Zaire from the cartel further undercuts
the stability of the diamond market. With increasing pressure
for the independence of Namibia, and a less friendly government
in neighboring Botswana, De Beers's days of control in black
Africa seem numbered.
Even in the midst of this crisis, De
Beers's executives in London have been maneuvering to save
the diamond invention by buying up loose diamonds. The inventory
of diamonds in De Beers's vault has swollen to a value of
over a billion dollars -- twice the value of the 1979 inventory.
To rekindle the demand for diamonds, De Beers recently launched
a new multimillion-dollar advertising campaign (including
$400,000 for television advertisements during the British
royal wedding in July), yet it can be expected to buy only
a few years of time for the cartel. By the mid-1980s, the
avalanche of Australian diamonds will be pouring onto the
market. Unless the resourceful managers of De Beers can
find a way to gain control of the various sources of diamonds
that will soon crowd the market, these sources may bring
about the final collapse of world diamond prices. If they
do, the diamond invention will disintegrate and be remembered
only as a historical curiosity, as brilliant in its way
as the glittering little stones it once made so valuable.
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