Diamonds Pricing and Ethical Issues Surrounding Diamonds
Table of Contents
History of Diamond and Diamond Trading
Return Characteristics of Diamonds
Current Market Structure
Ethical Issues (Diamond Conflict)
Diamonds are believed to be among the most precious commodities for trade. In the past three centuries, diamond has been considered to as one of the rare mineral elements in the earth’s crust. However, the immense demand for diamond by the global population appears to be the most probable reason as to why diamond has always been considered as a scarce trade commodity. Interestingly, geological findings indicate that diamonds top the list of the most abundant gem-quality colored stones. It is argued that diamond pricing is the most outstanding feature which creates unusual demand; thus, making diamonds rare (Yale University n.d.). The second reason why diamond has been considered to be scarce is the nature of its market structure. Over the years, diamond market has been characterized with an unprecedented monopoly in which a single player existed in the market. As a result, diamond pricing and its supply experienced unique market trends, and this is the principal reason as to why diamond supply chain has been manipulated to create market demand against business ethics. Yale University reports “Diamonds are rare because The De Beers Company, the world’s main supplier of diamonds, makes them rare; the company controls most of the world’s diamond mines and limits the quantity of diamonds supplied to the market” (p. 2). The De Beers Company has been exercising monopoly since its establishment in 1880s when Cecil Rhodes started diamond trading (Erlich & Hausel 2002). Despite the legal barriers including the U.S anti-trust laws, this company has always exercised monopoly in diamond trading. However, monopoly in the diamond market seems to end soon because its supply will increase significantly after Russia joins the market. Recently, a huge diamond field was discovered in Siberia which can supply the world market with trillion of carats in the next thirty centuries (Worstall 2012, par. 2). As a result, the structure of the diamond market is believed to change drastically in the future. Therefore, this research paper will provide an overview of diamond trading, especially with regard to the principal elements of diamond pricing.
History of Diamond and Diamond Trading
Historically, diamonds are known as beautiful objects of desire and their history is quite long. This is probably the principal reason as to why Pliny, a Roman naturalist remarked “diamond is the most valuable, not only of precious stones, but of all things in this world” (Gemological Institute of America 2014, par. 1). Precisely, the history of diamonds reflects the beauty and mystical powers combined with commercial expertise.
Despite the old-age myths, which overshadowed the history of diamonds including the mythical valley of diamonds which was said to have been guarded by venomous snakes, the magnificent nature of diamonds history unearth some of the most remarkable moments in the development of ancient cultures. According to the early history, diamonds date as early as thirty centuries. Gemological Institute of America (2014, par. 3) reports “the world’s love of diamonds had its start in India, where diamonds were gathered from the country’s rivers and streams. Some historians estimate that India was trading in diamonds as early as the fourth century BC”. It is believed that, diamonds became valued for its ability to refract light. In those days, Indians used diamonds for decorative purposes in their works of art. It is also believed that, diamonds were used as a talisman. As such, they provided protection in battles, as well as, warding of evil.
It is believed that, intensive exploitation of diamonds in India for commercial purposes led to the depletion of diamond mines in the early 1700s. This disruption of diamond supply from India led to an intensive search for the commodity in other parts of the world. Thereafter, Brazil became one of the earliest sources of diamond where diamond was discovered by gold miners along river banks. Historians believe that the extensive demand for diamond enabled Brazil to exercise dominance in the diamond market for one and half centuries. Unfortunately, diamond trading declined drastically in the late 1700s owing to the impact of the French Revolution which influenced wealth distribution among the most potential diamond consumers who served as the ruling classes. This was so because; Brazil relied on the European market for its diamond; thus, political upheavals in Western Europe disrupted diamond supply, leading to devastating economic consequences on Brazil’s diamond (Gemological Institute of America 2014).
However, diamond market was greeted with an unprecedented demand at the beginning of the 1800s. For instance, the United States and Western Europe gained significant affluence after European explorers discovered vast treasures of diamond in South Africa leading to the broadening of the diamond trade.
The discovery of diamond deposits in Kimberley, South Africa in 1866 marked the beginning of the modern diamond trading history. Later on in 1888, Cecil Rhodes, a British Businessman established the De Beers Company to control diamond mines in South Africa. It is reported that, De Beers Company gained control of the diamond market by 1900 in which it held 90% of the world’s diamond supply. However, it is worth noting that diamond market faced enormous challenges, especially in mining because surface diamond became depleted. As a result, underground diamond proved highly costly, and this caused a significant decline of diamond production. It is believed that, these challenges in diamond mining prompted miners to adopt efficient mining techniques in the effort of reducing the cost of production. In addition, diamond cutting and polishing emerged as some of the most cost reducing techniques, although these techniques improved the “appearance of finished stones” (Gemological Institute of America 2014, par. 8).
In the 1920s, diamond production had increased significantly to reach 3 million carats from the low production of less than a million carats, in 1870s. Thereafter, diamond production increased immensely to reach 50 million carats by 1970s, and this production doubled by 1990s in which the annual diamond production was 100 million carats. This was relatively low compared to the current yearly production in which 125.6 million carats produced in 2011 (Israel Diamond Institute 2012).
In regard to rough diamond supply, African continent served as the leading diamond producer by the end of 1970s although Soviet Union produced a significant share in the diamond market. It is believed that, South Africa and Soviet Union supplied the diamond market with high-quality diamond in 1980s, whereas Zaire produced low-quality diamond. However, the discovery of a new diamond mine in Botswana, in 1982 increased production of high-quality diamond to enable the country to attain the third rank for diamond recovery in the world. This discovery prompted the De Beers Company to persuade the government of Botswana, in order to gain control of diamond mining in the South African region. As a result, Botswana established a diamond-cutting industry through a contract with De Beers Company. Thereafter, diamond market experienced an immense expansion after diamond was discovered in other parts of the world including Australia and Canada, although diamond trading did not attract significant scientific research until recently (Gemological Institute of America 2014).
Return Characteristics of Diamonds
It has been found out that the return characteristics of diamonds are quite different from those of other precious stones in the market. These changes are attributable to the ethical considerations which surround diamonds trading. Another significant factor which determines the return characteristics of diamonds is the history of diamonds investment which reflects elements of monopoly in an imperfect market which allows unscrupulous dealers to hoard the commodity for the purpose of creating inadequacy in diamond supplies in the market. This aspect is also influenced by the current market structure of diamonds trading, although it seems to have changed from monopoly to oligopoly structure after many players in diamonds trading joined the global diamonds market. However, diamond valuing remain to be a significant factor that influences the return characteristics of diamonds, especially in regard to the metrics used in diamonds pricing.
In general, diamonds trading has been found to be associated with low CAMP. It also bears low correlations with gold, long-term US bond prices and the S&P 500. Moreover, diamonds trading has been found to exhibit low correlations with the US inflation. In comparison with gold, diamond investment involves enormous risks because it does not withstand extreme shocks on the stock market, whereas gold can be synchronized with stocks. Schiemenz ( 2012, p. 25) states “gold can be regarded as a safe haven investment in the context of extreme shocks occurring on stock markets on a daily basis…, in conditions of extreme market uncertainty, gold moves synchronous with stocks and other risky assets.” Evidence for diamonds correlation can be provided by the three different economic phases in the U.S economy: expansion 2002-2006, recession 2007-2009 and recovery 2010-2013. Diamond trading proved to be a risky investment because is not responding to stock market changes in a synchronized manner as it was the case with gold. As such, it is believed to contribute to the US inflation. However, it is worth noting that diamonds returns are influenced by the number of wealthy investors in high valued diamonds. It is believed that the increase of wealthy investors has led to the soaring prices (Kolesnikov-Jessop 2013). In regard to the liquidity of the diamond market, diamond trading is correlated to low liquidity costs, and this influences diamond pricing. This has been so because; investors experience challenges in buying and selling of diamonds in the secondary markets, although the proposed move of introducing exchange-traded fund is expected to ease trading.
Current Market Structure
Diamond market structure has always been characterized with monopoly in which De Beers Company controls diamond marketing in the world. Yale University (n.d., p. 2) reports that since 1889, “large diamond deposits have been discovered in other African countries, Russia, Australia, and India. De Beers has either bought out new producers or entered into agreements with local governments.” This implies that De Beers controls diamond marketing in the world, and this is the reason as to why it has been exercising monopoly in the global diamond market. This aspect is reaffirmed by Zimnisky (2013, par. 1) who states “De Beers was the diamond industry, and diamonds were synonymous with De Beers.”