In 1890 (just two years after De Beers was founded), Britain saw coming off the press The Firm of Girdlestone, the romance written by Sir Arthur Conan Doyle.  One of the plotlines in this book had a straight relation to the diamond market, and the parent of Sherlock Holmes made there two amazing prophesies: he actually predicted a possibility of discovering huge diamond fields in Russia and formulated a theory proving that the diamond market was not in fact a commodity market, but an information market. The protagonist of this romance, a heavy-weight stock gambler from the City, was going to fix up a corner in diamonds. In this case “corner” was a stock-exchange buzzword meaning a market situation where certain assets turned to be under the control of one player giving him an opportunity to rule the prices arbitrarily, leaving other players to string along as if they were cornered – hence the term. Asked by his bewildered companion, “How on earth are you going to rule diamond prices? You would want the capital of a Rothschild?”, the protagonist answered back with an elegant combination saying he would send a team to Russia to “discover” a huge (although phoney) diamond field, while another team would start buying in real diamonds from the Cape Colony miners in South Africa all in panic from the news of an avalanche of Russian diamonds coming soon to the market and therefore ready to sell their crystals at dumping prices. Then, the original Russian scare having proved to be all a mistake, the prices would go up once more, and the sought-after profit would be cinched.  Virtually, the main instrument in this non-trivial affair was the correctly channelled information flow undertaken to be generated by the protagonist, for which purpose he did not need a Rothschild-size capital, since the corner was not actually made in diamonds but in information about diamonds, and this was essentially different from the point of view of expenses.

Naturally, any raw market is sensitive to information about discovering new deposits, political situation in mining countries, improvements in processing techniques, new industries, which may demand raw materials, etc. However, any raw material is finally processed into a product of some use value. If the use value of a gasoline gallon or that of a rice bushel is quite evident for the end buyer and is undoubtedly correlated with their price, one cannot say the same about diamonds. In would be incorrect to state that diamonds have no use value at all – of course, they meet some social and aesthetic needs of their buyers and owners. Nevertheless, filling gasoline into the fuel tank of his or her car, the consumer is as a rule able to figure out why forty litres of it cost twice as much as twenty and why fuel grades of different octane levels differ in their prices. At the same time, any gem expert can acknowledge the possibility of a situation when two diamonds virtually equal in their weight and of a similar cut have some dissimilarities in colour, clarity and polishing quality invisible to the naked eye resulting in their price difference of up to dozens of percent. This aspect makes the fundamental difference between the diamond market and any other commodity market. The end buyer of diamonds may be concerned with flaunting his or her status or overwhelmed by romantic feelings or eager to experience aesthetic delight in gem chatoyancy. Anyway, realization of these needs does not suggest a situation when magnificently looking diamonds on rings, earrings or necklaces consecrated by famous jewelry brands and worn by women at some reception would be subjected to examination by their envy-choked girl-friends with the help of a binocular microscope and assistance of a couple of gem lab wizards. Thus, the diamond market may produce a situation when two samples of goods equivalent in their use value may be differently priced. And the difference in this case is stipulated by expert, that is somewhat arbitrary, information about colour boundaries, micro-inclusions and flaws, pitch angles and plane deviations, etc. which are subliminal for regular vision and regular environment where the diamond is being “operated.”  This is like a car seller saying to the buyer, “Here are two mass-produced cars of the model you have chosen. They are quite similar in everything – their body type, colour, engine, cabin… However, using non-destructive examination methods it has been established that the carbon content in the metal of the left front wheel hub in this one particular car is higher by 0.00003%. This does not influence safety, power or speed. Actually, this does not influence any application properties. However, since there is indeed more carbon in it, we ask you to pay $1,760 more for this car!” At best, the automobile showroom visitor would reckon that the car seller has spent a roaring night at the nearest pub.

Incidentally, our discourse about two diamonds whose price difference is stipulated by parameters not affecting their “operational” qualities is a very moderate example in modern time, when the concepts of traditional values tend to abnegation. The absence of connection between the use value, gem features and price is absolutely proved by the commercial success of the so called “black diamonds” observed during the last ten years. A piece of crystalline carbon saturated with graphite inclusions up to the state of complete opacity is cut like a polished diamond and turns into a market hit, whereas some ten years ago this nightmare of gem experts could lay its only claim to be graded as “bort” and was traded as industrial application raw material at $1 per carat as its best price. And this is not some local success of market experts from De Grisogono, but the quintessence of the diamond market where information is the major commodity, while the rest are its derivatives.

How about the case when the end user of a diamond is considering its purchase as an investment object? May it be that in this case the certification characteristics come into compliance with the use value? Unfortunately, if we do not take into account the innumerable texts of glamour publications tuned to the famous assertion “Diamond is forever!” but instead limit ourselves to professional research of the investment potential of diamonds, it would not be difficult to come to a disappointing conclusion: moneymaking investments into diamonds are a myth. Of course, diamonds belong to irreplaceable natural resources and it is true that their prices on the long timeframes move upwards with some grades of rough and polished diamonds beating the inflation rate. Nevertheless, this is not enough – to make an asset attractive from the investment point of view there should be some wheelwork to guarantee its high liquidity. Buying and selling of a “blue chip” is executed in a fraction of a second at any point worldwide from any PC connected to a stock exchange system. How much time would a diamond owner need and what would be the selling procedure for an investment diamond should he or she decide the price went high enough while the diamond was kept? The problem is not that the diamond owner will need more time than some seller at a stock market, but that this time is not defined at all. The selling procedure is not defined either - the so-called “diamond exchanges” have nothing to do with the modern stock exchange trade and are virtually medieval urban markets. The truth is that sellers providing diamonds for end users are generally not acting as dealers in the secondary market or, to put it more simply, there is no even tentatively structured market of investment diamonds at all. Gems with history are the only exception - they are indeed an investment commodity, but its liquidity is maintained by quite a different wheelwork that is by the antiques market.

So then, the use value of a diamond cannot correlate with its price. This surprising fact means among other things that the price in this case is not stipulated by the balance of supply and demand. What stipulates it then? Why this or that diamond is worth this or that price at some current point of time? What (or who) is the generator of this particular price?

Let us leave the end user of the “gift of love” for some time and move to the diamond pipeline segment where diamonds are sold wholesale. Professional dealers are operating in this area, and here aesthetic motives cede to quite a prosaic wish to obtain the maximum possible profit. The gem features at this stage are a necessary and sufficient argument in the discussion stipulating the price. The process is quite transparent if we omit the natural discrepancies in expert evaluations, although as a rule their spread is insignificant. The difference in price of two diamonds virtually equal in their carat weight will be determined by their colour features, clarity and cutting quality described in terms of the GIA system for instance. “This one-carat stone costs more than that one by 25% because their comparative data by GIA is the following…”  - this is quite a fair argument since the comparative price is convincingly proved by the difference in gems qualities. But what determines the absolute price? Where these 25% shall be counted from – one cent, one dollar, one thousand dollars? This naive question will sure make laughing any diamantaire perfectly aware that about 90% of the absolute price of a polished diamond is the price of the rough diamond it is made of.

We have to go to the beginning of the diamond pipeline, to the level of mining companies, and try to understand their pricing policy. What kind of procedures, instruments and rules are used to make up, for instance, the price list of De Beers? Why the price for this diamond grade is such as it particularly is? And what will it be tomorrow? At this point, the diamantaires will stop smiling. Since there is no comprehensible answer to these questions.  It is a strange paradox, but the financial results of diamond mining companies are a known thing and their accounting reports (at least their major aspects) are opened. The market has a long history during which diamond prices fluctuated influenced by industrial and fundamental reasons, and this history is well described in many treatises.  What precludes the diamond market analysts from making an efficient public model of pricing possessing prognostic features, the more so because the companies traditionally prefer to consider the pricing pattern to be their commercial secret?   The analysts are hindered by the common error: they research the diamond market as a commodity market, while it is an information market. It is not difficult to calculate the costs of De Beers and those of ALROSA for mining, stripping and sorting out diamonds and to deduce the tax pressure on the mining companies. It is possible to predict the output and the range of mined products with a sufficient degree of probability. However, to forecast prices one should calculate the demand.  The demand for rough and polished diamonds? Or for the information shell of rough and polished diamonds? Evidently, these are different kinds of goods. Those who can feel the difference invent the slogan “Diamonds are forever!” and are successful in utilizing the huge torrent of small-size Soviet diamonds in “eternity rings” for American matrons; they develop the Japanese market from scratch and promote “black diamonds,” etc. Those who perceive the rough and polished diamond market as a commodity market tend to explain such success as the result of shrewd marketing aimed at promoting real goods – rough and polished diamonds proper. This is a widespread delusion.

The fundamental difference between the commodity market and the information market is that the product value in the latter is reversible: it may be created and increased and may be reduced to zero and even brought to a negative figure, all this being done exclusively with the help of information technologies. In the oil market, for instance, prices may change at enormous amplitude depending on many factors. The product may go up in price due to some terrorist attack in Nigeria, the position taken by the US FRS on the interest rate, vigorous statements by the President of Iran and so on and so forth. Such events are used for stock exchange gambling and powerful speculators have always a chance to move the price up or down. Some proficient people like Jorge Soros can work real miracles with prices in commodity markets. The only thing which cannot be done here is to deprive a commodity of its use value or, which is the same thing, to liquidate the market itself.  The oil price can be $8 per barrel and $125 per barrel. Nevertheless, its use value is indestructible so far there are internal combustion engines, chemical and pharmaceutical industries and other innumerable areas of the world economy where this product is required.

The market of an information product or, generally speaking, the market of a product whose use value is not actually connected with its physical features, can be quickly and efficiently destroyed engaging relatively inexpensive means, especially in modern environment, taking into account the mass communication development level. There is no necessity to develop this thesis theoretically in relation to our analysis since in this case there is a persuasive historic analogy. 

In 1875 Spain was swept by an outbreak of cholera. King Alfonso XII gives to his wife, Queen Mercedes, a gift, which is a finger ring with an exclusive opal, as a mascot against the deadly disease. The queen dies. The ring is then passed to the princess, who soon goes beyond the veil too. The king starts wearing the opal ring himself and also falls prey of cholera. This disconsolate story becomes a hit of the European press and is lingering on newspaper pages for a suspiciously long period fouled with blood curdling evidence related not so much to the adversities of the royal family as to harmfulness of... opal and jewelry with this stone. People find a congeries of historic examples “convincingly proving” that wearing opals led royal family members and many other distinguished representatives of the human kind to their death.  Astrologers, psychics, medical professors, etc. of every hue and cry explain the harmfulness of infernal opals to perplexed consumers swaying their heads in disaffection and pointing to the harmful radiation of opals, their ability to attract devilry and facilitate horrible diseases… It took two or three years for the market of “ill-fated” opals to follow Alfonso XII – it seized to exist, just went busted like a soap bubble. This market had two fascinating peculiarities: it was the largest market of gemstones in Europe, the then major consumer of jewelry products, while the opal fields were lying in the lands, which did not belong to the British Crown.

It remains to be said that opal was the most popular stone prior to diamond and that diamond market founder Cecil Rhodes appeared in South Africa in 1870, five years before the Spanish monarch gave up the spirit (indeed not because of opal magic but because of mistakes made by those who designed the water pipe and sewage system in the royal palace), and that a very large gem-quality opal field was discovered in Australia (British dominion) in 1872. In the end of this illuminative story the place of opal in the jewelry market was taken by diamond, and as a consolation prize to the British dominion there was launched a well organized and efficient campaign boiling down to the following brilliant argument – as it turned out, opals were harmful if taken elsewhere, but Australia.  The noble Australian opal was just fabulous – no harmful radiation, no devilry and no diseases at all, aborigines wear it and do not die of cholera, unlike the hapless Spaniards.  The opal market, which shrank for the benefit of diamonds quite a bit, was completely conquered by Australian stones. All this happened long before the television, Internet and satellite communications. However, the main thing is the principle, while technical means influence only the time aspect of the process.

In modern environment, the diamond use value may be brought down to zero and even acquire some negative meaning (the stone brings bad luck) much faster and cheaper than in the 19th century, at least without attracting any “Rothschild-scale capitals.” The rich historic trail of bloody dramas related to owning diamonds is vastly superior to the options of the infelicitous opal, while the techniques of manipulating the consumer awareness went far ahead. Discussing such a possibility with jewelry industry people you will invariably be met with a baffled question, “Who really needs it? This market feeds so many people…” There is a simple answer to this question. This technology may be wanted by those seeking to re-format the world jewelry market to suit some patented synthetics or some “unique crystals” made of purest natural silica sand ($30 a ton) and savoured with a hitherto-unknown-to-science element luckily helping to solve intimate problems; and finally by those who own natural deposits of gem-quality stones which are indeed more rare than diamonds. Do not start looking for such people and companies inside the small little world of diamond business – they will come from outside. The paradox is that the industry is working every day to increase such a possibility.

One of the most serious problems discussed by industry professionals is the unprecedented growth of uncontrolled rough stocks belonging to the grades called Indian Goods and Small Stones. Such stocks are of a speculative nature – their owners are not aimed at cutting their rough but instead prefer to seek (unfortunately, successfully) some opportunities to obtain credits on security of these diamonds. These credit funds are then invested into businesses, which have no relation to the rough and polished diamond market whatsoever. According to the industry insider information, the scale of these stocks today reached the level of the world annual output for these grades of rough. The probability that this gigantic speculative bubble will go busted is growing at a fast pace. The collapse of prices for these grades of diamonds will severely hit the major mining companies where such kind of rough has a sizable proportion in the output pattern and then this negative impact will go its way along the whole length of the diamond pipeline. However, the main danger is that fatal cheapening of the “eternal value” (although affecting small-size stones) will give a unique opportunity to those players who understand the informational nature of this market. Time will show if such players appear or not, but it cannot be denied that an idiosyncratic “cholera germ” for the diamond market does already exist in reality.

The human nature changed little since the time of Sir Arthur Conan Doyle. So, one should not forget the answer given by great admirer of the Victorian values John Girdlestone to his companion who nearly doubted the compliance of diamond corner to ethic principles, “Dishonest!  Pooh!”  The merchant snapped his fingers. “It’s finesse, my boy, commercial finesse. Who’s to trace it, I should like to know.”