The last part discusses the so-called “stability” of the diamond market and how little it may take to make this market collapse.
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…
…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…
De Beers decided to squeeze the banks financing diamond sales by imposing “surcharges”.
…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a diamond dealer would have to pay $1,400 rather than $1,000 for a small lot of diamonds; however, if the surcharge was withdrawn, the diamonds would be worth only a thousand dollars.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…
…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…
Ok, that’s enough to scare me and to get me to think and rethink. I must admit that the investment value of diamonds–as things that appreciated with time–really got me. I really believed that. But now, I must admit that I am on the verge of digging deeper to find out if I had been continuously repeating a very, very bad mistake. It may not be wise to make a complete turnabout based on one newspaper article alone. But the amount of research that had been poured into writing that article is impressive and credible enough to merit more than a cursory reading. More research is in order to answer the question that is now nagging me: Had I been spending money on trinkets whose value is only artificial?
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