#336 Why are diamonds so expensive?

Why are diamonds so expensive? Because we believe they should be expensive, not because they are rare.

We think that diamonds are expensive because they are rare, but they are not as rare as we think. Diamond is a structure made of carbon atoms that are arranged in a crystal structure. Diamond is one of the hardest natural materials on Earth and is the highest conductor of heat. It is beaten by some manmade materials, such as graphene. Diamonds are formed between 150 and 250 km in the Earth’s mantle and most diamonds are over 1 billion years old. It takes about 825,000 psi of pressure and a temperature of about 1,400°C to make a diamond. Once the diamonds are formed deep in the ground, they are carried to the surface by plate tectonics, volcanic eruptions, or earthquakes. In the same way as fossils, they can be found on the surface, or by digging a little way down. Diamonds are usually found in igneous rocks.

So, why are diamonds so expensive? Diamonds are not that rare. They are the most common precious stone found. About 133 carats of diamonds are mined every year. There are three reasons why diamonds are expensive even though they are not rare.

The first reason is that they used to be very rare and the largest diamond mining company, De Beers, limited the supply of diamonds for decades to convince us that they are still rare. Diamonds have been used in jewelry for thousands of years. They were very rare to find and were extremely expensive. Most of the world’s diamonds came from India and they were mined there from about 700 BC. In 1700 AD, diamonds were discovered in Brazil, but people said the quality was inferior. To combat this, Portuguese traders shipped the diamonds from Brazil to Goa and then on to Europe, claiming they were Indian diamonds. Diamonds were rare and diamonds were expensive.

This all changed in 1866. Diamonds were found in Kimberly, South Africa. This sparked a diamond rush and soon a number of companies were mining the area. Slowly, Cecil Rhodes, a British politician working in South Africa, bought up all of the mining companies using financial help from the Rothschild family. He named his new mining company De Beers. So, De Beers, which I had always thought was a Dutch company, is actually a British company.

As diamonds were discovered in more and more places, De Beers bought each mine up. Throughout all of the 20^th century, De Beers controlled 85% of the rough diamond trade. The heads of the company quickly realized that more diamonds would bring the price down. It was simple supply and demand. Because they wanted people to keep paying a lot for diamonds, they decided to limit the supply. Somewhere, presumably in London but the location doesn’t seem to be public knowledge, De Beers has a stockpile of about $5 billion worth of rough diamonds. They release them as needed, but never in large enough amounts to cause the price of diamonds to fall.

Since 2000, diamonds have been found in many other places and De Beers’ control of the diamond market has fallen to about 35%. However, these new diamond companies could flood the market and bring prices down, but they are not eager to do so because that would harm them as well. One day, true supply and demand will possibly enter the diamond market, but not for as long as the companies are allowed to keep price fixing.

The second reason is advertising. In 1947, a copywriter at De Beers came up with the slogan “a diamond is forever” and De Beers began one of the most successful advertising campaigns in history. They managed to convince the general public that an engagement ring had to have a diamond on it and no diamond meant no love. They also “sponsored” Hollywood movies to have diamonds shown prominently. In the space of a few years, they rebranded diamonds as something people should aspire to. Something that was expensive and something that the rich wore.

The third reason is that we have convinced ourselves. Diamonds were always rare, but we have convinced ourselves that they are expensive because they are rare. This is not true, but it is what we believe. And if we believe that something should be expensive, we don’t mind paying high prices for it. If people suddenly realized that diamonds are overpriced and stopped buying them, a diamond price war could very well start. De Beers, with its enormous stockpile of diamonds, would be well placed to survive a price war, but the benefits would be passed on to the consumer. If, that is, we can call being able to buy diamonds a “benefit”.

So, why are diamonds so expensive? It is because the large diamond companies control the supply and encourage us to think that they are rare. And this is what I learned today.

Sources

https://www.mentalfloss.com/article/55447/6-surprisingly-fascinating-stockpiles

https://www.cnbc.com/2012/08/27/the-billion-dollar-business-of-diamonds-from-mining-to-retail.html

https://www.gemsociety.org/article/are-diamonds-really-rare/

https://www.rarecarat.com/blog/diamond-ring-tips/why-are-diamonds-so-expensive

https://www.rockher.com/why-are-diamonds-expensive

https://en.wikipedia.org/wiki/De_Beers

https://en.wikipedia.org/wiki/Diamond_(gemstone)

https://en.wikipedia.org/wiki/Diamond