Diamonds are called “a woman’s best friend”. They can be used to show off your incredible wealth, cut granite, or launder money if you’re an African warlord. In any case, diamonds are the physical representation of opulence, and the industry is going through a period of change that provides investors with huge opportunities.
The diamond trade has traditionally been one of the most secretive industries in the world. De Beers, a diamond cartel, had an almost absolute monopoly on the business for over 100 years, during which it regulated the supply of diamonds and kept prices inflated. A few diamond trading houses located mostly in Antwerp, Belgium, were designated “sight holders” by De Beers and could purchase rough diamonds in bulk (rough diamonds are diamonds yet to be cut and polished). These diamond trading houses were the secret link between diamond mines in African countries like Botswana and premium jewelry outlets in New York, London, and Hong Kong. Diamond trading was a largely deregulated affair and deals were often done behind closed doors with little or no paper trail. While other industries modernized and were transformed by improving technology, diamond trading remained entrenched in its roots.
This all began to change during the early 2000’s when suddenly people began to notice how diamonds were financing brutal regimes and atrocities in Africa. Movies like “Blood Diamond” and “Lord of War” showed how diamonds illegally sourced in war zones in Africa using slave and child labor, were used to finance war and horror. Amid public uproar, governments began to increasingly scrutinize the diamond industry. Under increasing public pressure and government regulations, De Beers made the decision to only sell diamonds sourced at its own mines (before De Beers would force independent diamond miners to market and sell their diamonds through them, threatening to flood the diamond market with supply if the independent miner refused.). Free of the De Beers diamond monopoly smaller diamond miners began to grab market share and produce their own diamonds and for the first time, there was no single player regulating the supply.
At the same time as the De Beers monopoly was being taken apart, diamond traders began to look to new growth markets. A rise in incomes and a new middle class in large emerging countries like China and India created a whole new class of people who could afford to buy diamonds. This convinced diamond traders that the demand for jewelry was about to explode. To be ready for the increased demand, diamond manufacturers (those who cut and polish diamonds), began to buy up rough diamonds in bulk. Banks, hoping to take advantage of the coming diamond boom themselves, were more than happy to extend large amounts of credit to these diamond manufacturers. The increased demand for rough diamonds allowed diamond miners to raise prices for rough stones. From 2009 to the Spring of 2011 rough diamond prices rose 75%. The expectation of strong demand for diamond jewelry in China and India led to over speculation in the diamond market which created a diamond bubble. In the Spring of 2011 the bubble burst. Demand from China, although growing rapidly, was not enough to meet the expectations of the diamond industry. This caused diamond prices to collapse, from their 2011 highs to 2012 diamond prices crashed 20%. Suddenly an over-leveraged diamond manufacturing industry was facing significant losses and was forced to curb rough diamond buying. This has led to a long-term recession in the diamond industry.
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