Editor's note: Bill Brown will be traveling during the next few months. His column is scheduled to resume in mid-September.
I'm not sure why June is the most popular month for weddings. I know a young man's fancy turns to love in the spring, but it seems like June is a bit quick for that love to turn to marriage. Whatever, June has long been the most popular month for marriage and I suppose it always will be. But that most visible symbol of love and marriage - the diamond engagement ring - has a much shorter history. In fact, it is only recently that diamonds have become the standard for engagement rings. Today, people value diamonds both as a symbol of love and as an investment. Economists can't say much about love or the symbolic value of diamonds, but we do know something about investing.
The South African diamond monopolist De Beers began a worldwide marketing campaign in the 1920s to increase the demand and perceived value of diamonds. The phrases ``diamonds are a girl's best friend'' and ``diamonds last forever'' are two of De Beers' more memorable advertising slogans. De Beers also sought to associate diamonds with the good life by giving diamond jewelry to movie stars to wear in the movies. The only restriction was that the diamonds could only be shown when the characters were happy.
De Beers also took steps to reduce the available supply of diamonds. When new diamond mines were discovered around the world, De Beers quickly bought them up to withhold diamonds from the market. Such measures are necessary because, contrary to popular belief, there is no shortage of diamonds. Many dry river beds in Africa, Australia and Russia are virtually littered with diamonds. If competitors refused to sell, De Beers coerced them into agreeing to production quotas. De Beers' control of the world diamond market is so complete today - it directly produces over half of the world's high quality diamonds - that it is illegal for De Beers to operate in the United States. Only smaller and lower quality diamonds are outside of De Beers' control. Many of these diamonds are mined in Russia and cut in India using very low wage workers.
To keep the price of diamonds high, it has been necessary for De Beers to buy and stockpile diamonds. That is extremely expensive, and how long De Beers can maintain this practice is not clear. De Beers is concerned that its diamond sales have increased at only about the pace of economic growth over the past 50 years. The sale of most luxury goods have risen substantially faster than the pace of economic growth. This may explain why De Beers' stock fell more than 50 percent in the past year, from $35 to $15. De Beers may be able to increase its profit performance if it expands from raw diamond sales into the more lucrative diamond cutting or branded jewelry making.
There are also political problems that may hurt De Beers and the diamond industry. The war in Sierra Leone and the Congo is thought to be largely financed by diamond sales by the rebels and outlaw governments. The eight largest industrial countries in the world, the G8, is considering additional regulations on the diamond trade.
What does this all mean to you young lovers planning to buy a diamond? Nothing is ever certain in economics and trying to predict prices in markets dominated by monopoly forces is exceedingly difficult. But we can make a few educated guesses. First, diamond prices are high largely because of contrived scarcity. Without the De Beers diamond monopoly, prices would almost certainly be much lower than they are today. Second, it does appear that De Beers power is weakening somewhat. This may mean that there will be additional sources for diamonds in the future. This would lead to stabilizing or even lower diamond prices. Perhaps. But Nick Oppenheimer, chairman of De Beers, maintains that the demand for diamonds can be assured so long as ``the consumer retains his or her belief in the diamond as a symbol of love, purity and natural and enduring beauty.'' That may well be, but think again if you are buying that diamond as an investment. Consumers, like lovers, can be fickle. And the world is changing.
Bill Brown teaches economics at the University of Alaska Southeast. He can be reached at email@example.com.
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