In
1977, in Los Angeles, a film producer, who had just
closed his account with his stockbroker, received an
unexpected call from a stranger with a distinct English
accent. The caller, identifying himself as a representative
of "De Beers Diamond Investments, Ltd.," began by commending
the producer on his acumen in withdrawing from the stock
market. "You obviously are aware of the fact that stocks
and bonds can't keep pace with inflation," he continued
in a soft voice, "but have you considered diamonds as
an alternative?" He explained that diamonds had appreciated
"700 percent over the last ten years," and that they
were the "most prudent investment available, since the
supply is tightly controlled by a private monopoly."
Without further ado, the caller offered to sell the
film producer a selection of "investment diamonds" for
$5,000.
"But how can I buy
diamonds over the phone," the producer asked incredulously.
"All the diamonds are
sealed in plastic with a certificate guaranteeing their
quality," the caller responded. "And of course you have
heard of De Beers." The more hesitant the producer became,
the more determined the caller became. "We can register
these diamonds under your wife's name, which might be
helpful for your taxes," the caller went on.
"Think of how surprised
she will be when the diamonds arrive ... and you are
buying them below wholesale."
The caller, it turned
out, was one of dozens of salesmen seated around a bank
of telephones in Scottsdale, Arizona. Like the rest
of the men in this boiler room, as it was called, he
was making a pitch to sell diamonds and had been supplied
with a list of names of individuals around the country
who had recently closed brokerage accounts. For every
order he sold, he received a commission of up 20 percent.
Since the prices were in reality far above wholesale
prices, the company could afford to pay its salesmen,
most of them "telephone pros," large commissions. And
despite the similarity of its name, De Beers Diamond
Investments, Ltd., was in no way connected with De Beers
Consolidated Mines. Like a host of other recently formed
diamond boiler rooms, with names like Diamond Selection,
Ltd., Kimberlite Diamond Resource Company, and Tel-Aviv
Diamond Investments, Ltd., this firm was formed to promote
"investment diamonds."
When the mail-order
diamonds finally arrive at the purchaser's home, they
are sealed in plastic with the certificate guaranteeing
their quality. The customer is then advised of what
amounts to a catch-22 situation: The quality of the
diamond is only guaranteed as long as it remains sealed
in plastic; if the customer takes it out of the plastic
to have it independently appraised, the certificate
is no longer valid. When customers broke the seal, many
found diamonds of inferior or even worthless quality.
Complaints to the authorities proliferated at such a
rate in New York that the attorney general was forced
to mobilize a "Diamond Task Force" to process the hundreds
of allegations of fraud.
"It is incredible,"
William R. Ralkin, the assistant attorney general said
in the New York Times in 1979. "These crooks will get
outwardly rational people to buy a sealed bag containing
supposed gems. . . . And they have the nerve to tell
their victims not to unseal the packet for two to three
years, after which they promise to buy back the stones
it much higher prices." He added, "It never falls to
amaze mc me how . . . professional people like lawyers
[and] medical practitioners will send checks for thousands
of dollars to people they never met or heard of after
being contacted by these boiler room operators."
Aside from selling
tens of thousands of diamonds a month over the telephone,
many of these newly created firms hold "diamond investment
seminars" in expensive resort hotels. At such events,
they present impressive graphs and data, and typically
assisted by a few well-rehearsed shills in the audience,
they proceed to sell sealed packets of diamonds to the
audience. (Not uncommonly, in dealing with elderly investors,
diamond salesmen play on the fear that their relatives
might try to seize their cash assets and have them committed
to nursing homes. They suggest that the investors can
stymie such attempts by putting their money in diamonds
and hiding them.
Some of these entrepreneurs
were relative newcomers to the diamond business. Rayburne
Martin, who went from De Beers Diamond Investments,
Ltd., to Tel-Aviv Diamond Investments, Ltd., both domiciled
in Scottsdale, Arizona, had a record of embezzlement
and security law violations in Arkansas and was a fugitive
from justice during most of his tenure in the diamond
trade. Harold S. McClintock, also known as Harold Sager,
had been convicted of stock fraud in Chicago, and he
had been involved in a silver bullion caper in 1974
before he helped organize De Beers Diamond Investments,
Ltd. Don Jay Shure, who arranged to set up another De
Beers Diamond Investments, Ltd., in Irvine, California,
had also formerly been convicted of fraud. Bernhard
Dohrmann, the "marketing director" of the International
Diamond Corporation, had served time in jail for security
fraud in 1976. Donald Nixon, the nephew of President
Richard M. Nixon, and Robert L. Vesco, the fugitive
financier, were, according to the New York State attorney
general, allegedly participating in a high-pressure
telephone campaign to sell "over-valued or worthless
diamonds" by employing "a battery of silken-voiced radio
and television announcers." Among the diamond salesmen
were also a wide array of former commodity and stock
brokers who specialized in attempting to sell sealed
diamonds to pension funds and retirement plans.
Meanwhile, in London,
the real De Beers, unable to stifle all the bogus entrepreneurs
in Arizona and California using its name, decided to
explore the potential market for investment gems. It
announced in March of 1978 a highly unusual sort of
"diamond fellowship" for selected retail jewelers. Each
jeweler who participated would pay a $2,000 fellowship
fee. In return, he would receive a set of certificates
for investment-grade diamonds, contractual forms for
"buyback" guarantees, promotion material, and training
in how to sell these unmounted diamonds to an entirely
new category of customers. The target was defined by
De Beers as "men aged 55 and over with inherited or
self-made wealth to spend." Rather than sell fine jewels,
as they were accustomed to, these selected retailers
would sell loose stones with a certificate for $4,000
to $6,000.
De Beers' modest move
into the investment diamond business caused a tremor
of concern in the trade. De Beers had strongly opposed
retailers selling "investment" diamonds on the grounds
that because there was no sentimental attachment to
such diamonds customers would eventually attempt to
resell them and thereby cause sharp price fluctuations.
Indeed, De Beers executives expressed concern that retailers
would not be able to cope with the thousands of distressed
investors who tried to resell their loose diamonds back
to them. In response to this new "diamond fellowship"
scheme, the authoritative trade journal, jewelers' Circular
Keystone, observed: "Besides giving De Beers an unusually
direct role in retail diamond sales, the program marks
a softening of its previous hard-line stand against
gem investing. Eric Bruton, the publisher of Retail
Jeweler in London, added, "De Beers is standing on the
edge of a very slippery slope.... They say it is unwise
to sell diamonds directly as an investment, then [they]
go ahead with this diamond investment scheme."
If De Beers had changed
its policy toward investment diamonds, it was not because
it wanted to encourage the speculative fever that was
sweeping America and Europe. Its marketing executives
in London realized that speculators could panic at any
moment, and by precipitously flooding the market with
diamonds they had hoarded, burst the price structure
for diamonds. They had, however, "little choice but
to get involved," as one De Beers executive explained.
Even though the "De Beers Diamond Investments" in Arizona,
which had pioneered in selling diamonds over the telephone,
had gone bankrupt, ' more than 200 firms had by then
entered the business of selling sealed packets of diamonds
to the American public over the phone. And aside from
these proliferating boiler rooms, many established diamond
dealers rushed into the field to sell diamonds to financial
institutions, pension plans and serious investors. It
soon became apparent in the Diamond Exchange in New
York that selling unmounted diamonds to investors was
far more profitable than selling them to jewelry shops.
By early 1980, David Birnbaum, a leading dealers in
New York, estimated that in terms of dollar value, nearly
one third of all diamond sales in the United States
were for investment diamonds. "Only five years earlier,
investment diamonds were only an insignificant part
of the business," he added.
Even if De Beers did
not approve of this new market in diamonds, it could
hardly ignore one-third of the American diamond trade.
It had to take some action.
Mass-marketed investment
diamonds was made possible in the 1970s by the invention
of the diamond certificate. Diamonds themselves cannot
be valued by any single measure, such as weight, and
the factors involved in such an assessment-clarity,
color, and cut-cannot be made by an individual investor
or financial institution. Moreover, since diamonds are
not fungible in the sense that one diamond can be exchanged
for another diamond of the same weight, some means had
to be found of standardizing the quality of diamonds.
Certificates, which guaranteed the color, clarity and
cut of individual diamonds, provided this medium.
The Gemological Institute
of America, a privately owned company established to
service jewelers, developed a convenient system for
certifying the quality of diamonds. For ascertaining
the "cut" of the diamond, the Gemological Institute
devised in 1967 a "proportion scope." This contraption
casts a magnified shadow of the stone in question over
a diagram that represents the ideal proportions for
a diamond of that size. By comparing the overlap between
the image of the diamond and the diagram, the deviation
from the ideal can be easily measured-and recorded on
the certificate. For determining the "clarity" of the
diamond, the Gemological Institute developed a "Gemolite"
microscope, which has an attachment for rotating a diamond
under ten power magnification against a dark background.
If no blemishes can be seen in the diamond under this
magnification, it is graded "flawless"; if there are
blemishes, but they are very difficult to find with
this lens, it is graded "VVS," and with imperfections
visible at lower magnifications, it is further downgraded.
Finally, to establish the exact color of the diamond,
the Gemological Institute introduced the "Diamondlite":
a boxlike machine with a window in it which allows a
diamond to be compared with a set of sample stones that
span all the color gradations from pure white to yellow.
The purest white on this scale is classified as "D";
the next grade of white is classified as "E." Gradually,
by grade "l," the white is tinted with yellow; and by
grade K," the color is considered to be yellow and of
much lower value.
By 1978, diamonds were
being routinely certified through these methods, not
only by the Gemological Institute of America, but also
by other Gemological laboratories in Antwerp, Paris,
London and Los Angeles. Since dealers needed certificates
for selling investment diamonds, and customers were
usually willing to pay a hefty premium for such a document
attached to the diamond, the laboratories found it difficult
to keep up with the demand. Long lines of diamond dealers
usually formed in front of the laboratories, and in
many cases, stand-ins were hired to wait in line for
impatient dealers.
The certification mechanism,
despite all the Rube Goldberg sorts of inventions employed,
did not entirely remove the subjective element from
diamond evaluation. Not uncommonly, dealers would resubmit
the same diamond to the Gemological Institute and receive
a different rating for it. It did, however, facilitate
the trading of rare diamonds. A diamond certified as
D, flawless, was an extreme rarity, and since very few
such stones existed, or would ever be extracted from
mines, they could be bought and sold on the basis that
they were in short supply. The price of these near-perfect
diamonds rose from $4,000 a carat in 1967 to $22,000
to $50,000 in 1980. Even though such extravagant prices
for D, flawless, diamonds are frequently cited by the
press in stories about the appreciation of diamonds,
they are atypical of diamond prices. In all the world,
there are probably less than one hundred diamonds mined
that can be cut into one carat, D, flawless, stones,
and only a small proportion of these ever are certified
and sold to investors. Moreover, very few diamonds are
ever sold for the prices reported in the news stories.
"No dealer I know has ever sold a one-carat investment
diamond for $50,000," a New York dealer commented.
The high prices quoted
for the few available D, flawless, stones do not necessarily
hold for diamonds of an even slightly inferior grade.
For example, in 1978, when D, flawless, diamonds were
quoted at $22,000 a carat, an H grade white diamond,
without any visible imperfections, was valued at only
$2,750- Once mounted in a ring or piece of jewelry,
it would be extremely difficult for the untrained eye
to differentiate between a D and H color (especially
since the setting reflects through the diamond). But
while this subtle difference makes little difference
in the sale of jewelry, it creates nearly 90 percent
of the value in an investment diamond. For what is measured
by this grading system is not beauty, but the comparative
rarity of a given class of diamonds.
Most investors have
no choice but to rely on the piece of paper that comes
attached to the diamond to specify the grade, and hence
the value, of their investment. Not all the certificates,
however, emanate from the Gemological Ins Institute
of America. Many certificates have been issued by less
reputable-or even nonexistent-laboratories, and the
diamonds might be of a much lower grade than that certified.
Even if the certificate
comes from a bona fide laboratory, its evaluation of
the diamond may later be disputed by another assessor.
Robert Crowningshield, the New York director of the
Gemological Institute, observed, ". . . I've never seen
two experts agree on the quality of a particular diamond."
The extent to which
the value of diamonds is determined by the eye of the
beholder was demonstrated in 1981 by an experiment conducted
under the sponsorship of Goldsmith magazine. In this
test, four leading diamond evaluators were handed 145
diamonds that had previously been graded by the Gemological
Institute of America, the European Gemological Laboratories
and the International Gemological Institute. The team
of experts was not told how each of the diamonds previously
had been graded. After the team had reached its own
consensus on the grade of each stone, the results were
compared with those of the Gemological institutes. In
92 Out Of 145 cases, the team of evaluators disagreed
with the grades previously given on the certificates.
Despite all the scientific paraphernalia surrounding
the process of certification, diamond grading remained,
according to this test, an extraordinarily subjective
business.
To make a profit, investors
at some point must find buyers who are willing to pay
more for their diamonds than they did. Here, however,
investors face the same problem as those attempting
to sell their jewelry: there is no unified market on
which to sell diamonds. Although dealers will quote
the prices for which they are willing to sell investment-grade
diamonds, they seldom give a set price at which they
are willing to buy the same grade diamonds. In 1977,
for example, Jewelers' Circular Keystone polled a large
number of retail dealers and found a difference of 100
percent between different offers for the same quality
investment grade diamonds. Moreover, even though most
investors buy their diamonds at or near retail price,
they are forced to sell at wholesale prices. As Forbes
magazine pointed out in 1977, "Average investors, unfortunately,
have little access to the wholesale market. Ask a jeweler
to buy back a stone, and he'll often begin by quoting
a price 30% or more below wholesale." Since the difference
between wholesale and retail tends to be at least 100
percent in investment diamonds, any gain from the appreciation
of the diamonds will probably be lost in the act of
selling them.
Many New York dealers
feared that despite the high pressure telephone techniques,
the diamond bubble could suddenly burst. "There's going
to come a day when all those doctors, lawyers and other
fools who bought diamonds over the phone take them out
of their strong boxes, or wherever, and try to sell
them," one dealer predicted. The principal ingredient
in the Diamond boom is expectations that may not be
fulfilled.
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