For more than a century the diamond business has been predicated on the fact that the vast majority of merchandise sold never reenters the market. A person’s diamond jewellery, with its powerful emotional baggage, is hardly ever sold off, but rather passed on to the children or other loved ones.
But the great financial crisis that struck during the fourth quarter of 2008 was so powerful that it could be rewriting the rules of business. With the recession in the United States and in parts of Europe so severe, the need for ready cash has been translated into selling off valuables, and particularly jewellery.
To no small degree, this powerful trend is being driven by a skyrocketing gold price, which at the beginning of December hovered about the $1,140 per ounce mark. It had risen by 6.2 percent over the previous month, by 22.8 percent over the past six months and by 54 percent over the past year.
During a discussion on Bloomberg Television in late October, Jim Rogers, a commodities investor, predicted that the gold price might reach $2,000 an ounce. But, speaking to Antwerp Facets, a gold industry leader expressed scepticism. A massive proportion of the gold out there in the market is held by private individuals, many of them living in India, he said. If the gold price climbed that high, they would flood the market with what they are holding. “Because so much gold is held by individuals as opposed to institutions, it will not climb upwards unabated,” he said.
This certainly could be the case with diamonds. Traditionally price stability has been maintained by balancing the flow of goods into the pipeline with the level of demand in retail markets. This certainly was true during the days of De Beers’ single channel marketing system, but also was relevant as recently as the start of 2009, when the world’s major rough diamond producers all curtailed the sale of rough diamonds in order to face the challenge of dramatic falloff in consumer demand.
However, it is easier for producers to balance supply with demand if goods are flowing in a single direction. In the event that a large number of recycled polished diamonds are being re-channelled into the pipeline, the job is considerably more difficult.
Many members of the diamond industry appear to be relatively sanguine about the issue for now. As one diamantaire said: "I find it difficult to believe that a man would propose marriage with what is basically a second-hand diamond. Similarly, he is not going to celebrate a wedding anniversary, or purchase a special gift for a female member of his family with a piece of jewellery that came from an old piece of jewellery."
But the question is: would he know that it was recycled? Even-Zohar believes that there is no possibility of checking its provenance. "Some of these diamonds come from heirlooms where the cut may be out of fashion and so they would be recut to suit today's tastes," he said. The diamond would enter the polished diamond market after being bought by a wholesaler or jewellery manufacturer and would then make its way to the retail sector.
"Since I made the presentation in Antwerp, I have heard from many members of the diamond trade about diamonds re-entering the business. This is a much bigger issue than I believed at the beginning. There are some Indian companies, for example, whose main expertise is buying diamonds from retailers and pawn shops in the United States and other countries. In New York, even close to the diamond district, there are signs offering to buy up diamonds.”
"But we don't know how large an element of the business this is,” Even-Zohar continued. “With gold, we know exactly how much recycled gold is coming back into the market because it has to be refined and those figures are known. But I don't believe there is a way to measure the amount of recycled diamonds. The problem is that the issue goes against all the principles of the diamond business and is therefore difficult for members of the trade to understand and tackle. It is still too early to say what the implications could be."
Even-Zohar said the recycled element of diamonds was already large enough that when calculating supply and demand figures it had to be added in since ignoring it could lead to a miscalculation. "My reason for raising the issue in Antwerp was that it is an issue that we need to be aware of. The business is too small for it not to have an impact," he said.
Meanwhile, Antwerp-based diamantaire Stephane Fischler, who also serves as chairman of the International Diamond Council, said the industry should "take a step back before determining how large an issue this is. There has always been some 'recycling' whether for trading up purposes, distress sales, or simply people inheriting some pieces of jewellery and wanting to turn them into cash. Secondly, as is too often the case in this industry, we do not have reliable data and we more often guess trends and the amplitude of change."
The rising incidence of recycled polished diamonds in the marketplace may have implications not only for price stability, but also for the position in the pipeline of the established diamond trade, said Even-Zohar during his presentation to the Presidents’ Meeting in Antwerp. “What prevents the World Federation of Diamond Bourses from initiating some publicity action inviting the public to sell their diamonds to a polished trader rather than to a retailer? Undoubtedly, this ‘diamond recycling’ represents a market niche that needs to be considered. It certainly should not be ignored,” he said.
He believes that one step the diamond trade could take would be to widely promote to members of the public a plan to buy up diamonds that they might want to sell. "We have to understand that there are some people who need money badly and they will be willing to sell heirlooms and other diamond jewellery," said Even-Zohar. "The diamond business could offer to buy diamonds at a fair price because we have the advantage of being a clean and respected industry. Our image is far above that of other buyers of second-hand diamonds, such as pawn shops, and that is a huge advantage."
Fischler believes there are two main issues in the debate about recycled diamonds: consumer behaviour, and emotional versus rational behaviour. "On consumer behaviour, it must be noted that too many people are still intellectually hostage by their western view of the world. Culturally, there are often very different reasons for buying diamonds in India and in the United States, for example. As a result, the patterns of recycling are, of course, affected by these.
"But for me the most interesting aspect of the 'diamond' perception today is the tension between the emotional being challenged by the rational. By this I mean that the free access to all data concerning diamond nomenclature and pricing through expanding e-commerce are turning diamonds into a commodity. I know the big ‘C’ word no one dares to utter. Just look what is happening in Asia with larger goods. Private individuals are becoming aware of the hedging-trading potential of diamonds. Good or bad, this is the nature of the market. Why should it only be for rough that hedging and trading is the current norm," he stated.
Fischler said the big question was whether recycling has affected the perception of consumers towards the value of diamonds. "It has not done so," he said. "Notwithstanding the short term, in an historic context of the current financial crisis, never in history were so many diamonds sold. And I would bet that with more transparency, the consumer will feel even more comfortable about buying not just for the 'once in a lifetime occasions'. But to achieve this, we as an industry are challenged to speak with one voice as far as ‘nomenclature’ is concerned and being all individually responsible for our common reputation. Recycling has always been, and will remain, simply a part of the natural trade cycle. The challenge for us is to manage it responsibly and efficiently."
Although Even-Zohar says it is still too soon to understand the amount of recycled diamonds in the system, he nonetheless concludes with some figures that give pause for reflection. "Since ancient times, about 5.2 billion carats have been mined worth around $420 billion. That means there are 1.3 to 1.8 billion carats of polished that have been sold for $900 billion to $1.2 trillion. If a diamond is forever, then there are an enormous amount of diamonds out there that could be recycled."