The Diamond industry is about to fall off its perch

Last year I wrote to Gemesis – a maker of lab created diamonds who are very secretive about their manufacturing process – and asked if I could come and tour their facility.

In essence they told me to “shag-off.” I wasn’t too offended or surprised given the proprietary nature of their business and the value of their product. I am a diamond specialist, trained very well in the art and science of assessing and valuing the shiny lumps of carbon. I did explain that to them at the time but the finger’s the finger and I can take a hint as well as the next guy.

Diamonds are not rare. There are other gems that are far rarer. Diamonds are made from compressed carbon, colored by imperfections that were introduced as they formed. Most are flawed. We call these flaws “characteristics” in the business. If they’re heavily imperfect they’re not gem quality and are used for industrial purposes. What is rare is a natural diamond free from “characteristics,” know as flawless. Better still a colored stone – called a fancy - free from flaws. Yellow is common, Cognac (brown) is also. Pink and reds are extremely rare. Blues, greens. Rarer still are large carat flawless clear and colored stones and these retain their value I believe, forever.

The beauty of a large carat flawless, well cut diamond is indescribable; you have to see it to appreciate it. Drop into Graff one day and ask to take a peek at one of their large flawless diamonds; the stones – and their prices – are life changing.

I will have to describe the product that Gemesis produces from knowledge that I have researched elsewhere, without having seen it first hand. Gemesis produces a perfect product – small yellow flawless gem quality diamonds. They’ve just added pink to the mix. Their perfection is so good, their manufacturing process so exact, that it replicates natures own factory deep beneath the earth and the end result is the product of high heat and high pressure.

There’s a story told that when these lab diamonds were first introduced into the market place that the staff at the DeBeers office in London had a collective brain hemorrhage. They were convinced that either a new source of diamonds was found or the stones were stolen. They weren’t either. They were however perfect in every way. And their manufacturing process made them undetectable from natural diamonds.

When Gemesis (and the other manufacturers) of lab created diamonds set up shop with equipment they bought in Russia some years ago, they started an irreversible downward pressure in the value of natural diamonds. That is because nature produces so few flawless diamonds and the lab gem quality diamonds are only flawless.

The lab created gems are exactly the same in every way as their natural counterpart with two exceptions; their lack of imperfections and price.

There are mountains of natural diamonds in storage in the DeBeers facilities, in Russia, in India and Australia. Mountains of them. These mountains exist to keep the price of diamonds high. You will read today in the Butler Report that collectors are hedging against inflation by investing in large high quality diamonds. A good move because of their rarity and beauty.

On the other end of the scale you have the lab created diamonds – perfect – beginning to spread into the market competing with natural diamonds at an estimated discount of 33%. They are currently limited in the size of their rough product to about 2 carats.

What does this mean to you and me? It means that we can now purchase a flawless yellow or pink diamond – up to 1.5 carats cut – for the same costs as a flawed natural stone. And that means that the less-than-perfect natural stones will be squeezed out of the market and with them the price floor as it exists today.

I deal with sophisticated gemstone and jewelry buyers on a daily basis. Their interest in these lab created stones is insatiable. They know that small diamonds are virtually valueless in the used market and are a terrible investment; however flawless stones of any size do retain their value.

Jewelers are scared by these new developments and rightly so. Their cheese is about to be moved. Currently natural diamond prices of quality have fixed non-negotiable, prices set from wholesale to retail. That’s the way it is and always has been. If anyone decides to discount product they would be advised to practice using those immortal words, “would you like fries with that?” for their next career.

It will not be long before some genius figures out a faster and more efficient method of gem quality diamond production. DeBeers will probably try to buy them out but they have not succeeded in buying Gemesis. In time the market will be flooded with perfect diamonds and the diamond market as we know it today will crash along with the price. At the end of the day a lab produced diamond is better than the natural one.

This won’t happen tomorrow. Maybe not in the next few years. The stones are here already and unlike cars and watches, diamonds are not a disposable nor a true consumable. As DeBeers tell us, diamonds are forever.