The diamond market, depressed for now, polishes its image

By , Special to The Christian Science Monitor

From the street level, New York City's 47th Street (also known as diamond jewelry way) is an anamoly. A rabbit warren of tiny shops and stalls -- organized into utilitarian exchanges and overflowing with opulent jeweled broaches, bracelets, and rings -- it is so dazzling it would make Ali Baba envious. The atmosphere is more like a Turkish bazaar than a modern retailing district.

Two years ago, when gold reached $800 and diamond prices were priced at $60, 000 a carot, action on the street was frantic. Everyone rushed to speculate on the spiraling prices of precious stones. But the scene changed dramatically after gold and diamond prices sank. Shop windows carried ''For Rent'' signs. Stores and stalls emptied. Only a few couples wandered around, pricing wedding rings.

But those scores of small retailers are only the tip of the iceberg on the city's famous street of jewels. Upstairs, above the shops, are the offices of the city's serious diamond dealers - the 2,000 or so members of the Diamond Dealers Club who handle about 80 percent of the diamonds that come into the United States and have access to direct sales of rough diamonds from the De Beers Consolidated Mines, the Euorpean syndicate that controlls nearly all the world's diamonds.

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And upstairs, the action is even more depressed than on the street. For the diamond dealers -- a closely knit group composed almost entirely of Jews whose families have traded diamonds for generations -- concentrate on trading stones, not on the jewelry business. They trade diamonds as casually as M&Ms, with only a handshake and their word of honor for a contract. With the price for perfect, round, flawless, one-carat diamonds down from over $60,000 two years ago to less than $20,000 today, many diamond dealers have suffered huge losses.

Compounding the problem has been a flurry of negative articles, including one well-publicized piece published recently in the Atlantic Monthly. The article condemned De Beers in particular and the diamond trade in general for marketing the gems in a deceitful fashion. Such are the ingredients for a full-scale industry collapse.

Although the diamond business is depressed, it is not a disaster, says William Goldberg, president of the Diamond Dealers Club. ''Even if a dealer had a $10 million diamond inventory, and it dropped in value to $2 million, it would not mean bankruptcy. If he were well capitalized, he would have fewer assets, but he would still be in business,'' he says.

Furthermore, Mr. Goldberg points out, the value of the flawless one-carat stone -- once characterized as investment grade -- has fallen the most. Few experienced diamond dealers would hold an inventory composed purely of such pricey stones. Most dealers diversify, holding melees (tiny diamonds, usually set in clusters, which have lost little value) and imperfect stones, usually set into jewelry.

But what does ''well capitalized'' mean in a business where a single, perfect stone could have cost a dealer $30,000 or more? Says one industry observer: ''People in the business before the diamond investment bubble found their old inventories skyrocketing. They were suddenly worth a lot more. They weren't forced to borrow excessively because they could sell old inventory at inflated prices. When prices fell, they weren't wiped out because they had little debt. Only the new guys who got into the business in the late '70s, when prices were already rising, have taken a beating.''

Most of the ''new guys'' were the high-flying investment outfits that published daily charts of diamond prices in the Wall Street Journal and elsewhere to lure inflation-panicked investors. A majority of them have retreated. Some have unwound their businesses quietly. Others went bankrupt.

''The diamond industry suffers from the investment people coming in,'' says Michael Roman, chairman of Jewelers of America, which represents over 12,000 retail jewelers throughout the country. Many of the investment people ''had shady reputations to begin with, and were looking for a new item,'' he says.

But among the traditional dealers there have been remarkably few bankruptcies -- a few small ones, Mr. Goldberg says, and one large one due to the company's obligations on an Israeli operation. (The diamond-market depression in Israel is worse than in the US.)

In the US, banks which have traditionally catered to the diamond merchants -- such as European American Banks, a consortium of European banks based in New York, and Algemene Nederlander Bank, a Dutch bank with several US branches - have been liberal in extending diamond loans.

''The banks have been very cooperative,'' Mr. Goldberg says. ''We have good people in this industry. These people are not high flyers. They don't have huge overheads. They are not big swingers.''

One skeptic says banks are coming through because their moves make good banking sense -- not out of kindheartedness: ''It is like the Polish loans. Foreclosing on a lot of diamond dealers would mean poor bank earnings and an unattractive series of bad-loan write-offs.''

When will diamond prices firm up? Three months ago the industry thought prices were bottoming out, but since then the price on a flawless one-carat has dropped by about $5,000.

Mr. Goldberg says he believes prices are hitting bottom now. And the diamond dealers are taking some action to stem further disaster. They recently decided to publish their own price lists for various grades of fine diamonds to prevent future unrealistic lists to circulate. They have hired a public-relations firm to give the industry a better image.

The industry admits there is little demand for diamonds. People are putting their money in high-yielding investments, not in a vault filled with diamonds that have scant hope of seeing their value rise soon. But De Beers hopes to change this practice with the help of a new advertising campaign. The push is intended to shore up the concept of diamonds as a luxury and a sentimental gift, not a fool-proof investment. De Beers says it is tripling its ad budget.

Says Mr. Goldberg: ''We are back in the jewelry business. Eventually people will forget the past. We are not selling a cat in a bag, something to put in a vault.''

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