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As investors clamored for more stones, companies sprang up to meet the demand. Ignoring business practices that were transplanted from Europe a century ago, young salesmen began marketing the gems as investments, not jewelry. Some of the new firms used hard-sell, boiler-room techniques. Customers buying a stone were given a certificate that theoretically verified its worth by attesting to its color and brilliance. The largest firm in the field was International Diamond Corp., which in its six years of existence sold 250,000 stones. IDC buyers received a promise that the firm would help resell the stones and were told that no customer had ever lost any money this way.
Diamonds turned out to be a poor investment, largely because they are hard to sell. Experts commonly disagree about the exact characteristics of a given stone, which means that price quotations can vary widely. Moreover, there is no ready resale market for diamonds. After buying stones at retail, individuals usually find that they can be sold back to jewelers and diamond dealers only at the wholesale price, which is normally 50%—or even less than 50%—of retail. Says William Goldberg, president of the Diamond Dealers Club, the leading U.S. diamond traders association: "Diamonds are like real estate. My home is a terrific investment until I go to sell it.
Then I may have to drop the price and give the buyer a second mortgage."
As with other hard assets and collectibles, the end to the diamond-speculation boom began in 1980, when inflation started to level off and interest rates shot up. That made investments like money-market funds more valuable, and diamonds, gold and other hard assets less attractive. Despite its sharp price increase last week, gold is selling for only about $380 per oz., well below its January 1980 peak of $850. A portfolio of U.S. coins is now worth 15% less than it was a year ago.
International Diamond Corp. filed for reorganization under the Bankruptcy Act last February, after reselling only $30 million worth of stones for its customers. The Federal Trade Commission has accused the firm of improperly claiming that it was selling diamonds at wholesale prices and falsely portraying them as risk-free investments. One of the company's founders, Bernhard Dohrmann, and about 100 ex-salespeople have joined a new company called Diamond Resource International.
Even though the investment market for diamonds has soured, the stones appear to be just as popular as ever. American sales of diamond jewelry increased by 7% last year, to $5.5 billion. Among the most successful items are diamond stud earrings for young girls, which cost an average of $100 a pair. Americans seem to believe that a diamond is still a desirable piece of jewelry, even if it has not been a very good investment.
— By Alexander L. Taylor III.
Reported by Peter Hawthorne/ Johannesburg and Jack E. White/ New York