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De Beers and the Diamond Mystique

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					De Beers and the Diamond Mystique
By Jacki Lyden and Michael Montgomery

In geology, diamonds are pieces of carbon crystals that were squeezed for eons, deep inside
the earth's crust, and then pushed toward the surface by volcanic eruptions. But diamonds
are more — they're symbols of devotion, fidelity and wealth. Diamonds used to be
extremely rare. That's why they were the prized property of kings, queens and conquerors.
But all that changed in the late 1800s when prospectors found huge diamond deposits in
southern Africa.

Since then, one company has controlled almost all the diamonds on the planet — the De
Beers Corporation, founded in South Africa by Cecil Rhodes. But the De Beers people
haven't mined only diamonds; they've mined the American psyche to create a marketing
juggernaut.

This is the story of the most enduring cartel in modern history.

Early Empire

On a recent morning in New York City, Tiffany and Co. held a breakfast extravaganza at its
premier emporium on 5th Avenue and 57th Street. Tuxedo-clad waiters carried platters of
champagne, a jazz combo played cool, quiet sounds, all a backdrop for stunning models who
glittered with mesh filigrees of diamonds. With price tags soaring to nearly half a million dollars,
the jewelry was part of Tiffany's new collection, called "Lace."

Outrageously expensive diamonds like these are a Tiffany hallmark — but their full pedigree
leads far away to the mines of southern Africa. Tiffany's icon, a 128-carat, canary-yellow
diamond called simply The Tiffany, was discovered in the 1870s at the Kimberley mine in South
Africa. The diamond-encrusted mines at Kimberly became known as kimberlites. And their
discovery set in motion huge mining operations that continue to this day, offering the once-rare
gem to millions upon millions of ordinary consumers.

The first effect of discovering kimberlites was that it converted diamonds from a rare gem to an
industrial product like copper or any other product that you can mine," said writer Edward Jay
Epstein, whose 1982 book The Diamond Invention cast a sharp light on the diamond trade.

Epstein says the discovery of kimberlite mines touched off a frenzy that propelled thousands of
prospectors into fierce competition. And when the kimberlite gems hit western markets in the
late 1800s, diamond prices plummeted from 500 dollars to ten cents a carat.

At that stage, a young man named Cecil Rhodes, who would later help build British colonial
Africa, saw an opportunity. "Rhodes saw that if all the miners put their shares together and
formed one company there wouldn't be the kind of competition that was causing the leaks or the
price falling," Epstein said.
With diamonds increasingly abundant, Cecil Rhodes founded the De Beers Mining Company as
a group — or cartel — of diamond producers. The first aim of the cartel was to control
production — if too many diamonds hit the market, prices would again plummet. By rewriting
the equation between supply and demand, and calibrating that equation itself, De Beers became
the most successful cartel of the 20th century.

By 1900, after knocking out competitors and buying up surplus, De Beers controlled an
estimated 90 percent of the world's supply of uncut or rough diamonds. It was a fierce
juggernaut.

"It was a ruthless, autocratic, dictatorial and in every way, a non free-trade kind of system," says
Matthew Hart, a Canadian mining expert and author of Diamond: A Journey to the Heart of an
Obsession. "But the actual material, the mystique, the gem let's say, thrived under the De Beers
system. It did very well and held its value. And because De Beers controlled the supply, the
illusion of the value of diamonds was sustained." Hart said that De Beers first courted colonial
rulers and then their African successors. Gun-toting mercenaries defended its empire.


A Diamond is Forever'

To truly exploit the growing diamond empire, De Beers needed to stoke demand, especially in its
biggest market, the U.S. In 1929, the Oppenheimer family, owners of the Anglo American
Corporation, seized control of De Beers. It was a critical time. America was entering a
depression, and diamond prices were sinking. De Beers' new owners embraced the masters of
myth, and hired the N.W. Ayer Advertising Agency to transform the public imagination about
the diamond. To do that, the company hired psychologists to burrow into American buying
habits. And it hired the most visionary artists in the world to help. At the office of N.W. Ayer in
New York City, company archivist Howard Davis showed original art produced by Picasso,
Salvador Dali and others for the De Beers account.

"What the ads really did was concentrate on a combination of emotion and status," said Davis.
"Early on they told us it would be a good idea to make a statement about what a young man
should do for his fiancée in the way of a diamond ring. The idea that they were trying to get
across was that if you loved her enough, you're going to spend a months pay on it (the diamond
ring)…I guess it worked quite well…"

It did work quite well, but the best was yet to come. In 1947, a maiden lady copywriter at N.W.
Ayer, Frances Gerety, created the most durable advertising slogan in history: A diamond is
forever. According to Howard Davis, Gerety coined the line after her nightly prayers, when she
was awakened by a flash of inspiration. Within three years of creating the 'diamonds are forever'
slogan, an estimated 80 percent of wedding engagements in America were consecrated with
diamond rings. Gerety herself never wed, but she had wed a concept to diamonds.

"The true genius of De Beers," said Matthew Hart, "lies in having created a connection, and
sustaining in the popular imagination a connection between something that has no value at all.
You can't eat it, you can't drive it home, you can't make clothes out of it, you can't build houses
out of it, and creating a connection between that valueless item and something that is extremely
valuable, which is human love. They created that connection — they made it up — and they've
sustained it."

But advertising was only one ally in De Beers' transformation of the American consumer's
imagination. Another was Hollywood. Beginning in the 1930s, De Beers set out to exploit the
new medium of motion pictures by getting directors and screenwriters to insert scenes into films
that captured the romance of diamonds, according to company documents cited by writer Edward
Jay Epstein. In addition, De Beers and N.W. Ayer encouraged jewelers to distribute diamonds to
top Hollywood stars for public appearances, according to Epstein.

Reportedly, one N.W. Ayer memo from the early 1940s stated "We spread the word of diamonds
worn by (film) stars….women who can make the grocer's wife and the mechanic's wife say.. I
wish I had what she has." Today we call that: product placement.

The movies successfully linked female power and sexuality with diamonds, according to Maura
Spiegel, a professor of literature and film at Columbia University.

"Diamonds had a special value, in part because if you wanted a piece of the glamour that you
saw in the movies you couldn't buy a miniature mink coat or a piece of a Rolls Royce but you
could buy a little tiny diamond or a ring with diamond chips in it and you had the real thing,"
Spiegel said.

17 Charterhouse Street

Each month, hundreds of millions of dollars in diamonds pass through De Beers London
headquarters. No sign identifies the building on Charterhouse Street. Secrecy is its hallmark. It is
said that hidden among the bricks are cameras that cover every inch of space, powerful enough
to capture the color of a person's eyes. And there is good reason for this elaborate security.
Inside, the company's vaults have housed as much as five billion dollars in diamonds in recent
years.

"De Beers has operations in South Africa, Namibia and Botswana," company spokesman
Andrew Lamont said. "De Beers also has contracts with other major producers like Russia, the
second largest producer in the world, and has a contract to buy a portion of the Canadian
diamonds. They are brought to London and put into about 16,000 different categories.

Critics contend that De Beers is also successful because behind the scenes it operates with
ruthless precision, choking supplies and manipulating prices through the events it calls "sights".
Every five weeks, 125 manufacturers and dealers — called "sightholders" in De Beers parlance
— flock like swallows to the company's London headquarters for these private sales. They
represent an elite group hand selected by De Beers to buy the cartel's rough diamonds.

"You can imagine this is like a sort of mini-United Nations every five weeks," De Beers' Andrew
Lamont said. "People (come) from all over the world. These are the leading diamantaires
meeting with each other, discussing trade, the state of the market and that's what makes it so
unique and effective."

If this sounds like an ordinary business deal, it's not. The men who come to these De Beers
diamond sights are seeing the diamonds for the first time — even though they'll spend half a
billion dollars, prices agreed on in advance by De Beers.

Author Matthew Hart said the sights are one of many extraordinary power games De Beers plays
with its own clients.

"These people, extremely rich and powerful men in their own right, are herded around like
cattle," said Hart. "The De Beers porters lead them into these extremely plain, unremarkable
looking rooms and they open up these attaché cases and there are bags of diamonds inside and
they are laid out and that's the first look they get at them…Can you imagine a group of
businessmen arriving anywhere to buy 500 million dollars worth of a product without knowing
exactly what they're going to get for their money? It's completely insane."

Monopoly

The sightholder transactions have piqued the curiosity of the U.S. Department of Justice, which
has a long running investigation of the De Beers company. In 1994, the Department of Justice
charged De Beers in a price fixing scheme. The company failed to turn up in court, which is why
you'll never see a De Beers executive sipping cognac at the Plaza Hotel in New York City, or
anywhere else in the United States.

Andrew Lamont admitted that De Beers problems with the United States are painfully real. "I'm
certainly not senior enough to get arrested but I do know that none of us can go to America if it's
to do with business," Lamont said.

For the record, Andrew Lamont rejected the price-fixing allegations. He said De Beers controls
its diamond supplies much like IBM manages its computer inventories by putting them on the
market as demand ebbs and flows.

But the central questions remain. Are diamonds rare? Or are their prices hideously inflated? De
Beers officials are unresponsive on these points. They will speak of how the company has
"democratized" diamonds by offering them to millions of ordinary consumers.

Author Matthew Hart said that today diamonds plainly are not rare, especially consumer quality
gems commonly used for engagement rings.

"There is a large supply of diamonds," Hart said. "In fact there is more than 100 million carats a
year of diamonds that come out of the ground. That might be as many as 800 million separate
stones. That's not to say they're not hard to find and it doesn't cost a lot of money to find them,
because it does."
Many of those diamonds are in places like Russia, Australia and Canada, countries outside the
grip of the cartel. But so far, none of these players is challenging the prices artificially set by De
Beers. And why should they, if they too can benefit?

				
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