Diamonds may not be a girl’s best friend forever

Diamonds are a girl’s best friend, Marilyn Monroe sang in Gentlemen Prefer Blondes. The hardest, shiniest allotrope of carbon has retained this cachet ever since De Beers created a huge demand for diamonds by marketing them as a token of a person’s lasting commitment to another. It did this through an assiduous marketing campaign from the 1930s, in which product placement in Hollywood movies played a significant role. But diamonds may not be a girl’s best friend for much longer.

There is currently a slump in the demand for diamonds, according to a Mint report. This is due to lower demand for them in China and the US, the two biggest markets, as gems and for industrial use. This drop in demand is down to depressed economic conditions in these countries and should be transient. But there is also a longer-term trend at work, one that is likely to undermine demand permanently. It has two components. One is the increasing sophistication of lab-grown diamonds and their superior ESG appeal, and the other is the luxury-goods paradox, in which lower prices destroy demand.

Diamonds have traditionally been known for embodying a paradox – the lack of correlation between a good’s use value and its exchange value. Water sustains life but is cheap, while diamonds have limited use but are expensive. There are two developments on the cards: the status-goods paradox will erode the demand for diamonds as they drop in price (and increase the supply of lab-grown diamonds); and the declining demand for diamonds will dilute their ability to illustrate the use value vs exchange value paradox.

Natural diamonds are scarce and require a lot of labour to mine and transport to cutting, polishing and marketing centres. This gives them their value. But the regions where the best diamonds are found also happen to be violence-prone, underdeveloped countries, particularly in Africa. The diamonds themselves trigger conflict – hence the terms ‘blood diamonds’ and ‘conflict diamonds’. the Hollywood hit Blood Diamonds, starring Leonardo DiCaprio, helped expose the seamy side of the industry and spark revulsion against the conditions under which diamonds are produced and marketed. DiCaprio also became an investor in America’s largest synthetic diamond manufacturer.

Human beings have long been fascinated by the possibility of artificially creating precious metals such as gold. This tradition of alchemy has been extended to diamonds – with far more success. Under tremendous heat and pressure, carbon turns into its transparent, crystalline form. Techniques have been refined to such a point that it is hard to tell the difference between a natural and an artificial diamond.

While natural diamonds still enjoy a premium, those who detest the violence, corporate greed and carbon footprint associated with them now prefer high-quality synthetic diamonds. The consequent increase in the demand for lab-grown diamonds, further improvements in their manufacturing, and achieving economies of scale in their production could crush the demand for natural diamonds permanently.

Luxury goods command a premium because they are scarce. In the case of normal goods, the price is inversely proportional to demand. The lower the price of something the higher the demand, and vice versa. But when it comes to status goods, the equation changes. A Rolex on your wrist signals status. The higher its price, the greater its ability to project the wearer’s status. Suppose the price of a Rolex watch drops to that of a boAt smartwatch. The Rolex wearer would dump his timepiece as it would have lost its ability to distinguish him from the hoi polloi.

If a flood of artificial diamonds removes the scarcity element from the market for diamonds, the stones will drop in value. They will no longer serve as a status symbol and this would destroy their demand significantly.