Diamonds Are Forever? A premium stone is an emotional purchase, not an investment. by BILL STEINBERG had no interest in diamonds until I became engaged five years ago. But after gaining a basic understanding of the characteristics of quality diamonds, it wasn’t long before I acquired a loop — a jeweler’s 10X magnifying glass. Looking closely at loose stones in local jewelry stores became a common occurrence for my fiancée and me. I also began looking though the loop at the diamond rings of friends, family, and business associates. I was fascinated by the inclusions, or internal flaws, that are found in practically every diamond. It is ironic that something which seems as perfect as a diamond could have something resembling microscopic garbage stuck inside its crystal structure. But that’s how it is. During a trip to Palm Beach, we once dropped into Tiffany & Co. to reassure ourselves that virtually perfect diamonds exist. They do, but with a staggering price tag. One night toward the end of our selection process, I had an unsettling dream in which I was able to navigate inside the crystalline structure of a huge diamond and assess the inclusions. The next morning I knew it was time to give it a rest. After viewing all those loose stones, we had a good feel for the type of diamond we wanted. We settled on an unpretentious 1.5-carat, “eye-clean,” near colorless diamond which our jeweler mounted on an antique platinum setting that we discovered on a business trip to Boston. We were ecstatic with the result. Shortly thereafter, I stopped carrying my loop after an unfortunate incident in Pittsburgh. One of my first cousins, as if participating in a parlor game, asked to borrow the magnifying device during a holiday dinner. She was devastated when she discovered her reputedly perfect marquise diamond had one large, white, feather-shaped internal flaw. I vowed to never again spoil someone’s illusion. Each spring, the allure of diamonds is perpetuated via television to a whole new crop of future newlyweds by the latest DeBeers diamond commercial. These ingenious spots are designed to perpetuate a calculated illusion by emphasizing the timeless romantic value of the most precious of jewels, diamonds. But are diamonds really all that precious? Does it make sense to invest in these premium stones? Couples stretch their budgets or raid their savings in order to buy a diamond engagement ring. Few realize that a cartel, operating as a monopolistic force, artificially limits the supply of diamonds to world markets in order to keep prices high. “Syndicate, mafia, and cartel are all the same word,” explains local diamond merchant Doron Rozen. “The syndicate does keep the price high and stable so people will not lose faith in the value of a diamond. They are serving everyone’s purpose.” The cash coffers of the cartel are very deep. In order to exert their influence on the supply and price of the diamonds not produced from their holdings, syndicate agents are active buyers of cut diamonds in the open market. Rozen claims the cartel has stockpiles of cut diamonds that haven’t seen the light of day for more than 30 years. The cartel distributes its highest-quality diamonds through “appointments” with about 100 “sight holders,” or official distributors, located around the world. As a sort of benevolent dictator, DeBeers also underwrites the costs of the perpetual diamond marketing campaign. Jay Mednikow, a principal at his family-owned jewelry business, buys cut diamonds directly from syndicate sight holders whenever possible, rather than buying from brokers. He says his goal is to cut out as many middlemen as possible. Rozen, on the other hand, often buys rough stones on the open market and has them cut at an overseas factory, in addition to buying other cut stones from brokers. He equates buying cut stones directly from the syndicate with paying too much. “Nobody knows how diamonds would be priced if the cartel ended,” Rozen says. “Diamonds are not a commodity for the average investor.” “As a jeweler, I am not hawking diamonds as an investment,” Mednikow says. “Choose a diamond for emotional reasons. Pay for a diamond based on real knowledge.” Educated customers are preferred by most quality jewelers, if nothing else because they are less time-intensive to service. Diamond buyers should insist on an independent grading report, and understand that the report is still based on one human opinion. This is the unfortunate reality: There are endless ways to deceive a diamond buyer. When making your “emotional” purchase, understand the inherent limitations of your diamond’s investment potential and deal with a jeweler you trust. After giving my wife’s ring the most thorough cleaning it has had in quite some time, I pulled my loop out of the closet last weekend and marveled at the round brilliant stone under the illumination of the afternoon sunlight. The inclusions appeared even slighter than I had remembered. It was fantastic. In a moment’s pause, a flood of memories about the history of our relationship washed over me. There was no question as to whether we got our money’s worth. (William I. Steinberg, CFP, is an advisory associate at the Memphis financial planning firm of Kelman-Lazarov, Inc. His e-mail address is bill@kelman-lazarov.com.)