Tales of Soft Money — The Forever Stones — Part I


The thought of diamonds have spurred most peoples' imagination at some point in their lives - often as children. Many tales have been told, written or shot as movies about these incredibly valuable stones, of enough glitter to reflect the love for a special girl. But as we grow older we sometimes run in to facts that disenchant us from earlier views on things, and I think the long story of diamonds may be one of those disenchantments.

This series of articles has a narrative mostly revolving around Edward Jay Epstein's 'The Rise and Fall of Diamonds', a wonderful account on the De Beers' so called 'diamond invention' of manufacturing demand while ruthlessly restricting supply, and of the intricate workings of that diamond cartel. The series also hopes to underline the various economic forces that shaped the price movements of diamonds over the last decades, and finally also explore the economic impact of lab-grown synthetic diamonds that gradually have increased in importance. To adequately explain the stellar price rise in the late 70s, the subsequent fall in the 80s, and today's precarious situation, we ought to start from the beginning. And that is, understanding what diamonds are, how they were formed eons ago, and what the market for them that took off for real in the late 19th century, initially looked like.


Hobart M. King has on geology.com summarized how diamonds are formed, and the first thing he makes clear is to dispel the myth that diamonds as a rule are formed from coal. In fact, diamonds hid under Earth's crust before any plants grew on our planet - plants that over millennia formed the horizontal coal layers that we today extract and utilize as condensed energy. Florentine scholars managed to vaporize a diamond in 1694 with the help of sunshine and a magnifying glass, and from this experiment many later suspected that the precious stones were made of coal, or more specifically carbon. A century later, English chemist Smithson Tennan burned a diamond in a sealed vessel filled with pure oxygen, and managed to trace the diamond's composition to that of carbon by weighing the carbon dioxide that had formed. So if not from coal itself, but from carbon, how exactly did Earth's diamonds come about?

King distinguishes four different processes in which the natural diamonds we know of today came into existence; one of these accounts for the absolute majority of diamond formation:

  1. Volcanic eruptions from Earth's mantle: Almost all commercial mining of diamonds today are done in underground mines or open-pits connected to vertical 'pipes', stretching down to Earth's upper mantle, about 150 kilometers deep where the pressure is enormous and the temperature is over a 1000 degrees Celsius. Through volcanic eruptions, diamonds that formed deep down there were thrown up towards the surface. These eruptions are extremely rare and have never been recorded by modern humans.
  2. Tectonic plate movements: Some diamonds are thought to have been transported deep into the mantle by plate tectonic processes. There they could possibly start forming as little as 80 kilometers under the surface, only to be transported deeper and then brought up again by the same plate tectonic movements.
  3. Asteroid impact: Other diamonds are thought to have formed under the huge impact of asteroids. Evidence supporting this thesis consists of impact sites in Arizona, USA, and Siberia, Russia. Here is the first instance where coal very well might have been part of the formation process.
  4. Space collisions: NASA researchers have detected nano-diamonds in meteorites. One example is the samples taken from the Allen Hills meteorite. These diamonds are thought to have formed during high-speed collisions in space. Coal is not part of this equation either.

Then there is a fifth way of which diamonds can form, which has been mentioned; we have managed to do this since the 1950's. It is the employment of enormous amounts of energy in laboratories to recreate the conditions that nature has managed to conjure. I of course talk about synthetic diamonds, which today are so easily produced that they have crowded out natural diamonds in industrial usecases, as part of drill bits, cutting tools, grinding wheels etc. So far, diamond grading experts are more often than not able to grade these lab-grown stones as incredibly close to, but not exactly as, natural diamonds. But the grading is highly difficult, and incurs high, impractical costs. The question we must ask ourselves is: will humans and machines at one point fail the 'diamond Turing test', and in the future not be able to spot any difference between a natural and a synthetic gem? If that is the case, it will have great repercussions for the whole gem stone industry, diamonds included.

But let us go back to natural diamonds for a while, to understand the kind of market the synthetic stones soon may upheave.

Meeting Harry Oppenheimer

In the end of the 1970's and beginning of the 80's when Epstein documented his investigation, Harry Oppenheimer was heading a powerful Johannesburg-based De Beers that still stretched its corporate arms to large and important offices in other cities such as London, Antwerp and Tel Aviv. Through various sub-entities, shell companies and agreements the company controlled a vast majority of all the world's diamond production and supply, and so was in effect a powerful, global monopoly. Even the ever so morally corrupt USSR sold its Siberian diamonds through De Beers' intermediaries for great profits, despite at the same time leading the charge of a total boycott of South African products and services during the apartheid era.

As Edward Epstein visited the De Beers headquarter in 1978, the company's production stemmed from African diamond mines, situated partly in countries on the verge of, or post, radical nationalist takeovers. Upon having been inquired on the dangers of such arrangements, Oppenheimer stressed the mutual advantageous structure of those mining schemes; any political party or strongman in power were dependent on taxes from De Beers' diamond extraction ventures. They were also dependent on De Beers' skilled engineers as extracting diamonds was more often than not extremely tricky. What Oppenheimer didn't stress during that conversation was that, where the radical entities proved extra cumbersome, Soviet pressure could help contain them in exchange for earlier mentioned trade deals. The Soviets also knew that their own diamond mines did not produce the type of diamonds needed for certain strategical reasons (oil drilling being one important example), and so their diamond export was also complemented by a smaller diamond import of De Beers stones fitting such needs. It was in other words in the interest of most actors involved, not to stir up unnecessary troubles.

But racial trouble was sometimes spotted on the horizon, and so De Beers tried to diversify geographically by opening more mining operations outside of South Africa. Upon inquiring more on this cross-border pivot, Oppenheimer invited Epstein to visit the new mines in multiple African countries - something which the latter gladly accepted.

The Orapa Mine Example

By visiting the De Beers mine in Botswana, Epstein clearly got a good insight in how diamond production looked like at the time, so I thought I could share his recount of it all. He arrived to what looked like a rather large but also somewhat artificial city in the outskirts of the desert; the building sets had been prefabricated in South Africa and then transported over the northern border. Electricity infrastructure had been imported and roads had to been built from scratch as well.

The mine itself did not align with Epstein's preconceptions of deep, dark tunnels in which miners toiled. Instead, a big, open wound was catering to about fifty Botswana workers that were busy loading bluish earth onto a large yellow truck going back and forth between the mine and a conveyor belt. The blue note of the earth came from containing kimberlite ore. In fact, the whole diamond 'pipe' was a kimberlite pipe that millions of years earlier had spewed diamonds up to Earth's crust together with the much more abundant kimberlite. A Scottish engineer explained to Epstein that two tons of that ore contained on average one carat of diamonds - a small measure based on the uniform weight of ancient 'carob' seeds.

Another thing Epstein noted was that the diamonds never touched human hands. The conveyor belt took one thousand tons of ore per day to a separation plant about one-quarter of a mile away, where the ore was crushed by machines strong enough to pulverize more or less anything. The powdered ore then entered water-filled centrifuge cylinders that rotated in order to separate the high-density stones, like diamonds, from other materials. Back on to the conveyor belt, the heavy material proceeded in boxes to a process of X-ray bombardments which activated photoelectric cells if any reflective glimmer was strong enough. With automated air streams, the glimmering stones were then separated further and sent to the separation room.

In the separation room, the diamonds remained inaccessible to humans as they were sorted behind a glass wall with attached rubber gloves. A sorter operated these gloves and divided the high-density stones in piles of diamonds and non-diamonds, and then had his or her work audited by another worker. Epstein noted that the diamond pile was mostly black, which, it was explained to him, was because of all the black, industrial-grade diamonds. Such stones were more abundant in nature, and used for industrial purposes such as drilling or grinding. Clear diamonds set to shine as gems were definitely of the minority; that pile was sent, under the guarding eyes of men with shotguns, to the Botswana capital of Gaborone where an official appraiser determined their quality, only to have them sent to De Beers' central facilities in London for storage. From these operations, Botswana made half of their national income at the time of Epstein's visit. He briefly commented that it was no wonder that the whole government was present during that mine's inauguration.

Epstein was taken to other interesting mines such as the Letseng-La-Terae mine in the Kingdom of Lesotho, where diamonds were extracted from the top of a high mountain - the end point of yet another vertical kimberlite pipe. That mine yielded 'large stones', which De Beers defined as any uncut diamond weighing over 14.8 carat. Epstein also visited a Namibian operation where De Beers engineers forced the very ocean away in order to reach the valuable stones. Namibia was at this time plagued with internal unrest, and was only nominally free. South-Africa held the reins, and so De Beers had had no trouble getting a foot-hold in the old German colony. Epstein also noted De Beers' apparent indifference to the country's politics; if the black nationalists took over, they would still likely keep the company operating as they did not have any of the skills needed to maintain the gigantic, artificial ocean-walls that made the diamond mining possible in the first place.

Loyalty Rituals in London

Interesting as some of the theory and practice of the De Beers diamond mines may be, the real market impact was manufactured in London, as is evident when Epstein describes one of the company's legendary 'sights'.

A 'sight' was a gathering of 250 or so chosen De Beers clients, who included diamond-cutting factories in New York, Tel Aviv, Bombay, Antwerp and Hong Kong. This more or less monthly occurrence included the transfer of a pre-selected number of uncut diamonds from the De Beers' stockpiles to the diamond-cutting industry of the world. At the sights in 1980, around USD 2B worth of diamonds were distributed, to be resold in the retail market for up to USD 8B after having been cut and polished. Before each sight, research was conducted to spot changing patterns in global demand. The goal was to never supply more diamonds in the boxes than what could be bought up by the public at current prices or higher.

In a typical sight, the clients arrive at a fortress-like building at Number Two Charterhouse Street; this is the headquarter of the Diamond Trading Company - another De Beers entity. According to Epstein, the building held at the time almost all the uncut diamond supply in the world. One by one, clients are taken to private viewing rooms equipped with an electronic scale, a magnifying glass and a telephone. A small cardboard box is brought to each room, weighted by a De Beers employee, who promptly leaves. All of the specifications for the diamonds that the box contains are written on its outside. So is the price. The client has to make a choice, leave the box, or buy everything that the box contains - good and bad. There are never any arguments or price haggling. In these 200 or so boxes are all of the coming year's diamonds for engagement rings, necklaces and earrings. The contents of each box shapes which company may gain market shares the coming year, and which may lose. It largely depends on prior loyalty and other strategical decisions taken by De Beers.

This loyalty is not to be taken lightly. As the De Beers at the time had a monopoly on uncut diamond supply, they could crush any diamond-cutter that had misbehaved by for example selling diamonds from earlier sights to 'weak hands' - retailers eager to wage price wars. Epstein has stories where one misbehaving Israeli diamond dealer got a box full of mostly low-grade and economically worthless stones; since the cutting of them still incurred high labor costs, accepting the box would ensure that he made a large net loss on it. The Israeli accepted anyway, realizing that declining the offer would have him uninvited to future sights which as a consequence would starve his supply line. And so, with an iron fist, De Beers could control the shape of the whole diamond cutting- and retail industry by punishing those who did not stay in line with De Beers' vision of future supply and demand.

Cecil Rhodes and De Beers

It is also worthwhile to understand exactly how this global diamond monopoly came about. And for that, we have to go back as far as the 19th century, when the sun never set on the British empire.

Even though natural diamonds before the 19th century were found in a few river beds in India, and in the jungles of Brazil, the total world production was minuscule. Epstein's story of the birth of a truly global diamond market briefly starts in 1870, and here is a short summary of that era.

It all took off when large diamond 'pipes' were found near the Orange River in South Africa. In the mouths of these, diamonds formed deep in Earth's mantle had been thrown towards the surface in violent eruptions. As these eruptions cooled, they left the vertical 'pipes' as rock skeletons - one of many testaments to the planet's unruly past. Spawning a diamond rush to the sight - something that would birth the city of Kimberley - it attracted also a young Englishman named Cecil Rhodes (now infamous and nowhere to be seen on De Beers' official webpage). Cecil's brother had acquired a nearby tract of land, previously owned by two Boers named De Beers. From that starting point, and with good business acumen, Rhodes managed to build a profitable mining syndicate that he later merged with the other British mining ventures in the area, forming De Beers Consolidated Mines Ltd. Applying for a special charter to the Colonial Office in London, it was granted in 1880, proclaiming the company's right to not only mine, but to build railroads, lay telegraph wires and allegedly even annex territories with private armies. In other words, it had been granted similar privileges as had the British East India Company formed two centuries earlier.

As the supply of diamonds on the world market increased, prices fluctuated heavily and the trend was a logical decrease. To counter this, Rhodes bought up more or less all other diamond mining companies in South Africa. One major company refused, and so Rhodes unloaded large parts of De Beers' inventory on the market, crashed the diamond price which had the competitor shares trade at low prices as well. Having then bought those shares in 1888, the budding diamond mining monopoly was more or less established. It is estimated that in 1890, Rhodes controlled more than 95% of the world's diamond production. The next logical steps were to reduce the annual diamond production at Kimberley from 3 million carats, to 2 million carats, and to establish a contract with a London-based diamond syndicate that it alone would have the right to buy Rhodes' uncut diamonds in exchange for abiding to restricting supply. At this time, Rhodes was also elected prime minister of the Cape Colony, and initiated various military conflicts with white Boers and black Africans alike.

Rhodes died in 1902, leaving no descendants. Within a year of this event, another youngster arrived in South Africa - Ernest Oppenheimer.

The Diamond Jews

The London syndicate, mentioned earlier, consisted at the time of ten different companies - all owned by Jewish merchants. Epstein emphasizes that such a constellation was nothing strange, given the shape of Europe over the prior centuries. As Catholics often had been forbidden to lend money for interest, that task had been (sometimes involuntarily, due to restrictive and unfair guild policies) picked up by European Jews, who when getting various gem stones as collateral also had become experts in carefully assessing said stones. Before diamonds were found in South-Africa, most stones had come from India, from where Arab merchants had brought them and sold to Jews for gold or silver in cities such as Cairo or Aden. The stones then found themselves to other areas with a considerable Jewish populations, like Frankfurt, Lithuania and Venice.

Due to the superior transportability of diamonds, the business of valuating and cutting them suited Jews perfectly. As European pogroms was a rule rather than exception, this property of the diamonds meant wealth could quickly cross borders should Jewish families have to flee their aggressive neighbors. Examples of this were observed during the Inquisition, which had many Portuguese Jews flee Lisbon to Amsterdam. After the flow of diamonds from India faltered, and as new diamonds were found in Brazil, the diamond trade center slowly shifted from Amsterdam to London - then the capital of the empire with superior sea power. Many of the Jewish diamond merchants of Amsterdam consequently moved across the canal. And it is here that the story of the London Jews intertwine with that of De Beers.

The discovery of the South-African mines occurred at around the same time as the Brazilian fields yielded less and less stones. Fearing that the diamonds of Kimberley would flood the delicate diamond market, the Jewish diamond families decided to answer the threat by forming a syndicate bent on buying up excessive supply. In other words, they, like De Beers, were interested in restricting total supply on the market. One of the merchants that took the lead in dealing with the upcoming Rhodes was Dunkelsbuhler, who also happened to bring into his London business a German Jew named Ernest Oppenheimer.

Oppenheimer started from the bottom as a diamond sorter under the supervision of his older brother. This brother sent Ernest to Kimberley in 1902 to help the syndicate's dealings there. Having studied extensively the reports of what kind of diamonds arrived to London, and where they came from, Oppenheimer had quickly become an expert in the details of the global diamond network. Around this time, diamonds started to be found outside of the mines of the De Beers, namely in the Boer lands of Transvaal. Frank Oats, who had succeeded Rhodes, scoffed at such rumors only to later find out he had a problem at his hands. The profitability of the South African company rested heavily on its ability to control global production output. Luckily for De Beers, the Boers had just lost a was to the British, and control over the new mines could be arranged in favor of the company.

Oppenheimer, who had just created his own gold venture, Anglo-American Corporation, saw through De Beers' monopoly strategy and so also saw his own chance. With money from the gold venture, he acquired a Namibian diamond property that De Beers also needed to consolidate the monopoly, and so managed to exchange that property for De Beers shares. At every opportunity, he and many of his cousins continued to buy De Beers shares, and by 1927 he had become the most powerful force in the diamond world. In 1929 Oppenheimer was finally voted chairman of the De Beers board, despite not being a South-African. One of his first main concerns was not the discovery of new diamond mines, but what he deemed an irrational exploitation of them. In other words, the supply, from the ground to the syndicate in London, needed to be rigidly managed.

As the Depression cast its shadow over the world's markets in 1929, De Beers got in trouble. Lacking the needed diamond sales, reports came from Oppenheimer's old syndicate acquaintances that in order to stay afloat, they had to sell more of their cut and polished inventory of diamonds. This was surely to depress diamond prices further, and Oppenheimer saw no other way than finally trying to acquire the syndicate itself. Not much resistance was put up against this move, and Oppenheimer's younger brother Otto was put in charge of that distribution arm. The Diamond Trading Company was created and established in London, functioning as De Beers' distribution arm.

All major mines in South-Africa closed, to curtail new supply. From producing over 2 million carats in 1930, only around 14 000 carats were produced in 1933. The relatively new mines in Namibia closed as well. Diamonds produced in Belgian Congo and in Portuguese Angola were bought up by Oppenheimer's London company in order to hinder their emergence on the open market. All of this was financed with the issuing of bonds. By 1937, De Beers' stockpile had grown to about 40 million carats, or 20 years of supply given an approximate 2 million carats market per year. According to a US government report, Oppenheimer was at this time ready to dump millions of carats in to the North Sea should his company face bankruptcy and liquidation. De Beers was saved by a timely industrial demand for diamonds in the wake of the invention of the diamond grinding wheel, used in the process of mass productions of cars, airplanes and other machinery. One small problem was the mines in Belgian Congo, which also produced industrial-grade diamonds by the tons. Oppenheimer then managed to strike a deal with the Belgian government: his London arm was going to buy up that supply in exchange for De Beers sending fine diamonds to cutters in Belgian Antwerp. Consequently, London became the center for industrial-grade diamonds while Antwerp acquired the more traditional diamond-cutting market.

In part two of this series, we will follow De Beers near annihilation as a business entity as the world headed for war, how an increasing industrial-grade diamond demand saved them, and how as a result of this new type of demand, research into synthetic diamonds proceeded for the reason of national security.