According to a weekend article on moneyweb, “It’s a great time to buy a diamond”…even if “fewer people want one”. There is also this graph:

Which basically says that polished diamonds are relatively cheap – as in “relatively cheap when compared to other luxury items”.

So this takes me back to a Geneva auction in 2013, where I wrote about a pink* diamond setting a new record for the world’s most expensive gemstone.
*its official colour is “fancy vivid pink”, the highest grade, apparently.

Here’s a picture of “The Pink Star”:

Here’s a picture of someone awkwardly attempting to wear it nonchalantly:

And here it is at its first public appearance, being completely overshadowed by Helena Christensen’s make-up:

The 59.60 carat diamond sold for $83 million.

So here’s the question: why?

A Variety of Bad Reasons

So I googled “reasons why diamonds are worth a lot”. And here are the reasons offered:

“Diamonds are extremely rare. And anything extremely rare is precious”

Completely false.

If I paint a picture today, and it’s the only one I’ve ever painted, then it too is “extremely rare”. But it’s not valuable.

Rarity is not the creator of value*.
*Gold Conspiracy theorists, ahem. If I had a nickel for every time a gold bug declared that “Gold has value because there’s a limited amount in the world,” then nickel would also be a commodity in short supply, and I could launch a nickel standard by the Gold Bugs’ own definition.

Sorry, you’ll need to do better than that.

“Diamonds take millions of years to form”

I have also taken millions of years to form. I am a complexity of evolutionary advance, genetic selection and chance encounters between every single ancestor.

But we don’t even need to go that far. I can just go hiking. And every rock that I step on will have been millions of years in the making.

“They take a lot of labour to get”*
*I found this one on a Yahoo answers page, in my grammatical defence.

This is actually a very Marxist way of looking at the world, where the only determinant of value is the amount of human labour that went into the creation of a product. So:

value of diamond = labour time in excavation + labour time in extraction + labour time in producing extraction equipment + labour time in transportation + labour time in cleaning + labour time in cutting + labour time in selling you said diamond

But this view struggles to reconcile itself with the real world: where you can take a really long time to make something, but no one wants to buy it.

“Diamonds are the hardest substance”*
*also a Yahoo answer.

?

I seriously doubt that the Pink Star is prized for its hardness.

Anyway – mankind has managed to create its own materials that are harder than diamonds. So that can’t be it.

The Only Reasonable Reason

“Diamonds as status symbols”

At some point in history, some mover-and-shaker ruler found a shiny stone and attached it to a headdress. The trend caught on. And suddenly, the world of royalty was swept by the desire for molecular trinkets.

Over time, rival kings and queens started aiming for bigger, better, brighter and rarer – in order to be more awesome than their less-decorated royal counterparts.

And the world is yet to recover.

Well, it’s that, and advertising (perhaps I’ll save that for tomorrow).

For How Much Longer Though?

We’re now able to produce diamonds in a laboratory. And I’m not talking about cubic zirconiums – I’m talking about pure carbon subjected to similar pressures as those found at the earth’s core (here’s the article on How Stuff Works?).

To the point where jewellers struggle to tell the two apart.

My question: how much status will a pink diamond have when the rising middle classes of Africa, China and India are awash in a sea of laboratory-grown gems? True – status is unpredictable, so maybe it will be able to hang its hat on provenance.

But I’m pretty sure that’s not enough. After all, if diamonds are seen everywhere, then how can you display your status with it?

Some Historical Examples of Formerly Precious Materials that are no longer so precious

• The Washington Monument is capped with aluminium, because it was once considered a precious metal. And then someone revolutionised the refining process (or something). Today, pass me that coke can.
• Amethyst used to be considered one of the cardinal gemstones (alongside diamonds, emeralds, rubies and sapphires). Until around the 18th Century, when large supplies of it were discovered in South African mines…

In fairness, Mr $83 million is probably safe. The Pink Star is has its own name, after all.

But for your run-of-the-mill diamond rings…

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.