Diamonds Are Not Forever: The 90% Crash of 1979

“A diamond is forever.” That is probably the most successful advertising slogan in history. De Beers spent decades convincing the world that diamonds are rare, precious, and eternal stores of value. But Chapter 12 of Torsten Dennin’s “From Tulips to Bitcoins” tells a different story. A story where investment-grade diamonds lost 90% of their value in twelve months.

The Diamond Machine

Before we get to the crash, it helps to understand how the diamond market actually works. Because it does not work like any other commodity market.

The world produces about 20 to 25 metric tons of diamonds per year. That is 100 to 130 million carats, worth roughly 10 billion dollars. But here is the thing. Only about 20% end up in jewelry. The rest go to industrial uses. Your engagement ring is the minority use case.

The major producers are Russia, Australia, Canada, and several African nations. But production geography matters less than you might think, because for most of the 20th century, one company controlled virtually the entire market.

De Beers. Founded in 1888 by Cecil Rhodes in Kimberley, South Africa. Owned roughly 45% by Anglo American and 40% by the Oppenheimer family. De Beers directly controls about 30% of production, but its real power comes from the Diamond Trading Company, a subsidiary that buys most of the world’s rough diamond output. The DTC allocates quotas, manages prices, and distributes diamonds through the Central Selling Organization to about 150 authorized “sightholders” in London.

Think of De Beers as OPEC but for diamonds. One entity deciding how much supply reaches the market and at what price.

Diamonds Are Not Normal Commodities

Another thing that makes diamonds unusual. There is no standardized pricing like you get with gold or oil. Diamond valuation uses the “4 Cs”: color, where D means perfectly colorless and it goes downhill from there. Clarity, where IF means internally flawless. Cut, with the round brilliant being the most popular. And carat, where one carat equals 0.2 grams.

The pricing is not linear either. A 2-carat diamond is not twice the price of a 1-carat stone. Larger diamonds are exponentially more precious. In 2018, a 1-carat diamond could range from $500 to $10,000 depending on the other three Cs.

Most trading flows through Antwerp, which handles about 85% of rough diamonds and 50% of cut stones. This is not a market where you open your brokerage app and click “buy.” It is a market built on personal relationships, closed-door negotiations, and a cartel that decides who gets to play.

The 1970s Gold Rush for Sparkly Rocks

By the late 1970s, the US dollar was in bad shape. Inflation was running hot. Oil prices were through the roof. Investors were desperate for anything that could hold value when paper money was losing it.

Gold was the obvious choice, but people started looking at diamonds too. Small, portable, practically indestructible, and supposedly scarce. Hard currency you can put in your pocket.

De Beers watched this investment demand build and made a calculated decision. They only moderately expanded supply. Less supply plus more demand equals higher prices. Higher prices attracted more investors. More investors meant more demand. The cycle fed itself.

1979: Pure Hysteria

In 1979, things went vertical. Average diamond prices doubled in a single year. But investment-grade stones went completely insane. A 1-carat diamond of the best quality multiplied ten times, reaching around $60,000.

Israel got swept up too. The Israeli government backed bank loans for diamond companies. Easy money poured into the diamond sector. Everyone was buying. Everyone was sure prices could only go up. The same story that plays out in every bubble since the Dutch were trading tulip bulbs in the 1630s.

The Crash

De Beers eventually tried to cool things down by expanding supply. Instead of stabilizing the market, it triggered the collapse.

The first crack appeared in Japan. A bank stopped accepting diamonds as collateral. That is a small thing. One bank, one country. But in a market built on confidence and artificial scarcity, small cracks spread fast.

The first price drop made speculators nervous. Some started selling. More selling pushed prices lower. Lower prices meant borrowers fell below their collateral limits. Lenders demanded more collateral or forced sales. Forced sales flooded an already oversaturated market with even more diamonds.

It was a classic margin call death spiral. The same pattern that shows up in every crash in this book.

Even De Beers, the all-powerful cartel, could not stop it. They tried buying back diamonds to soak up supply. They withdrew over 6 billion dollars worth of diamonds through the CSO. They slashed mining quotas. They shut down an entire mine.

It did not matter. Within twelve months, investment-grade diamonds fell from $60,000 to $6,000. Ninety percent. Gone.

What Stays With Me

A couple of things from this chapter stand out.

First, the diamond market was never a real market in the traditional sense. It was a managed illusion. De Beers controlled supply, controlled distribution, controlled marketing, controlled pricing. That works great when everyone plays along. But the moment outside investors flooded in with leverage and speculation, De Beers lost control of its own creation. You cannot run a cartel and have a free market at the same time. Eventually you have to pick one, and the market picks for you.

Second, diamonds as an investment have a fundamental problem that gold does not. There is no standard pricing. No liquid exchange. No ticker symbol. When you need to sell a diamond in a panic, who do you sell it to? Another panicking investor? The dealer who sold it to you at a 50% markup? Good luck. The same illiquidity that lets De Beers manage prices in good times becomes a trap in bad times. You cannot get out.

Dennin uses this chapter to show that even a cartel as powerful as De Beers cannot override the basic mechanics of a bubble. Artificial scarcity works until it does not. And when the confidence breaks, no amount of market manipulation can put it back together.

Previous: Chapter 11: Oil Crisis 1970s

Next: Chapter 13: Silver Thursday

This is part of my From Tulips to Bitcoins book retelling series.