In March 1981, after a long run of inflationary diamond prices, Thomson McKinnon Asset Management Inc. launched the Diamond Investment Trust; one of several trusts it formed to invest in diamonds. In retrospect, diamond prices were past their peak and cooling, eventually leading to the collapse of the trust.

At launch, shares in the Trust traded at $994, but as investors got wind of the quickly declining diamond prices, the fund's shares lost favor, dropping some 43 percent to $565 seven months later.

A year earlier, in 1980, D/FL 1 carat diamonds sold for $50,000. By 1985, they sold for $8,000-$12,000 among wholesalers in what is considered until this day one of the worse crashes ever in diamond prices.

Diamond wholesalers still view with near horror the steep drop in diamond prices in the 1980s. Some of them lost a considerable amount of money when the value of their expensively bought inventory lost a large chunk of its value.

As the example above shows, in some cases the value of inventories was slashed by as much as 80 percent. The result was a large number of bankruptcies and the fall of a number of very large companies, dragging the industry into a major catastrophe.

Though launched after prices started to decline (but before the large tumble), in the memories of many in the wholesale sector, the Thomson McKinnon Diamond Investment Trust is still associated with the steep price drop and therefore many of them oppose the formation of diamond funds today.

An Early Warning?
Is the Thomson McKinnon Diamond Investment Trust the ultimate warning against investing in diamonds? Not necessarily. First, the timing of the trust was horrible. While diamond prices are currently softening, the declines are nowhere near the free fall of the mid-80s. In addition, the 80's price crash followed a great upward run in prices. The current declines – and rises – are far more moderate.

It's important to remember that none of the proposed investment opportunities today is a future market, ostensibly creating a lesser impact on long-term pricing.

Finally, Thomson McKinnon Inc. was probably suffering from a number of problems unrelated to diamonds, which eventually led to its fall from grace.

The lesson is that while diamonds as an investment opportunity were sexy when prices escalated, the market will always have its ebbs and flows and that should not deter any of the current efforts. The diamond industry as a whole can only benefit from them.

(The upcoming IDEX Magazine August issue takes an in-depth look at investing in diamonds. Email us if you are not on the magazine's mailing list)

Follow Up (1): Trade $ Not %!
We got many responses to last week's column saying the list is out of whack. Overall, the agreement is that Fancy cut diamonds are in good and steady demand, and prices are increasing (prices on IDEX Online's trading platform confirm this). However, the issue goes far beyond the accuracy, or lack there of, of the reported prices.

A number of companies, such as Saraff in Antwerp, are initiating changes in their local markets, calling for boycotts.

Naftali Holzer, Director in I.D.R.P., wondered why the prevalent list rarely changes. "Frequent changes will make the list irrelevant and traders will (consciously or not) switch to working in dollars rather than percentages," he writes. "We are hooked on percent discounts," another reader (who asked to remain anonymous) added, "and don't know the dollar price of our own goods. This is insane."

The consensus among many in the market is that the discount system is obsolete. "As long as we trade [based on] percent discount, we are a 'captive audience'," another insider states, "and that is EXACTLY the point. The market got addicted to the percent discount system, which forces it to work with the list."

The sad part is that this is a vicious cycle and a phenomenon that exists only in the diamond industry. Further, in many ways, it holds back the industry's development. Therefore, we are urging you to set yourself free from the discount system – think dollars instead.

Follow Up (2): Lab-Made Diamonds
After GIA's report last week that more undisclosed lab-made diamonds were detected, this time in Hong Kong, on Friday we broke the news that the Indian market is getting organized in fighting this dangerous trend. All the details are here.

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