Vol 4.9 "Diamonds Are Not Forever" October 7, 2005

Dear Friends,

It’s October 4th, 2005, 9:36 a.m. I am over a month late in
writing September’s newsletter. As best I can, I’m going to
try to recap what I and the diamond industry have been through
in the last 30 days and the way it will forever affect how good
quality diamonds are purchased in the world markets.

Thirty Days Before

My Dad and I got to Houston Hobby Airport on September 5th with
very little trouble. It was Labor Day, and the streets were
clear. After a career in aviation (executive with Fairchild Aircraft
and former wing commander, USAF), my dad is now DCI’s CFO. We were
going to New York to have a meeting with the manager of DCI New York
to see why clients were experiencing unusual delays on the processing
of their orders. The meeting should have lasted only 30 minutes’ it
lasted 9 hours.

The Day My World Changed (September 6th, 2005)

Todd Couturier, who works with me at my home office, used to work
for American Express Centurion and finagled two suites at the
relatively new W Hotel in New York. While at first I wasn’t
impressed with the retro 60’s motif of the room, the bed was
comfy, and the location at Times Square was wonderful! The
meeting was at our offices at 579 Fifth Avenue scheduled
for 9:00 a.m. We had the whole day for the meeting and whatever
(shopping and eating) because we weren’t flying back until
Wednesday September 7th. I had no idea when I walked into
the office my life was going to forever change!

The Meeting

My father and I: ‘Good morning!’

Buzzz!! We have a double door security lock at DCI New York
for security purposes. The buzz was us being let in.

Me: ‘Hi Neil (manager of DCI New York), how’s it going?’

Neil: ‘Pretty good, I guess. Would you guys like anything to drink?’

Dad: ‘Do you have the hard stuff?’

Neil: ‘Classic Coke, full octane? Of course!’

Dad: ‘Great.’

Me: ‘Water is fine for me.’

We exchange pleasantries for a while and then I got to the
point of the meeting.

Me: ‘Neil, as you know DCI New York is falling a little behind
in filling all the orders, and we just want to see what’s up?’
(I wanted to say ‘What’s up like the Budweiser commercials but
realized it was a little lame to use a 7 year old bit regardless
of how much I personally loved to say Wazzzzzup?!’).

Long Dramatic Pause’’.

Neil: ‘Fred, do you know how for 20 years you’ve been telling
people to buy shy?’

Me: ‘Ah huh.’

Neil: ‘Well, they did. And now they’re all gone —
the good quality ones.’

Me: ‘What do you mean they’re all gone?!’

Neil: ‘They are all gone! All the shy stones (.45 ‘” .49 ct,
.65 – .69 ct, 1.45 ‘” 1.49 ct, 1.85 ‘” 1.95 ct, 2.85 ct ‘” 2.95 ct)
are gone, and it’s not only those. All the full sizes over 3
carats are gone. The rough to cut 1.25 ct and 1.75 ct box
radiants are gone. The rough to cut 65/65 princesses in any
size are gone. The 65/65 Asschers are gone! Fred, they’re all gone!’

The conversation proceeded from there. For 9 hours, we tackled
many questions. What rough was still available to fill current
and future orders? What type of rationing was needed to stretch
the current supply of ‘fulls’? A full is a hard weight diamond
.50 ct, .75 ct, 1.0 ct, 1.50 ct, 2.0 ct, and rough to cut full
sizes was still available. Important note: When I tell you, the
reader, that the world is running out of diamonds, again, I am only
referring to the good diamonds, not the commercial grade stuff
that consolidators like Costco, Sam’s, Blue Nile, Zales, Bailey
Banks & Biddle, Mondera, or Dirt Cheap Diamonds sell. There is
no shortage, nor will there ever be a shortage of commercial
grade diamonds.

Everyone defines a ‘good’ diamond as a diamond that holds or
appreciates in value over time when you try to sell it. Commercial
grade diamonds, on the secondary market, sell for only a small
fraction of what you paid. That is also the case now for the fancy
shapes (pear, marquis, emerald cut, asscher, oval, heart, trilliant,
baguette), and melee. They have little or no secondary market value.
The top price you’ll see for any commercial grade, fancy shaped, or
melee diamonds will rarely be a penny more than 19.7% of the original
dollar spent. While a good diamond (white, eye clean, Class 1 or 2,
non-fluorescent, natural, fully bonded) will always bring you even
money (100% of what you paid) as long as the vendor you bought it
from stays in business. Even if they don’t, you’ll at least get
40-45% of what you paid as dump value (the average is 60%) or
80-85% on the secondary market to an end consumer who is not looking
to flip the rock. There is no question, if you are going buy a
diamond, it makes no sense purchasing a crummy one with bogus
‘certificates’ that don’t guarantee you anything. It leaves you
holding a piece gravel if you ever want to part with your rock.

Anyway, this is what the market (world) is dealing with. Good
diamonds in entire categories are extinct except the onesies and
twosies, and what is left could be gone as early as 2010. The
following is an excerpt from GIA publications entitled, ‘Diamond
Conferences Forecast Big Changes’, by Russell Shor that made its
way to me Saturday September 10th, 2005:

Profound changes will rock the diamond industry in years to come,
and not everyone will survive them, according to speakers at the
Rapaport Diamond Conference in New York and the Second Antwerp Diamond
Conference, held in Belgium. Most agreed that the net result of
these changes would be mergers and stronger partnerships with diamond
producers and retailers.

Moshe Leviev, of LLD, Israel’s largest diamond manufacturer, told
the audience at the Rapaport event that shortages of rough diamonds
over 20 points, especially high-quality goods, will be a dominant
factor for the next decade.

‘Diamond stocks, held by De Beers and other mining companies,
totaled over $22 billion a few years ago. Now these are down to
$3 to $4 billion ‘” essentially working stocks, meaning there is
no overhang,’ he said.

He added that there will be no major new ‘breakthrough’ diamond
mines coming on line for five to eight years at minimum, so shortages
will get worse as demand rises.

Dilip Mehta, president and CEO of Rosy Blue, noted that the industry
is entering an era of fundamental change: from an excess of
supply over demand, to the reverse.

‘We’ve seen how rising demand helped De Beers liquidate nearly all
its buffer stocks of diamonds; and, assuming that demand keeps rising,
production will not be able to keep up,’ he said.

Both warned that prices for diamonds will rise significantly in coming
years, beyond the point where retailers and suppliers will be able to
absorb them.

The De Beers Diamond Trading Company (DTC), however, has set a growth
target of 50 percent in worldwide diamond jewelry sales ‘” $84 billion
‘” by decade’s end, according to S. Lynn Diamond, director of the Diamond
Promotion Service, New York. Because of supply shortages, it’s apparent
that most of this growth will come from price increases, not rising unit
sales, added Ken Gassman, analyst for the Rapaport Group.

Leviev stressed that the DTC’s Supplier of Choice initiatives will take
their toll on diamond manufacturers.

‘First, there is no guarantee that sufficient rough will be available to
support all of these initiatives. Second, the market cannot support 130
different diamond brands. So we are likely to see many companies bankrupted
by high costs,’ he said.

Shortages in quality rough diamonds will ultimately lead to a major
reorganization of the industry, with prominent retailers and diamond
suppliers vertically integrating, said Elliot Tannenbaum, partner of the
Israel-based Schachter Namdar Group.

‘By 2010, we will see suppliers taking major stakes in retail jewelers.
By 2028, we will see a situation like the oil companies where a few
major players have operations integrated from mining to retail. Retailers
not attached to major suppliers may have difficulty finding supplies,’ he said.

The future, however, is less worrisome than the current industry debt and
inventory situation, said Peter Gross, who heads the diamond and jewelry
division of ABN AMRO.

‘Before we get to the supply shortages, there is an excess of polished
inventory hanging in the market and manufacturing capability, which are
driving the price of rough to unrealistic levels,’ he said.

He said the excess manufacturing supply is causing the current increase
in rough prices, even as large quantities of polished are still sitting in
dealers’ safes.

‘The rising cost of rough and lengthening credit terms of U.S. retailers,
have contributed to a very sharp rise in industry debt during the past year,
from $6.88 billion to $8.66 billion. Most of that increase is from India,
where the debt nearly doubled in three years,’ he said.

Here is an excerpt from another article that was published September 24,
2005 by The London Times entitled, ‘Diamonds Are a Girl’s Best Friend,
But They Don’t Last Forever’ by Jonathan Clayton:

Diamonds have lost their sparkle in Kimberley, source of some of the
19th century’s greatest fortunes and a name bound up with the history
of British colonial rule in Africa. De Beers, the world’s largest diamond
miner, has ceased production at its last three underground mines, ending
34 years of diamond extraction in this small town in the dusty Northern
Cape, South Africa’s most sparsely populated province.

‘These mines are more than a hundred years old,’ David Noko, general
manager of Kimberley Mines, said. ‘They are depleted. It is as simple
as that. We have always known that mining is finite and must end some
time. That is the nature of the business.’

Scotty Ross, a mining historian and guide at one of the sites, said:
‘The deeper you go, the more expensive it is to bring out the required
tonnage. The diamonds are smaller and of lower quality. You finally
reach a depth and output where it is no longer viable . . . That is where
we are now.’

The company said in a statement that the mines were no longer profitable.
They will formally close at the end of the year following the required
consultation process with the Government and mining unions.

About 1,000 jobs will be lost, and the news has not gone down well in
a town that has a 36 per cent unemployment rate and little to show for
decades of often brutal and violent exploitation.

As I conclude the most serious newsletter that I will probably ever write
in my life, I want everyone to know I love being the Diamond Guy®. While
there were times in my life I dreamt about being an NBA basketball star
(too short, no talent) or a medical doctor (don’t like being forced to
study, and I don’t take orders well), I will be the Diamond Guy® for
however long God sees to it. I will do my best (shooting to at least make
it to 2020 when all the 70 million echo boomers are engaged) to be here to
advise you and help you make one of the biggest purchases of your life go
as easily and as happily as possible. During the coming years expect huge
shortages, waiting lists, and even rationing if you are to get the diamond
of your dreams. In the end, when you hold that clear piece of carbon in
your hand that has the ability to make the speed of light crawl before your
very eyes, you’ll know it’s worth it because for at least a moment in time,
you got to look God in the eye and see him smile.

All The Best,
Fred

The founder and president of Diamond Cutters International, is one of the worlds top diamond experts, as well as a three-time Guinness Book record holder in jewelry design.
Fred The Diamond Guy
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