The Fifth C: What Determines Diamond Cost?
The De Beers Corporation
Anyone who knows anything about diamonds has heard of the diamond giant, De Beers. (At the very least, you’ve likely heard their tagline: “A Diamond is Forever”). De Beers used to own 85% of diamond rough. Other companies such as ALROSA and Rio Tinto have now taken large cuts of the pie. Nonetheless, De Beers still retains control of 35-40% of the world’s roughs and determines a great deal of the market.
An event De Beers hosts helps set diamond prices every season. Diamond dealers compete to be one of 84 “sightholders” at De Beers’ “sights.” These companies are invited to view and purchase diamonds directly from De Beers ten times a year.
De Beers determines how much and what kind of diamond rough to sell to each company or sightholder and at what price. Dealers can only accept or reject boxes, each valued in the millions. They can’t negotiate. In addition, sightholders must obey strict rules and can’t sell to retailers who will lower prices. De Beers has the right to know the sightholders’ markets and inventories and can also audit the companies as well.
Sightholders who disobey the rules face serious consequences. De Beers may give them bad deals or block them completely. In this manner, De Beers keeps diamond market prices high and stable.
How De Beers Controls Diamond Market Value
If diamond prices fall, De Beers will sell fewer diamonds to sightholders, thus decreasing supply, or will charge sightholders higher prices. If a new supplier emerges, De Beers will flood the market with similar quality diamonds at an extremely low price, thus driving out the competitor. De Beers is so protective of the diamond market that it has even bought diamonds stolen from its mines to prevent thieves from selling the diamonds at below-market price.
Except when used for industrial purposes, diamonds remain largely a luxury commodity.
Diamonds have a set international market price, unlike other gems. In this respect, diamond is somewhat like gold. However, diamond pricing is much more complicated than gold. While every ounce of gold is the same, diamonds must be graded to determine their value. Even though the 4 Cs is the basic standard for grading, a myriad other factors influence diamond value.
Diamonds used to go through the hands of several intermediaries (as many as eight) from mine to wholesale to retail. Each of them took a cut before the diamonds reached retail. The retailers then sold the diamonds for whatever price they pleased. (To learn more about the tiers of players in the gem world, read “A Guide to Understanding the Inner Workings of the Gem Trade”).
Retailers got a sense of the market through regularly dealing with merchants and learning how much customers were willing to pay. Consumers based their decisions on price comparisons at local stores. Of course, the past few decades have changed this, especially with the advent of the Internet.
Before diamonds could have a stable and predictable market price, a basic agreement on their worth had to exist. In 1976, Martin Rapaport established a diamond “rap list” that gave price benchmarks for colorless round, pear, and marquise-cut diamonds. Based on the high cash asking price in New York, these benchmarks are published in Rapaport magazine monthly and updated weekly online on RapNet. These guidelines are available only to those directly involved in the industry. Retailers around the world use these reports. The price guide tends to be quite expensive, with the least expensive subscription starting at $55 a month.
A Sample Diamond Price Chart
|(0.46-0.49 CTS) DATE ROUNDS|
This chart resembles what you might see on a typical diamond pricing list such as Rapaport. The header at the top indicates the carat size range, the report publication date, and the shape of the diamonds priced. To calculate diamond price, first, choose a color grade (leftmost column) and a clarity grade (top row). Next, multiply the number shown at their intersection by 100, then multiply that number by the carat size. For example, an I-color grade, VVS2-clarity grade diamond would cost $3,000 per carat. So, a 0.46-ct round diamond with these qualities should cost roughly $1,380. Note the exponential decrease in price as a diamond goes down in color and clarity.
The Effect of Rap Prices
The establishment of Rapaport meant good news for the consumer but bad news for diamond dealers, since manipulating diamond prices became more difficult. It also commoditized something that for years had been marketed as unique and of immeasurable, eternal value. In the decades after the creation of Rapaport price guides, retailers still sold diamonds for above Rap prices. Nowadays, with industry changes and consumers’ increasing ability to shop around, retailers usually sell diamonds at around Rap price.
10 to 15% below Rap is often considered a great deal for retail. 30 to 35% below wholesale is an excellent deal for wholesale. However, less popular diamond shapes and colors may receive greater discounts. Of course, extremely rare large or historical diamonds are exceptions. Rapaport price guides don’t account for these.
The Limitations of Rap Prices
Rapaport also doesn’t take into account all possible value factors. For example, the Rapaport price guide focuses on Color, Clarity, and Carat, based on Gemological Institute of America (GIA) standards, but doesn’t adjust for Cut. It assumes that all the diamonds listed are fine cut. Of course, this isn’t a huge oversight, because consumers should ideally only purchase stones that have “Excellent” to “Very good” cut grades. Stones with lower cut grades just don’t make good deals and don’t look visually appealing. Polish and symmetry, also not included in Rapaport, should also be “Excellent” or “Very good” for a stone to be a good purchase.
Diamond Cost and Quality: The 4 Cs and Beyond
The best way for consumers to find good deals is simply to look for them online or in stores.
Everyone knows about the 4 Cs of diamond grading — Color, Clarity, Cut, and Carat. What consumers often don’t know is that within these grades are minute subdivisions, variations, and judgment calls that don’t make it into the grading report.
Clarity Variations Within Each Grade
Jewelers will sometimes add modifiers to a stone’s clarity grade. For example, a “high” SI1 (slightly included 1) means it approaches the quality of a VS2 (very slightly included 2). There are also “low” VS2 stones. This means that though they qualify as VS2 they nonetheless have serious enough inclusions to almost drop into SI1 territory.
Clarity grades take many factors into account — the location, size, relief, type, and number of inclusions. However, let’s say one stone has multiple low-relief inclusions (low contrast and harder to see) while another has one high-relief inclusion (high contrast and easier to see). Although the stone with one inclusion could receive a higher grade than the one with multiple inclusions, the stone with the lower grade may actually look better to the naked eye. That would make the lower grade stone a much better deal, since it will likely have a lower price.
Borderline Stones and Diamond Cost
Each GIA-graded diamond is evaluated by more than one grader. Sometimes, a diamond will sit right on the borderline between grades. If two graders disagree, a senior grader will be asked to make the final call. It’s a big decision, because the grade difference means a big difference in price. If that stone makes it into the higher category, it may not be the best deal for the price. On the other hand, if it falls into the lower category, the stone may be a very good deal. Of course, once the stone leaves the lab, no one knows what grading process each stone went through. It takes an experienced gemologist to say whether a stone is a good deal for its price range.
Simply put, there are many factors to consider within the rubric of the well-known 4 Cs of grading. Thus, a VS2 grade guarantees neither an eye clean stone nor that it will look better to the naked eye than a “high” SI1. To make this call, seeing the stone in person helps consumers the most. Realizing this, many diamond websites nowadays provide 3-D views of the stone or let consumers chat online with gemologists to ask about the stone’s characteristics. (Asking the opinion of a gemologist friend is an even better option).
Some branded cuts, such as “Hearts and Arrows,” will cost more because they boast greater cutting precision, which results in a greater loss of rough. “Hearts and Arrows” diamonds will have greater symmetry than most other diamonds. However, that doesn’t always mean they have better overall cut grades.
The prices of diamonds with different shapes fluctuate depending on their popularity. Rounds are the most expensive because they’re always in demand. They also result in the greatest waste of diamond rough when cut. When considering what shape to cut a diamond, faceters weigh the value of a particular cut at that moment in time against the amount of wasted rough the cut requires. A cut that saves stone mass usually results in the greatest value for the diamond. However, most diamonds that can be profitably cut into rounds will be cut into rounds.
Colorless diamonds on the normal color scale are usually yellowish, brownish, or grayish in hue. Diamond hue is only listed on grading reports if the color grade is below K, but the hue of the diamond starts to show at a color grade of G. Brownish and grayish diamonds tend to be more affordable than ones with yellowish tints, although they’re becoming increasingly popular in edgy modern and sometimes even vintage designs.
Fluorescence will decrease the value of D-F color grade diamonds but may increase the value of G-J diamonds, depending on the color of fluorescence. Medium to strong fluorescence can cause a stone to look milky, thus decreasing its value. However, blue fluorescence can counteract any yellowish hue that a lower grade diamond may have. Therefore, it may actually improve the color of diamonds with grades G or lower. This slight increase in value only holds true for blue fluorescence.
On the other hand, yellow or green fluorescence will always lower diamond prices, unless the diamonds are fancy yellow or green. In such cases, these fluorescent colors will make the diamond colors appear more saturated, thus increasing their value.
Weak fluorescence doesn’t have much of an impact on a diamond’s value. It may lower the price slightly for D-F color diamonds, even if it doesn’t affect the appearance of these stones. In this case, the slightly fluorescent diamond might make a good deal.
Diamond Cost Factors at the Retail level
Online stores can usually sell stones at a more affordable price than brick-and-mortar stores. Simply put, they don’t have to pay rent or employ as many people. However, the services offered at physical retail stores (and sometimes by online stores) can also add value to a stone.
Maintenance and Other Services
Diamond jewelry requires maintenance. Diamonds attract grease, so they should be cleaned regularly. Grease, lotions, and dust greatly diminish a stone’s luster and brilliance. While you can sometimes clean your diamonds at home, only a store can check and maintain your jewelry’s prongs. Diamonds are so hard that if they come even a little bit loose in their settings they can start to wear away at the prongs. Eventually, they will cut through them and fall out.
In the long run, buying diamonds from a store that offers warranties, free maintenance, and ring re-sizing services can help save money. Some stores also offer buyback or trade-up packages. For those who like to update the look of their jewelry, this makes a worthwhile added value.
Of course, customers in stores can see the diamonds for sale in person.
Compare the prices and services offered by online and retail stores, then determine what you’re willing to pay for and how much you’re willing to pay.
Designer and Name Brands
Jewelry brand names (not just cut brands) can raise the price of diamonds. When it comes to brand names, all price tags go out the window. What’s being sold isn’t simply a stone but also the reputation and artistry of the jewelry.
However, consumers shouldn’t purchase stones blindly just because the store is well known. For example, Tiffany and Co. has begun catering to the demand for lower priced goods by selling lower grade stones. Stones under a carat are graded in house. Stones over a carat have both in-house and GIA certificates.
So, you can now get the Tiffany brand for less. However, you’re still paying for the brand. Consumers looking to purchase I-color stones, for example, must decide if a certain design or brand name justifies the extreme markup in price, especially if the stones are only of average to above-average quality.
No Great Deals in the Diamond World
Keep in mind that, in general, there are good deals but no great deals in the diamond world. If a diamond is priced extremely low, odds are it has a drawback in one of the 4Cs. Of course, there’s nothing wrong with purchasing a stone with lower color or clarity grades or with characteristics like fluorescence. The key thing is to be familiar with what goes into determining the diamond’s price. You can then make an informed decision.