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Courting catastrophe: tulip and diamond mania

Two investment bubbles over 340 years apart provide proof of Edmund Burke’s famous observation that those who do not know history are doomed to repeat it. NURIT ROTHMANN reports.

It was 1554 when Ogier Ghiselin de Busbecq, ambassador of Holy Roman Emperor Ferdinand I to the court of Suleiman the Magnificent, the Sultan of the Ottoman Empire, returned to Vienna from Constantinople carrying the first tulip bulbs ever seen in Western Europe. Little did he know that this simple act would set off a chain of events resulting in the first speculative bubble in recorded history.

It would become known as Tulip Mania – Tulips began popping up from Vienna to Augsburg and all the way west to the shores of the North Sea; however, their transformation into the national flower of the Netherlands began in 1593 after Flemish botanist Carolus Clusius published an academic paper at the University of Leiden that showed the plants were unusually able to tolerate and adapt to the difficult and harsh weather conditions of the Low Countries. Weather was not the only reason for the increasing popularity of the tulip, whose intense colours provide it with a noble appearance that certainly helped turn it into a sought-after status symbol.

All this was happening during a period when the Netherlands was at the height of its economic prowess. An abundance of wealth held by its citizens coupled with an undersupply of tulips led to the price of tulips doubling from year to year. As the economic benefits of the trend became more obvious, the number of individuals getting in on the action rose exponentially – flower auctions were taking place everywhere in Amsterdam, Haarlem and other Dutch cities; people were taking out loans to trade in futures, which essentially meant buying plants that had not yet grown, let alone bloomed. Contracts could be purchased one day and sold the next for a sizeable premium and it seemed prices could go nowhere else but up.

At the height of Tulip Mania in the winter of 1637, certain single tulip bulbs were being sold for more than 10 times the annual income of a skilled professional then, suddenly and without warning, a rumour spread about one specific type of tulip not finding a buyer at auction. The startling news spread quickly and panic set in. Like all bubbles, this one had burst. Investors were left with little more than a handful of dry and almost worthless tulip bulbs.

The turn of Diamond Mania

For diamond industry old-timers, the story of Tulip Mania will rekindle still-traumatic memories of the diamond investment bubble in the late 1970s and early 1980s.

It essentially began in 1976 when an Israeli government anxious to attract foreign currency through the quick development of its country’s diamond industry began supplying huge amounts of capital to the commercial banks at very low interest rates. By passing the discount onto their clients, it was hoped that the Israeli diamond sector would manage to increase inventory and, consequently, exports.

As part of the new policy, US dollars brought into Israel through the sale of diamonds received more favourable exchange rates. This made speculating in rough diamonds a particularly attractive prospect, resulting in the creation of apparent demand for rough, which bore no relationship to what was happening in the polished diamond market.

Because prices were rising so rapidly, it made sense for companies to simply re-trade boxes of rough rather than cut and polish them as there was no certainty that they would get a viable return in the polished diamond consumer markets.

Making matters worse, the standard practice was for a diamantaire to deposit their rough in a bank as collateral for a low-interest loan, which then was mainly being used to buy more rough diamonds. Israel’s three main diamond-financing banks were holding enough over-valued inventory to threaten the stability of the entire world market.

The fever that began in Israel spread to Antwerp and New York and also began catching the attention of speculators in the investment community. Diamond investment firms began opening in the US and Europe, promoting one carat and larger polished diamonds, sometimes with buy-back agreements.

In March 1977, a 1-carat, D-colour, flawless diamond was selling in the trade for US$7,200 (AU$9,360). Three years later, in March 1980, that same stone could fetch more than US$60,000 (AU$78,000).

The speculative bubble bursts

In an attempt to prevent the markets from veering completely out of control, De Beers Group began adding sizeable surcharges on sightholder boxes in the spring of 1978, making it known to the Israeli banks that they were effectively financing diamonds at grossly-inflated values.

The first surcharge was 40 per cent in March 1978 and that was followed by a 25 per cent surcharge in May, a 15 per cent surcharge in June and a 10 per cent surcharge in July. The diamond producer also cancelled the sights of companies that it knew were taking premiums on unopened boxes or who were simply financially unstable.

De Beers then instituted a 30 per cent average price increase in August 1978, a 13 per cent price increase in September 1979 and a 12 per cent price increase in February 1980.

De Beers’ actions, coupled with the onset of a severe economic recession in the US and Western Europe, led to the deflation and ultimate bursting of the speculative bubble.

Equilibrium was eventually re-established in the rough diamond market and the prices for high-quality polished stones began returning to more reasonable levels. Between March 1980 and September 1981, the value of a 1-carat, D-colour, flawless diamond halved and, by September 1985, it was selling at about 20 per cent of its price just four years earlier.

The effect of this on the diamond sector was devastating. Hundreds of companies that were holding onto debts, sometimes worth multiples of their inventories and receivables, were forced to declare bankruptcy, among them some of the most well-known names in the industry. Recovery did not come until about 1987 on the back of the massive expansion of a diamond-jewellery buying culture in Japan.

Investment prospects for a non-commodity

The popularity of a diamond as a means of investment in the late 1970s coincided with a general increase in the commodity investment market; however, the fact is that diamonds have always had difficulty conforming to the profile of a typical commodity.

Commonly, commodities are products that can be bought in bulk and usually do not have any – or very few – distinguishing characteristics among individual units. A general requirement for a product to be treated as a commodity is that units can be mutually substituted. For example, copper and oil are commodities, where the price per unit changes almost daily across the globe, according to supply and demand on various commodity markets. The number of copper and oil categories is limited. In contrast, a car is not a commodity because it is produced in numerous different-quality levels and different types. The same essentially is true of the diamond.

When rough diamonds arrive from the mines, De Beers’ Diamond Trading Company sorts them into more than 11,000 different categories according to their size, shape, quality and colour. Polished gem-quality diamonds come in hundreds of different categories, based on the particular permutations of carat, clarity, colour, cut and shapes of the stones. It is virtually impossible to substitute one diamond for another and therefore it is almost impossible to qualify the diamond as a commodity.

Despite both this and also the trauma of the investment bubble of the 1970s and 1980s, many diamond dealers still fantasise about selling their products as they would a commodity, believing that this will open another sales avenue.

This is not to say that diamonds do not have investment value. They most certainly do but their value is mainly as preservers of wealth. When the diamond business works properly, diamond prices are non-volatile and they rise slowly and steadily, hopefully a few ticks above the rate of inflation.

The anchor of the diamond business remains the jewellery market and the bridal jewellery market in particular. In the US, the country that is responsible for more than 40 per cent of all diamond sales, up to 85 per cent of the diamond jewellery are associated with matrimony.

It is also worth remembering that, regardless of the ebb and flow of economies or the inflation and deflation of speculative bubbles, young people continue to get married and, when they do, they generally buy diamonds. The industry’s primary mission is to make certain that they continue doing so.

For those who are interested in learning more about the disturbing but fascinating story of the diamond investment bubble of the 1970s and 1980s, please read An Economic Review of the Past Decade in Diamonds, which was written by William E Boyajian, then-president of the Gemological Institute of America (GIA), in 1988. It was published in the autumn 1988 edition of the GIA Gems and Gemology journal.

Nurit Rothmann

Contributor  N. Rothmann

Nurit Rothmann specialises in brokering rough diamond deals, managing tenders and writing market reports. Visit:

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