Market Thinking

making sense of the narrative

Diamonds and Pearls

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A little over a hundred years ago, some of the richest men in the world were the railway Tycoons who had helped open up America. They were the equivalent of the the internet Tycoons of today and they largely lived in New York rather than California. And like all rich men throughout history, they attracted merchants and others seeking to cater to their every whim. And also like most rich men throughout history, leading the way were purveyors of fine jewels for their ladies.

One day in 1916, Pierre Cartier put on display in the window of his small showroom on Fifth Avenue in New York, what was declared to be the most valuable and expensive pearl necklace in the world. Made by his brothers back in Paris and with a price tag of $1m, he was hoping no doubt to catch the eye of one of the latter day oligarchs. In those days the discovery of a large natural pearl was an international news event, similar to that of a large diamond and collecting these pearls to make into necklaces was the aim of the grand jewellers looking to attract the super rich. He was of course successful, as 26 year old Massie Plant fell in love with it and persuaded her husband, a 61 year old railway tycoon, to buy it for her. The interesting twist is that rather than pay cash, Morton Plant did a deal with Cartier and swapped it for his mansion on fifth avenue, indeed what is to this day the Cartier building.

The real point of this story however, is not so much that the mansion is now probably valued at 100 times that figure, (although that is a worthy enough story)  but rather that when the pearl necklace was sold on Massie’s death 40 years later, it was only worth $150,000. The key reason for this of course was that unbeknown to either M.Cartier or Mr Plant, just at that time the Mikimoto brothers of Japan had developed the technology to produce cultural pearls and expanded so rapidly after 1916 that by 1935 there were 350 pearl farms in Japan producing 10million cultured pearls a year. Supply met demand with such force that the price collapsed.

The obvious parallel today of course is the diamond market. For decades the supply of diamonds has been effectively one of the world’s few real cartels, controlled by De Beers, but this looks increasingly like going the way of pearls. In May last year, De Beers shocked the jewellery world by making its own lab built diamond, selling it for 80% of the price of a mined diamond, at $4200 a carat rather than $6000. Within six months however this had fallen to just $800 a carat, Massie Plant’s pearl necklace took 40 years to drop that much in value. De Beers is trying to keep the distinction between mined and lab grown, as assuredly as jewellers tried to keep the difference between real and cultural pearls, especially as the cost of manufacturer has dropped to $300 a carat from $4000 over the last decade according to Bain & co. Even better they are obviously conflict free. There is a growing market for industrial diamonds for high tech applications and the ‘industry’ is obviously hoping that this will enable them to keep their retail margins high and the decision by De Beers to push their lightbox brand as ‘fashion’ rather than luxury is clearly designed to try and maintain exclusivity.

They may succeed, but I for one wouldn’t bet my house on it.

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