How To Lose Money in the Diamond Business-- Lots of It

Russell Shor 

THIS COLUMN will inform the diamond trade and retailers with diamonds in their safes how to devalue their inventories by half. It’s not a gag headline. This could happen if unscrupulous manufacturers or dealers manage to outwit gemological laboratories and researchers by creating “undetectable” lab-grown diamonds.

Currently, and for the foreseeable future, the labs have the ability to identify lab-grown diamonds, but as sure as you are (hopefully) reading this, there are people trying to make lab-grown they can pass as natural stones and pocket the difference in price.  

Some background:

It’s been nearly a decade since lab-grown colorless diamonds entered the market in commercial quantities. And while the vast majority of their manufacturers scrupulously adhere to disclosure standards, there have been attempts, almost from the beginning, by some dealers to disguise the origins of such stones by applying various treatment processes - annealing (heating) to obscure telltale growth patterns; radiation to alter the color and even adding some natural-looking inclusions. 

Then, such dealers have attempted to test the gemological labs by trying to slip these dressed up lab-grown through the labs. In one well-publicized case nearly a decade ago, an unnamed dealer submitted hundreds of undisclosed lab-grown diamonds to IGI in Antwerp. While the lab caught them, the incident sent shock waves through the industry because the stones had been treated to intentionally disguise their origins. Since then, there have been similar attempts — even one where, rumor had it, that a lab passed the diamonds as natural the first time they were submitted but flagged after they were resubmitted. Also, two years ago, the GIA flagged a group of lab-grown diamonds that appeared to be treated to alter their colors to to appear more natural

No doubt there will be more attempts, particularly as the price if the former keeps falling. Now, to address the question at the opening of this column: what if they succeed?

I am not trying to be alarmist here. All colorless lab-grown diamonds are Type IIa which account for about 2% of the diamonds in the market. Currently, all gemological labs flag these lab-grown diamonds though a two-stage process: first testing for Type II, then testing for Type 1 stones get a “pass”. However, there is no doubt people are working on developing such stones in their labs, and, since Type IIa diamonds are considered “more desirable” than Type 1a, the only reason to produce them would be deception. 

Okay, What happens if someone succeeds and sends the goods through the labs without telling anyone? 

There’s an economic law — let’s call it (somewhat immodestly) Shor’s Law: Prices of gemstones invariably fall to the level of doubt.  

This means that if no one can distinguish natural diamonds (or any gemstone) from lab-grown, prices always fall to the synthetic level. Since the wholesale price price of lab-grown diamonds is about 40% of naturals and dropping, this means that all diamond inventories would be be devalued by that much, except, perhaps, for those with blockchain-verified supply chains. 

Of course anyone who manages to develop a lab-grown growth or treatment process sophisticated enough to deceive the gem labs would keep it to themselves and take the profits. However, such secrets rarely last very long — the nature of greed is to keep building the house of cards until it collapses; the secret escapes and prices crash. 

Exaggerations? Consider this. In the late 1990s, when LKI introduced HPHT treated Type IIa natural diamonds saying the GIA could not detect them, trading in Type Iia diamonds froze . And a few years later, when rumors went through a Hong Kong trade show that some HPHT treated fancy pink diamonds had slipped through the labs undetected, such goods on offer were immediately pulled from the shelves. So, this is not just a theory.

However, I am trying to alarm any diamond producer trying to create Type I in hopes of fooling the labs. They, and dealers who abet them, may make good profits for the short time their secret is safe but when it gets out, their inventories will devalue as quickly as everyone else’s. In short, everyone will lose in the end.