What Are This World Dominator's Real Intentions?

How De Beers created a stranglehold on the diamond industry... The phrase that sparked it all... Making a major splash in a new segment of the diamond market... The technological advances that made this all possible... What are this World Dominator's real intentions?... How to ride this trend with 'one click'...

A legend in the diamond trade is disrupting a new market...

British expatriate Cecil Rhodes was only 26 years old when he founded the De Beers Mining Company in 1880 in Kimberley, South Africa. Recent discoveries in the area had sparked a diamond rush over the previous decade.

By 1888, Rhodes and De Beers controlled 90% of the world's diamond production. But Rhodes wasn't finished... He leveraged his control of the market by forming a partnership with the London-based Diamond Syndicate, which agreed to buy a fixed number of diamonds at a set price. By controlling the world's supply and setting the prices, Rhodes had essentially cornered the diamond market.

De Beers would continue to gobble up competitors and dominate the market for the next four decades – long after Rhodes' death in 1902.

Then, in the late 1920s, a new era began for De Beers...

That's when a young Ernest Oppenheimer took control of De Beers through his company, Anglo American (NGLOY). Oppenheimer founded the firm in 1917 as a gold-mining outfit, but he was no stranger to the diamond industry.

Like Rhodes, Oppenheimer was a British expat. He began working for a diamond broker in London at only 17. His employer was so impressed, he sent him to South Africa to purchase diamonds in 1902 at only 22 years old.

Oppenheimer would continue the same methods that made Rhodes successful – buying out the competition and setting the prices. "Common sense tells us that the only way to increase the value of diamonds is to make them scarce," he famously said.

Oppenheimer created a single channel for diamond marketing in 1930 called the Central Selling Organization, which later became the Diamond Trading Company.

For another half-century, De Beers held a stranglehold on the diamond industry.

De Beers didn't simply control pricing by limiting supply...

It also sparked demand through brilliant marketing.

In 1947, a De Beers copywriter coined one of the most successful advertising campaigns ever. You've probably heard it before: "A diamond is forever." The four-word phrase packed a powerful message... Diamonds weren't just fancy objects. They were a symbol of eternal love.

Between 1939 and 1979, De Beers increased its annual advertising budget from $200,000 to $10 million. Thanks to the campaign's success, diamond sales in the U.S. exploded, soaring from $23 million to $2.1 billion – a gain of more than 9,000%. By 1990, 80% of first-time brides in the U.S. received diamond engagement rings.

Of course, such rapid growth and opportunities for profit inevitably meant more competition. As new diamond discoveries were made in Russia, Australia, and Canada, De Beers' market share shrunk from about 90% to around 20% today.

But De Beers recently made a major splash in a relatively new segment of the diamond industry...

I'm talking about lab-grown diamonds.

You see, diamonds are merely pure carbon atoms arranged in a crystal structure. Going back to the 1950s, scientists successfully created synthetic diamonds in their laboratories. Early on, the technology was insufficient for creating gem-quality stones, so these synthetic diamonds were mostly used for industrial applications.

De Beers has always done an excellent job of staying on top of threats to its diamond empire. Not long after the first synthetic diamonds were made, the company acquired the early technology and formed De Beers Industrial Diamond.

Through the years, the technology has improved dramatically. By the 1970s, lab-made diamonds had approached the quality of rough diamonds – at least for small gemstones. But not until about five years ago did manufacturers figure out how to successfully create high-quality larger diamonds of at least one carat.

Today, manufacturers can produce high-quality, 10-carat synthetic diamonds, opening the door for companies to sell them in the jewelry market.

But as the popularity of synthetic diamonds started to rise, De Beers refused to budge...

The company didn't want to offer synthetic options for its gem-based diamond business. It had already invested billions of dollars in capital toward finding rough diamonds.

But just because it didn't sell synthetic diamonds, doesn't mean it wasn't working in the space... In 2004, De Beers filed a patent that it described as "a method of incorporating a mark of origin, such as a brand mark, or fingerprint in a [chemical vapor deposition] single crystal diamond material."

Because this type of branding would have no value in a typical industrial diamond, it was clear De Beers had started to think about selling synthetic products to retail consumers. Still, the company didn't enter the space until its hand was forced... You see, the world's supply of natural diamond deposits is shrinking. And we'll never get those diamonds back.

Meanwhile, technological advancements haven't only improved the appearance of synthetic diamonds, they've also significantly lowered the cost to produce them. Consulting firm Bain & Company recently reported that it costs between $300 and $500 to produce a one-carat synthetic diamond today... down about 90% over the past decade.

Today, you can't tell the difference between a rough diamond and a synthetic diamond with the naked eye...

As I told Commodity Supercycles readers earlier this month...

Last July, the U.S. Federal Trade Commission ("FTC") changed its jewelry guidelines to essentially declare that a diamond is a diamond whether it's taken from the ground or designed in a lab. In other words, they're all the same now.

By doing that, the FTC removed the stigma associated with "fake" diamonds.

Plus, millennial buyers prefer synthetic diamonds because they're concerned about depleting resources and avoiding so-called "blood diamonds" that are mined in war zones and sold to continuously fund conflicts. A recent Berenberg Research poll of 2,000 female millennials found that 53% would happily accept an engagement ring with a lab-grown diamond.

As the quality of synthetic diamonds has improved and the cost to produce has declined, experts predict synthetic diamonds will take market share away from rough diamonds...

Today, synthetic diamonds make up just 2% of the $87 billion diamond-jewelry market. But experts believe the demand will balloon to $5.2 billion by 2023 – annual long-term growth of more than 20% over the next five years (compared with just 2%-3% annual growth in the rough-diamond market).

Once again, De Beers is doing everything in its power to control market share...

The company had little say in its competitors discovering new sources of rough diamonds over the past three-plus decades. But it has positioned itself to become a major player in the synthetic-diamonds industry, keeping close tabs on the technology as it improved over the years. And now, it has finally revealed its hand. More from the issue...

Last May, De Beers changed the game when it introduced its "Lightbox" jewelry collection. The company's pricing structure is simple. No matter which color you choose, a quarter-carat synthetic diamond costs $200. That means a full-carat diamond costs $800. And the company charges a set price for its settings – $100 for silver and $200 for 10-karat gold.

According to news service Bloomberg, De Beers' Lightbox diamonds cost about one-fifth the price of existing synthetic diamonds. And they're one-tenth the cost of similar natural gems.

Of course, synthetic-diamond producers don't like this... Many complained that the prices simply don't make sense and that the company must be selling them below its production costs. Some producers went as far as filing a "predatory pricing" complaint with the FTC.

Regardless, De Beers appears to be fully focused on ramping up its efforts...

The company plans to invest nearly $100 million through its Element Six subsidiary to build a new production facility in Portland, Oregon. Its goal is to make up to 500,000 carats of synthetic diamonds per year. That would put it among the largest synthetic-diamond facilities in the world.

The company picked Portland for easy access to the region's cheap hydroelectric power. Electricity is one of the biggest costs of producing synthetic diamonds, so this location will give the company a major advantage.

And as trade publication Jeweller Magazine explains, De Beers' proprietary technology could also give the company a big leg up on the competition. In fact, Element Six can color its lab-grown diamonds brown, pink, blue, yellow, and more. It has invested massive amounts of resources in this technology, which it can produce much faster and much cheaper than other companies.

For now, De Beers' intentions for the future aren't completely clear...

It's impossible to know whether it wants to become the low-cost synthetic-diamond producer and compete head-to-head with its competitors... or if it simply wants to sell its products at dirt-cheap prices, giving consumers the perception that synthetic diamonds are a cheaper, lower-quality version of rough diamonds.

The latter could once again send the prices of rough diamonds soaring. In other words, De Beers could be selling synthetic diamonds at breakeven – or even at a loss – to ultimately boost the much larger part of its business. In Jeweller Magazine, mining analyst Des Kilalea described the effects of De Beers' pricing...

Some manufacturers of lab-grown diamonds have suggested that it is not possible to make a return [on consumer sales] at $800 per carat, suggesting that the business will be a loss leader to damage the lab-grown diamond market... Our view is that other lab-grown diamond makers may well not be able to compete on cost, as they do not operate on the scale which Lightbox proposes (500,000 carats of lab-grown rough converted into 200,000 of polished).

The impact on the industry has already been dramatic...

Last week, De Beers CEO Bruce Cleaver said that wholesale prices for lab-grown diamonds have fallen by as much as 60% since his company began selling Lightbox diamonds last September. He expects that number to continue to fall.

Moving forward, De Beers is positioned to succeed as both a top-five producer of rough diamonds and the leading low-cost producer of synthetic diamonds in the world. It won't matter whether consumers start buying more synthetic diamonds or continue to prefer the more expensive, higher-quality rough diamonds. Either way, De Beers is set up to profit.

Today, De Beers represents nearly a quarter of Anglo American's revenue. The rest of Anglo American's business has a long track record of success with other natural resources – including platinum group metals, coal, copper, iron ore, and nickel.

That's a big reason I recommended the company's stock to Commodity Supercycles subscribers a few weeks ago. Today, we're already up 6% on the position... but I believe the gains are just getting started.

New 52-week highs (as of 2/28/19): Ionis Pharmaceuticals (IONS), Kirkland Lake Gold (KL), Motorola Solutions (MSI), Spirit AeroSystems (SPR), and W.R. Berkley (WRB).

Have you ever bought a synthetic diamond? How did it compare to a rough diamond? Share your thoughts – and any photos you might have – with us at feedback@stansberryresearch.com.

Regards,

Bill Shaw
Baltimore, Maryland
March 1, 2019