Conflict Commodities and Currencies

It has always bothered me that our industry is so vulnerable to outside criticism that we never sit back and think about the overall effect on us and what a proper answer should really be. I refer to the latest attack on the diamond industry entitled by all concerned as “conflict diamonds.”

This was addressed by a world group called Global Witness and was immediately picked up by the news media. [We saw] people in Africa with their hands chopped off and Congressman Tony Hall offering a bill to identify diamonds sold by insurgents, revolutionaries, terrorists (take your pick), and to keep those diamonds out of our mainstream trading. It was made to sound as if all the troubles and unrest in the world is being caused by diamonds. [But] what was actually shown on TV was man’s inhumanity to man.It is not diamonds alone that finance terrorist or revolutionary activities, and it is not diamonds that cut off the hands of vulnerable people. It is a power-hungry group who would use any commodity available to fund their activities and/or promote their agenda. These same groups terrorize whole populations to add members to their cause by fear and intimidation.

Witness similar happenings the world over. The selling of arms and weapons of destruction to such groups should also be examined. In Colombia, crops and terrorism are used to fund such activities. In oil-producing countries, oil is used. In copper- and other mineral-producing countries, those minerals are used. In repressive countries, slave labor is used. And all of the above are changed from “conflict commodities” into “conflict currencies.”

There also are recent cases where “legitimate” mainstream companies have funded insurgency and terrorism in many parts of the world. Yet our industry addressed these accusations against diamonds as if we alone should feel guilty for these acts. Instead of looking at the big picture, we set to work setting up a system to identify “conflict material.” How about identifying “conflict oil,” “conflict crops,” “conflict minerals,” and “conflict arms dealers” in general? How about identifying the currency movers who move currency gained from these sales? Or the banks and money launderers who legitimatize this money so it may be used by rogue groups?

When communism was in vogue in Russia, we never objected to the deals made by them and De Beers, even though we knew the money was being used against us. When we and our allies buy oil from Iran, Iraq, and Libya, no one asks, “Whose oil is it?” Maybe we should set up a system to identify such “conflict oil.” In late November, the Wall Street Journal ran an article on the possible use of tanzanite trading to fund terrorism. It’s just another mineral. I’m willing to bet that any mineral or commodity you can name is somehow associated with the funding of undesirables through money laundering. We cannot flag all such merchandise, but we can flag the countries they come from or the illegal traders and the banks that move their funds. Our efforts must focus not on an industry, but rather on people and organizations.

Now our government is engaged in a major war against terrorism, and we have to beg “allies” to help us identify funding sources for terrorist activities. We can see now who our friends really are. Let’s bring our efforts to bear on the global problem, not put on our industry a dirty Band-Aid that can’t do the job properly at all.

The jewelry trade should not be backing any effort that makes people feel guilty about buying jewelry. It should be aiding efforts to place the blame for terrorism where it really belongs and not just on jewelry commodities.

I call upon Congress and trade organizations such as the World Diamond Council, JVC, Jewelers of America, Diamond Clubs, and others to see these efforts for what they really are, and attract world opinion to the real problem—man’s inhumanity to man. Stop using diamonds and gem materials to sensationalize these worldwide problems and start pointing the finger at the people who are truly responsible.

Howard Rubin
GemDialogue Systems Inc.
Rego Park, N.Y.

SI3 Revisited

In response to SI3, I have followed with great interest the evolution of the grade and its use within the industry since its inception. As publisher of The Guide, my involvement is critical, as I have a responsibility to industry subscribers throughout the world. To date, SI3 is not a part of my publication and is not currently planned for inclusion in spite of its acceptance by the World Federation of Diamond Bourses. The term is flawed in its definition and [for] reasons proposed by recent letters to the editor.

The GIA grading scale was developed by GIA in the 1950s, and eventually became a world standard for grading diamonds. Through the years, the scale evolved and some minor changes were made to address current production standards. The letter by Mark Gershburg of EGL (JCK December 2001) discusses the changes GIA made to the system in the 1950s, ’60s and ’70s. For example, GIA added I3 when more low-grade diamonds began to appear in the market. Those who use this argument to justify more changes have a valid point. Everything changes in our lives and diamond production and marketing is no exception.

However, a change such as this would have a great impact on the diamond industry, so before we can adopt the change it must be a completely sound decision. I am not as opposed to the idea of an SI3 grade as I am to the way it has been introduced.

In conversations with GIA executives, I agreed with their concerns for this new grade. The grade as it stands is not well defined. I have heard or seen printed no less than three definitions of SI3 . By adding any new grade, GIA states that it actually adds three new grading boundaries and creates the need to reteach the system to all grading personnel. Like all grades, there are high, low, and middle boundaries. Where does the SI3 cut off and the redefined I1 begin? SI3 does not offer any new grading parameters that are not already inherent in the GIA grading scale. It does not quantify a particular range of inclusions; it is merely a marketing point.

One flawed definition floating around is that the SI3 grade is the lower end of SI2 as well as the better I1 stones. Those who argue that it might be a low SI2 are in a dream world. Explain to me how a diamond would be valued higher with an EGL SI3 if it is argued to be a GIA SI2 . No one has successfully done so.

There is no doubt that SI3 was embraced in the diamond world as a marketing tool. One reason for the new grade has been the pricing gap issue. However, there are pricing gaps in other categories as well. There is a big drop in price between I1 and I2, so perhaps we need I1.5. The difference from IF to VVS1 is about 30% in value for a one-carat round. Do we need a grade between these?

My personal feeling is that the grading system as it exists is fine. The problem as I see it has been in terminology. When the system was developed, I am sure GIA did not anticipate imperfect diamonds being sold in any quantity like they are today. Had they known this would happen, then perhaps the name would have changed. After “slightly included” might have been “moderately included” or another less obtrusive name, and my guess is we would not be having this discussion.

As for the gap in pricing, all sellers, buyers, and appraisers have the responsibility to grade each diamond for all of its attributes, including ranges within grades and cut quality. We already have a problem within the industry with inaccurate grading reports with the scale that exists now without adding SI3. No two diamonds are alike and they should be priced according to their own merits. Industry publications for pricing should be based on market-driven information using a standard that is well defined. If accurately done, then the user can adjust value accordingly based on the other attributes.

Perhaps the strongest argument for not adopting the grade is that it has not been endorsed by GIA. While some will say that we do not answer only to GIA, we are in an industry that has had to overcome many adversities. We need an authoritative organization like GIA that does not buy or sell to set the standards. If we allow the trade to set the standards, then they lose their credibility. The colored gemstone industry has struggled with this same problem for years because the trade tries to set standards for issues like treatments.

And finally, one last caution to the industry: I have stated before when SI3 was first introduced that anyone who represents himself as grading to GIA standards and then adds SI3 is not grading to GIA standards. I do not know of a legal case yet based on this premise of altering the standard and calling it a standard, but I am sure it is only a matter of time before it will happen. We are allowed to borrow freely from the GIA grading scale; we never were given permission to alter it to our needs. Should GIA decide differently and add SI3 to the grading scale, I will, of course, follow suit and add it to The Guide.

Richard B. Drucker, G.G. Publisher of The Guide Contributing Editor to JCK

GIA and SI3

We have studied the SI3 suggestion at various times over the years, and yet again recently when proposed and adopted in principle by the World Federation of Diamond Bourses. However, GIA still concludes there is no reason to change our long-standing and universally accepted diamond grading system.

Bill Boyajian, President
Gemological Institute of America
Carlsbad, Calif.

More on SI3

Tom Tashey expressed shock at the contention that an SI3 -graded stone was just a plain old I but with a better name, as no evidence was presented for that viewpoint. Let me provide that evidence.

For several years, I have heard comments to the effect that the diamond grading of the GIA Gem Trade Laboratory was “slipping,” the implication being that some stones were being “upgraded.” Since it was of little concern to me at the time, I paid little attention.

All that changed when I consigned a 2-ct. stone with a small visible flaw to a local jeweler for consideration by his customer. It was accompanied by a certificate stating the clarity grade was I1 (i.e., bearing flaws visible to the naked eye), which had been prepared by a GIA graduate gemologist and diamond dealer with 20 years of experience.

Another stone under consideration was one having a visible flaw and clearly inferior to mine. It was accompanied by a 1999 GIA Gem Trade Laboratory certificate stating its clarity as SI2 (i.e., bearing flaws which are not visible to the naked eye, but can be observed using a 3X jeweler’s loupe).

The confused saleswoman, another GIA graduate gemologist with almost 20 years of sales experience, consulted GIA and was told something to the effect that the certificate was not in error, and that the Gem Trade Laboratory now grades stones with eye-visible flaws as SI—contrary to all other accepted grading systems. Now, more confused than before, she could not satisfactorily explain all this to her customer, who left without buying either.

On hearing this, I personally contacted the GIA Gem Trade Laboratory (GTL) and related my story. On hearing that my certificate had been prepared by a mere GIA graduate gemologist, it was derided as inferior to a GTL certificate because the GTL uses different criteria for grading. However, these criteria are not made available to the public, or even GIA graduates. Nevertheless, using these criteria, round brilliant stones with eye visible flaws can still be graded SI2. Q.E.D.

Consequently, since it appears GIA has not incorporated the SI3 grade into its system and uses SI2 for the same purpose (thus explaining the apparent “slipping”), it behooves GIA to document the exact date it changed its grading criteria and to explicitly define what those new criteria are.

Mr. Tashey also doubts that the demand for SI3 is sparked by the negative connotation associated with I goods, because it has been in use for 12 to 15 years. (This also correlates with the de-emphasis on science by GIA, but that is another story.) However, one must recognize that this demand was instituted by and for diamond dealers—not the public. The public knows that eye-visible inclusions have a negative effect on desirability, and the price gap between SI2 and I1 is directly due to this fact.

Obviously some diamond dealers believe the creation of a new category to fill this price gap will be advantageous. However, since the stones in question have eye- visible flaws, the obvious designation for this category should be something like I0. However, this still bears the stigma of I and really isn’t going to inspire additional consumer demand. Demand can only be stimulated by “giving it a better name”—i.e., SI3.

The fact that in so doing one must destroy the accepted diamond grading nomenclature of the last 50 years is of little consequence to those whose major concern is next month’s bottom line. However, it is of utmost concern of the public’s long-term perception of the integrity of the jewelry trade.

Granted, GIA is a large and nebulous organization, and it is difficult to find one who will unambiguously define its tenets, but these are matters that need clarification for the sake of this industry. If GIA intends to continue to set the standards for clarity grading, I believe it owes this industry the answers to the following three questions:

1. Do you condone the GTL grade slippage which allows

eye-visible inclusions to be graded SI?

2. Do you intend to accept and teach the concept of SI3 ?

3. Do you intend to redefine SI so as to include eye-visible inclusions?

W. Wm. Hanneman, Ph.D.
Hanneman Gemological Instruments
Poulsbo, Wash.

An Analysis of Diamond Branding

In order for diamond branding to be successful, three elements must be firmly in place:

1. a unique, distinctive product recognizable by others;

2. an extremely large advertising budget to create the persona of the brand;

3. a controlled distribution system for maintaining the profitability of the brand.

In analyzing these factors with respect to diamonds, we will find that diamond branding presents many challenges.

When a consumer buys a branded item, one of the reasons he does so is that it is recognizable by others, either by a distinctive design or—for more generic items—by a logo. Whereas some brands may have built their reputation on the quality or uniqueness of the product, most other brands depend on their logo for recognition. In either case, the recognition of the item by others equates to a simultaneous recognition of what the item cost.

The branded diamond, however, is not a distinctive product that can be recognized by others as a premium entity. So the question remains as to whether the consumer will be willing to pay a premium price for something so nondescript. This is a significant barrier that must be overcome by the diamond branding companies.

Second, we are all aware that brands are built by advertising.

The brands we are most familiar with have been built by companies who have spent megabucks year after year to build and promote their brands. The question initiated here is whether a diamond company can spend a paltry few million dollars a year in advertising and create a strong brand.

The third essential in creating a brand is establishing controlled distribution. The purpose of creating the brand to start with is not only to sell the product but also to sell it at a significant profit margin. Did you ever wonder why you can go into the shopping mall where five or six stores carry the same Polo shirt, but all charge the same $125 for it? The manufacturers of branded items have learned how to control the distribution and retail price of their products, whether they sell it through other dealers or through their own retail outlets.

Unfortunately, the jewelry industry is a fragmented business. Can a manufacturer selling a branded diamond control the retail price for which it is sold? Putting legalities aside, even if the manufacturer “strongly suggests” the price at which something is to be sold, what is to prevent the independent jeweler from discounting it to make the sale (or perhaps throwing in the mounting to complete the deal, which pretty much amounts to the same thing)? Certain diamond brands may opt to limit distribution of their product, but will the profit margins be maintained through such uncontrolled and fragmented distribution? If discounting of the branded item prevails, the advantage to the retailer to sell the branded item is then greatly diminished.

The secret of product branding is to take a commodity item and turn it into a luxury item. The diamond industry has voraciously and unwittingly taken the diamond, a luxury item, and turned it into a commodity. Finally realizing that commodity items are by definition low-profit items, the branding companies are now trying to reverse the damage the industry has done to itself over the years. But is the diamond already too ingrained in the consumer’s mind as a commodity item? Remember, we have already put a label (read: certificate) onto a diamond. Is the concept of branding analogous to putting a label on top of a label?

These are some of the challenges facing the manufacturers of branded diamonds. There are many formidable obstacles in creating and selling a diamond brand, and whether these can be surmounted remains to be seen.

Steven R. Martin, G.G., MBA
M. Martin and Co.

The Future of Retail?

I am the second generation of a small-town jewelry store. Our store is now 52 years old and I have been managing since 1976. I have seen a lot of changes and have never been afraid to face them head on and optimistically. It is not always easy to do business in a town where you are so well known. The most depressing times are when I see my classmates with jewelry they have purchased elsewhere. There can be small-town thinking and jealousies instead of being proud of the success of their own.

I often feel I am on the front lines of a war on small business’s success. With the superstores fulfilling every consumer’s every need, the downtowns have faded away. Now, Wal-Mart has come into every area and killed our downtown’s retail. I have seen the small farmers and now small businesses either run out of business or bought out by the big guys. This scares me! America was based on the small entrepreneur and prices have been fair because of our competition. If this trend continues, there will be monopolies and price setting. It seems the American consumer is blind to what is happening, and I would like to see them informed and educated.

My newest war is, I’m afraid, too big for me to deal with.

“Wholesale to the public”—an oxymoron being allowed to be claimed. I have reported a few to the JVC, but there are so many and I haven’t time to report them all. Is the future of my business not retail jewelry and diamonds, but repairs and repairs? I hope not.

Karen M. Greaton
Greaton’s Jewelers Inc.
New Richmond, Wis.