The Rapaport Scam

April 8, 2016 by Maarten de Witte at Diamond Foundry

Martin Rapaport is the aging leader of the diamond industry who now represents everything that is wrong about it.

Where De Beers has built an industry through its brilliant marketing, Mr. Rapaport is milking it for his personal profit and leading it in a direction that harms everyone and only profits one: himself.

Mr. Rapaport is at the center of an organized scheme of price collusion — the synonymous Rapaport Report — which under plain view of the entire industry deprives consumers of billions of dollars annually. But this is just about money and we have written elsewhere about it (See How It Works: The Rapaport System of Price Collusion for Mined Diamonds).

What is even more disconcerting in our view than illegal price collusion is that Mr. Rapaport advocates blatant ethical confusion in these ways:

1. Mr. Rapaport suggests that cultured diamonds hurt the livelihood of artisanal African diamond diggers and their families. Diamond diggers have been enslaved in mining for 100 years. The plight of diamond miners is the responsibility of those who have most profited from them in diamond mining. Shifting the blame and/or cure to others is disingenuous to the extreme.

2. Mr. Rapaport claims that mined diamonds have value because of their “store of value”. This is of course totally untrue. In fact, it is even against SEC rules to suggest an investment quality of natural diamonds because there is no established secondary market. When you walk out of the store, the “stored value” goes down 75%. The diamond industry can do better than that. It is time to simply admit the truth that diamonds — 99% of them — are simply a luxury product. There is no stored value. It is time to stop deceiving consumers about that. “Consumers” today have a good b-s detector. They are constantly on the lookout for ulterior motives and they demand transparency. You can call your diamond ethical or an investment but they know it is not. This is no way to sell diamonds in the future.

3. The whole storyline around a supposed scarcity of mined diamonds is plainly false too. Everyone knows it is not true. The mining of diamonds is mankind’s ultimate mass production. There is nothing romantic or natural about it. Industrial mining operates at a massive scale. Former Tiffany & Co.’s CEO Michael J. Kowalski says that “few industries in the world have a larger environmental and social footprint than mining.” Even the largest lab-growers are boutique operations in comparison to industrial miners.
 Here’s the point about industrial mining of resources in the Earth: Dig twice as fast and you extract twice the material. There is no scarcity of mined diamonds other than the controlled pace of extraction by the diamond cartel.

4. There is no basis of fact to assume that lab grown diamonds will be “down at the level of CZ in price or glass crystals…” anytime soon, if ever. Growing diamond crystals the size of a gem in a laboratory is very hard. There is substantive capital expenditure involved for complex semiconductor type equipment. Semiconductor chips have become very inexpensive but due to the higher and higher circuit integration density attained on silicon wafers. The wafers themselves have not been on technology’s Moore curve. By comparison, mined diamonds are free in the ground. If anything, prices for mined diamonds ought to be down to the level of CZ. Diamond mining is plenty profitable as we know.
 It is the Rapaport report itself which has been a major cause of trouble for the diamond industry. It has detached pricing from the market for too long.

5. In many ways, lab-grown gem diamonds are the epitome of human scientific achievement. Lab-grown diamonds are a conscious choice for buyers precisely because they are not mined from the Earth. By converting greenhouse gases into diamond crystals indistinguishable from mined diamonds — because a diamond is a diamond — a new, eco-friendly choice is available. Minute variations of growth patterns that only advanced scientific tools can detect are smaller between mined and lab-grown diamonds than they are between mined diamonds from various countries of origin.

As a creator of lab-grown gems, we are seeking to set a new standard on ethics, transparency, and social responsibility in the diamond industry. This is a much needed opportunity for the entire diamond industry which has not been doing so well lately. In any well-run business, when things have not been going well for some time, it is time for innovative ideas and new leaders. We look forward to making the diamond industry fruitful for the entire distribution channel once again.

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