Zimbabwe Threatens Black Market Diamond Sales

Time and again I have told you that one of the classic stores of value during hard times I do not recommend is high quality stones in the 1/2 to 1 carat range, and never mind that they brought fortunes through most wars for the last two hundred years safely.

Why? Because I figured the day would come when the boys from DeBeers would be unable to keep their artificially high price on one of the most common carbon formations, that’s why. Diamonds are beautiful, but they aren’t really scarce. The IDC has controlled availability for a very long time but the more we tolerate falling standards and increased governmental interference the less anything is safe to count on.

Diamonds aren’t hard to find. They aren’t particularly hard to mine. The real problems are keeping the miners (official and amateur) from stealing them, shipments from being high-jacked, and iron-clad control of the price.

I lay the latest silly soap opera out below, but unless you have a taste for the usual suspects saying the usual things and looking perhaps sillier than usual, I’d quit reading as soon as I grasped that it doesn’t matter who is right (if anyone is), but that the threat to your investments, if they include diamonds, is that the man who brought you the Zimbabwe currency coup has more or less control of an estimated 25% of the world’s unmined diamond supply, and he says calmly that he’s going to sell them on the black market. He’s got a nice supply of mined diamonds, plenty of diamond sands, and an agreement with diamond cutters, so your decision is whether or not to sell investment grade diamonds and dump jewelers’ stocks, or just to mark your calendar to see where diamond prices are in time for your wife’s birthday.

Mugabe’s opposition is the bleeding hearts crowd serving, I conjecture, as a mask for the no doubt terrified diamond cartels, although they are dreadfully earnest, of course. Be of good cheer, the Big O is on top of this one. Obama says he will forbid diamond imports into the USA! Another great call, Barry. The threat is that cartel control will be loosened to some extent and the price of diamonds fall somewhat. Even considering we’re dealing with Robert Mugabe, surely he has enough sense to see that he can’t afford to knock too much off the price of diamonds because he’ll be one of those with the most diamonds to sell. Although…perhaps that doesn’t matter when you have a quarter of the world’s supply…he can make up in volumn what he loses in price.

The howls world-wide are not about upsetting every diamond buyer, cutter, and vendor on the planet or dealing every jeweller from Harry Winston to Zales a crushing blow via depreciation of inventory, but about alleged “human rights” violations. Contemporary thought holds that people have a right to cross some boundaries in search of what they want, such as the border between Arizona and Mexico and into poorly-guarded diamond fields.

Suppose those were your diamond fields, looking like giant ant-lion hills, and 30,000 “unauthorized” (“undocumented?”) “miners” descended on them. (I put “miners” in quotation marks because it requires no skill to sift lumps out of sand.) I don’t think you even need to channel the leader of Zimbabwe to figure out you would do what it took to get those thieves out of your diamonds, particularly since all they have to do is sift through sand and pick out dull grayish pebbles. I doubt many of us would worry about public opinion or being gentle. Do we hear anything about how those are Zimbabwe’s diamonds, or that their leader is responsible, one can only suppose, for preserving such a vital asset in a country whose currency is a joke? Only from those who are not admirers of Mr. Mugabe. Never mind worldwide economic tremors, gotta protect the “right” of people to steal. But which people? I was amused by an indignant report from in country that “The troubled African nation is rich in diamonds and other natural resources. However, critics of Mugabe say his economic policies have contributed to precipitous economic decline.” Not only that, but they have charged “smuggling by members of the elite close to President Robert Mugabe and his party, ZANU-PF.” No! Say it isn’t so! The President, his brother, and his friends have had their fingers in the till? Whoever heard of such a thing? We sure don’t put up with goings on like that in America.

I’m still with Zimbabwe’s President, Robert Mugabe; he may have messed the fiat money up brilliantly, and anyone with any sense supposes he has some nice off shore bank accounts, but having somewhere between 25 and 30% of the diamond supply and selling it for the benefit of his people (and himself, and his advisors, friends, and anyone else bright enough to cut himself into the action, with the people coming last) should buy him a lot of forgiveness. I don’t know what Robert’s plan is, but I know what I would do in his position. We spiritual descendents of robber barons aren’t dumb, you know. You let the big guys buy you off, of course. For massive amounts of boodle. No matter how many guards are hired or glossy seals are affixed to formal agreements, you can always renege on them later.

Mugabe is (you should pardon the expression, considering the allegations) sticking to his guns.

Philimon Bulaway reports for Reuters: “A defiant Mugabe told lawmakers diamond sales have ‘huge potential’ to revive the shattered economy. He says Zimbabwe can account for one-fourth of the world’s diamond supply. ‘Let there be no doubt whatsoever about our resolve to sell our diamonds for the benefit of our country and its people,’ Mugabe said in a speech to open a new session of parliament (back in February. Ed. note)…With Zimbabwe now projected to contribute around 25 percent of the global diamond output, there are huge prospects for the diamond sub-sector to emerge as a major driver of the country’s economic turnaround.” Mugabe commented quite recently that the country will sell the diamonds, “even without clearance,” a reasonably polite way to say “on the black market.” An admirably blunt follow-up statement was, “We can sell our own diamonds our own way, any way.” It just hit me: he may view money like a Keynesian, but he’s got a good grasp of “what’s mine is mine.”

The second meeting of an international do-gooder commission in less than a month is due in St. Petersberg’s, but President Mugabe announced recently that the country would go ahead with diamond sales despite not receiving authorization from the world’s diamond control body. Here’s where we have to sort out WHICH diamond control body, because there are two, now. DeBeers and so forth have been keeping the price of diamonds artificially high since the days of Cecil Rhodes in large part by restricting supply rigorously and limiting the number of those authorized to buy and sell. The new bully/busybody on the block is a group formed after the civil war in Sierra Leone rising twenty years ago where diamonds were used to fund the participants. This lead to certain stones being referred to as “blood diamonds,” and the result was the Kimberley Process, a program that attempts to guard against the illicit sale of gems that finance those conflicts. The gems now come with certificates attesting they were sold by authorized sources, not guerilla bands. Another layer of bureaucracy, and, we old hands suppose, taxation. Who ever heard of free stamps/certificates?

“Governments, industry executives and human rights groups signed onto it,” and whyever not, with something for everyone? Governments get more power, the industry makes more money, and human rights groups feel all warm and fuzzy. Zimbabwe hasn’t received certificates that allow it to export diamonds which come from its “controversial” Marange (mare-AN-gay) fields, controversial primarily because of the actions purportedly taken to get the claim jumpers out of the sand pits, since January. Bulaway notes, “The Kimberley Process diamond certification scheme has not authorized international sales amid allegations of killings, human rights violations and corruption in the massive diamond fields discovered in eastern Zimbabwe in 2006.” One basic problem is that the Kimberly Process deals with diamonds that are used to fund insurrection and invasions, not those which are being squabbled over internally by a country’s government and assorted people who cannot resist dull gray pebbles in sand pits that do not belong to them. Any excuse is fine for the leaders of the left to expand regulations, so they are glad to stand up for those alleging “continuing human rights abuses in Marange and smuggling by members of the elite close to President Robert Mugabe and his party, ZANU-PF.” No, those don’t have anything to do with the case, but that’s how movements and governments grow.

Enter Briggs Bomba, director of campaigns at Africa Action, a Washington-based non-profit group purportedly worried that black market diamonds would touch off an international crisis. Fear not, he has a solution: “With or without KP certification, there is a market out there that diamonds from Zimbabwe can go to. So, what I see as the way forward is to really to speed up the process of making sure that whatever is outstanding in terms of Zimbabwe’s meeting the KP requirements is resolved speedily and Zimbabwe is allowed to sell diamond through the KP process.” Nice office, manages to make a khaki shirt and paisley tie look like a uniform, interesting accent (“MAN-i-uh,” for example, instead of “mane-ee-uh”) and I wouldn’t buy a used car from him.

AA and others say that without certification so called “conflict diamonds” “would re-enter the international market in large numbers and the Kimberley Process would become meaningless.” Yup, next thing you know we’ll be overrun in diamond-financed terrorists, diamonds being so easy to steal, and all. “In the extreme, some experts say, the US, the largest consumer of diamonds, could bar diamond imports,” and sure enough, Obama just threatened that very thing. And he meant it to sting, by jingoism. No, dears, I have no idea what happened to America not being arrogant and interferring in the internal affairs of others. However it may be, “the Obama administration opposes any attempt to export Marange diamonds without certification by the Kimberley Process,” having spare time on its hands.

“We look for Zimbabwe to make further progress implementing the necessary steps to bring the Marange diamond fields into compliance with Kimberley Process minimum requirements,” State Department Spokesman PJ Crowley pontificated. Do ALL of these people believe in fairies and taking the word for the deed? Do they ever listen to anyone else? The KP bunch in Tel Aviv said last month that Zimbabwe had met the minimum requirements. They stated specifically that certification was not approved, “even though a KP monitor said Zimbabwe met the minimum conditions for certification.” Run that by me again? They agree that Zimbabwe met the minimum conditions, but nobody is satisfied? “Some say the international community should make an effort to understand the political reality of Zimbabwe and engage with its leaders.” Bizarre. Meaningless. My best guess is that this is a power play by Mugabe (who has most of the right on his side) that the IDC is trying to stay well away from, hiding behind beards and useful idiots.

“Let’s not get caught up in the false polarities that characterize Zimbabwe discussions where it’s Mugabe mania or Mugabe phobia. The challenge is how we break an objective path that brings back ordinary people to the center of discussion and how they are affected,” Bomba said. (Remember him? From the “non-profit” action group located in Washington, D.C., where real estate and salaries are so cheap?) Ordinary people haven’t got any business in the discussion, and they aren’t really affected. If Mugabe sells some diamonds, he’ll trickle down a bit, but nobody takes “the little people” seriously in Africa any more than they pay attention to the Silent Majority here. Bomba says he “fears that if the diamonds are sold in the black market, without KP certification, it will be difficult to monitor the revenue from those diamonds which should directly benefit the people of Zimbabwe, not a few corporations or government officials.” Don’t you love these high-minded types? This has nothing to do with profits, monopolies, or taxes. It’s about the children.

My best guess is that Bomba’s group is getting a nice present from De Beers and that nobody much expects more than a very few, very carefully selected people of Zimbabwe to benefit, the important part being to restablize the system–that is, restore the diamond monopoly first, and then stabilize Zimbabwe enough so that Mugabe can be president as long as he wants to and then retire elsewhere with a steamer trunk of cut stones.

Which puts us back to where we were at the end of the fourth paragraph. You can pour sparkling stones out of your little chamois pouch and ponder whether the price will go up or down. You can peer at your stocks in big or fancy jewelers–if you still own anything that dangerous–and decide whether or not to get rid of them. My preference is to keep a casual eye on the diamond market and plan on upgrading your wife’s solitaire that you bought her when you were young and not nearly as successful if prices fall.

If the diamond market ever really gets away from the cartel, the average modestly nice stone will run about $5/carat–or perhaps $20, considering velocity and when creating $1.3 TR out of static electricity finally bites us in our checkbooks.

Linda Brady Traynham
Whiskey & Gunpowder

July 14, 2010

The Daily Reckoning