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The saying goes ‘diamonds are a girl’s best friend’ and it is certainly true that the vast majority of women enjoy receiving and wearing this jewel.  It is customary in many parts of the world for diamond rings to be exchanged when a couple becomes engaged to be married. The tradition of exchanging rings is often achieved following a lengthy process of saving to buy the ring because it is an expensive commodity.  The question any accounting student should be asking themselves is “why are diamonds so expensive?” and “what determines the price of a diamond?”. The price paid for a diamond ring is not high because diamonds are rare, but because their supply is closely controlled. In addition to the supply being controlled the desire for diamonds was created through a clever marketing campaign in 1938 by De Beers (Darr, 2013). In summary the price of diamonds has been created through marketing and supply constraints. Therefore, marketing plays a significant role in determining how much of a profit mark up can be used in the process of selling these diamond rings.

When buying a diamond ring some may argue that the price of a diamond is related to the future prices; however, diamonds are not the same as gold. Gold is a commodity traded on the stock market and in general it can appreciate and retain its value in times of inflation (although in April, 2013 we did see the price of gold fluctuate).  However, although gold can appreciate, diamonds do not. That said the intrinsic value of a diamond to the woman who receives it can be significantly higher than the book value.

 

The original article on this subject is:

Darr, R (2013) Diamonds are a sham, Business Insider. www.businessinsider.com accessed 20th March 2013.