The Hidden Market Power of Fluorescent Diamonds

The diamond trade had a glowing love affair with fluorescence, but why did this change and what is the value of this category of diamonds?

Once upon a time before the diamond industry standardized to GIA color grading terminology the term Blue White (Blauweiss) was used to describe the finest color white diamonds. The original Blue White diamonds came from South Africa’s Jagerfontein mine. The best Jager stones were highly transparent (clear and colorless) with a bluish tint due to fluorescence.

Ironically, during the early part of the 20th century fluorescence was seen as something that had a very positive impact on top colors. The extra sparkle fluorescence provided when the diamond was seen face up in sunlight was accepted as verification of the diamonds high color. Blue White diamonds were avidly sought out by the trade and consumers who paid higher prices for diamonds with fluorescence.

Contrary to current market conditions, fluorescence added value to high color diamonds.

Now, the history of what happened to fluorescence is very interesting and informative. The trade had something very good going with fluorescent Blue White diamonds, but they blew it. Instead of maintaining consumer confidence in Blue White the trade began selling all types of lower color diamonds as Blue White. The term Blue White and the underlying concept that blue (i.e. fluorescence) added value to white (colorless) diamonds was so abused by the trade that in 1938 the U.S. Federal Trade Commission outlawed the use of the term Blue White for anything but blue diamonds.

Abuse of the term Blue White and the subsequent FTC restrictions undoubtedly encouraged the establishment of the GIA color grading system. Color grading systems try their best to differentiate between the amount of color or tint in a diamond (i.e. the degree of its transparency or lack of any color) and the sparkle effect provided by fluorescence (fluor) in various lighting environments. In fact, one primary reason the GIA developed standardized color grading using a Diamondlite box with a controlled light source was to be able to color grade diamonds while minimizing the influence of fluor.

Eric Bruton in his classic book Diamonds explained the impact of fluor on color as follows: “If the diamond is examined in sunlight, even reflected light which contains ultra-violet light, the blue fluor will tend to cancel the yellowish body color because the colors are nearly complementary, and the stone will appear whiter than it is. These stones are often mistakenly called ‘blue-white’. Similarly, a stone that fluoresces yellow will appear worse in white light containing ultra-violet.”

The bottom line is that blue fluor enhances the color of diamonds in almost all lighting conditions. Is this bad? If not, why does the trade pay lower prices for fluor diamonds?

In some instances the trade does pay more for fluor. Typically J color and lower fluor stones bring a better price. This is because they look whiter to the trade. However, when it comes to higher D-F colors in VS and better clarity grades fluor is discounted. In general the more expensive the diamond the greater discount.

Some people believe that the trade is making a mistake and fluor diamonds are wrongly discounted due to misinformation and a misguided herd instinct. The theory is that the trade misunderstands the impact of fluor on higher color stones which is minimal because there is very little yellow color in the stone to improve upon. Suppliers believe that if they could convince buyers not to discount fluor they would make more money and improve liquidity.

The GIA in 1997 published a definitive research report on the effect of blue fluor on the appearance of diamonds. The GIA’s observations confirm Bruton and emphasize that with the exception of milky fluor the impact of fluor on higher color diamonds in minimal. Interestingly the GIA concludes, “This study challenges the industry notion that fluor usually has a negative effect on better color diamonds.”

MARKET POWER

The GIA is saying that lower prices for high color fluor stones do not make sense. So why does the trade discount higher color fluor diamonds? Are the diamond markets irrational?

This writer tends to believe in the rational market theory. In other words, over the medium and long term markets are never wrong because prices reflect the combined wisdom of everyone everywhere. The old market rule, “You can fool some of the people some of the time and the rest of the people the rest of the time, but you can’t fool all the people all the time,” makes perfect sense. It is especially true when people are voting with their money.

While education and information certainly shape demand, add value and influence market forces that set prices, over the long term, by definition, markets do not make mistakes, they value things correctly.

So why does the trade discount fluor? Let’s view the market from the perspective of a diamond trader and consider some diamond history.

As the investment diamond boom developed in the mid ‘70s and prices for D-IFs skyrocketed, very strong blue over-white or over-blue hazy diamonds needed to be weeded out of distribution. Since traders were flipping certs over telex machines the easiest way to do this was by avoiding strong blues (SB). Sure some SBs were fine but you had to look at them and convince your customer they were ok. In some instances fine jewelers were resisting mixing fluor goods with non-fluor goods because the stones face up differently.

Also, the French who were important buyers at the time hated fluor. This may be because fluor means ‘false color’ in French. Perhaps if certs didn’t mention fluor no one would have cared about it. However, since it was there on the paper dealers figured they could use it to haggle and do some price differentiation.

In soft markets dealers could discount fluor stones without disturbing the market value of inventory too much.

GRADING ISSUES

Traders were and still are disturbed by the correlation between over-graded colors and fluor. Nothing upsets a trader more than buying a G and finding out the stone is really an H because some lab made a mistake. Unfortunately, the probability of a lab over-grading a fluor stone is much greater than a non-fluor stone and a large percentage of high color mistakes turn out to be fluor.

Over time mistakes pile up in the market since no one wants to buy them. This reinforces the notion that over graded stones have fluor. Perhaps if the labs graded fluor more conservatively dealers wouldn’t be so afraid of them.

Korea’s scandal in the early 1990s also had a great impact on world prices for fluor goods. In short, the Korean labs over-graded the color of fluor stones which encouraged huge imports of fluor stones. In the early ‘90s Koreans were the world’s largest buyers of fluor stones and as much as 50 percent of the stones sold in Korea were fluor.

The bubble burst in 1993 when an investigative TV special informed Korean consumers that their fluor stones were over-graded. Korean consumers found out their Gs were really Hs and no one in Korea ever trusted a fluor stone again. Not only did the Korean buyers stop buying fluor stones they became net sellers as consumers insisted sellers replace the fluor stones.

As the market struggled to deal with the Korean problem along came the Russians dumping diamonds. Guess what? A huge percentage of Russia’s diamonds were fluor. Now it is very nice for the cutters and the GIA to explain to everyone that fluor stones are OK (assuming they are not over-graded). But let’s consider supply and demand from the dealers’ perspective.

I’m a dealer looking for D-F, IF-VVS goods. Expensive stones. 70 percent of the stones offered to me are fluor 30 percent are not. If prices are the same or near same, which stones do you think I am going to buy? Frankly, I don’t care what anyone says about fluor or even what the stones look like. I trade scarcity. I trade liquidity.

DISCOUNTS

One primary reason dealers discounted fluor stones was to protect the market from the great inflow of Russian goods. The overriding factor justifying the market discount for fluor was scarcity. If Ds were expensive because they were rare it was reasonable to expect that scarcer Ds (i.e. Ds without fluor) would be even more expensive.

The trade did not and does not necessarily price diamonds based only on appearance. Scarcity also has a great influence on price.

Obviously from the market perspective there appears to be a reasonable basis for price discrimination against fluor. While this article supports the rational markets theory it is important that we pay careful attention to what the GIA is saying. It may very well be that the trade is over-discounting fluor. If fluor diamonds are graded accurately under ideal laboratory lighting conditions blue fluor stones have an advantage in that their color improves in normal daylight.

While education can play an important role changing buyers’ perception about the negative impact fluor has on higher color diamonds it will have to be backed up by solid results. In other words the labs are going to have to be very serious about not over-grading the color of fluor stones even though these stones tend to appear whiter than they are.

Furthermore the labs must clearly indicate on their grading reports instances where milky fluor detracts from the quality of the diamond. Only then will the trade and consumers have the confidence to pay better prices for fluor stones.

Regarding relative scarcity fluor stones are scarcer than non-fluor stones. The reason the availability of fluor stones is greater in the market is because they are more difficult to sell. Over the long term if the trade changes its perception about fluor goods and they sell through on a more liquid basis market availability may decline so that there is no longer an oversupply of fluor stones in the market.

From an economic perspective, there appears to be little benefit to the trade by increasing prices for fluor stones. It is likely that any price benefit will be absorbed by higher prices for rough. Furthermore, the availability of fluor stones helps the market adjust to varying degrees of availability. When the availability of higher colors are tight the discount for fluor drops as buyers more readily accept fluor because there are fewer alternatives available.

On the other hand when goods are plentiful the fluor discount grows protecting prices for non-fluor goods. This assures less price volatility for higher colors.

The assertion made by the GIA over two decades ago is still true today. The negative perception of fluor is a trade issue, whereas consumers are not bothered by it, and even attracted to its effect on their diamonds. That should influence market behavior, encourage greater acceptance of high color fluor stones and ultimately shift the demand curve for fluor diamonds.

However, it is important for us to recognize the sophisticated nature of price making forces in the free market and the role of the market in deciding what is and is not a better diamond through pricing. The beauty of the free market is that it is a real changing live world, open to all information, influences and opinions.

Yet at the same time markets provide real numbers that reflect the consensus of all participants as to the real value of diamonds.

In conclusion, the fact that fluorescence has a positive “blue white sparkle” impact on diamonds should encourage greater acceptance of fluorescent diamonds. While it is important for us to recognize the sophisticated nature of market pricing driven by scarcity, we must also consider the role of the trade in marketing the relative benefits of fluorescence.

There is significant opportunity for the diamond trade to influence market behavior by marketing the concept of “blue white sparkle.”

While commoditization of diamonds based on GIA grading reports establishes pricing standards in the interdealer market, the opportunity to add value to diamonds through honest communication with consumers is powerful. The only way to increase profits is by adding value and the best way to add value is to sell something more than the stone.

We need to sell sparkle.

Consumers want to buy sparkle and it’s high time we sold it to them. Currently, “blue white sparkle” is not only the best value in the diamond market for consumers, it is also the best marketing opportunity for the trade. So, let’s do it.

This is a revised article first published on April 9, 1998 in Rapaport Magazine.

Image: Alrosa