RAPAPORT... I interviewed David Marcus in his office overlooking the Los Angeles Jewelry District on January 7, 2010. Marcus is a diamond wholesaler and cutter who has served several distinguished terms as president of the second-largest diamond bourse in the United States – the Diamond Club of the West Coast Inc.

During the past 30 years, Marcus has worked with – and grappled with – some of the most influential people and groups in the trade. He is well known for extending a hand of friendship to other associations industry-wide. He has fought tirelessly to organize his fellow diamond dealers and jewelers into a cohesive group, cooperating for the benefit of all. Many vital services that specifically benefit the diamond and jewelry industry worldwide owe their origin to his original vision and support.

Marcus' wry humor, piercing blue eyes and outspoken candor mark him as the rare gems that everyone knows him to be: one of nature’s gentlemen.

JAMES MOSELEY: David, you’re completing your last term as president of the Diamond Club of the West Coast, is that right?

MARCUS: I finish in February.

MOSELEY: Then what?

MARCUS: Well, I’ll still be involved, of course, and I’m not retiring. It’s just time for someone else to carry the torch.

MOSELEY: How do you see the industry today?

MARCUS: It’s a difficult time. No one needs me to tell them that. But I see opportunity for entrepreneurs who understand what the problems facing us really are.

MOSELEY: What are they?

MARCUS: They are three-pronged. The first problem is the mining companies. The second is skyrocketing gold prices. The third is how the diamond cutters – the sightholders – react to being squeezed in the middle. Then there’s the question of where that leaves the dealers.

MOSELEY: Can you unpack that for me?

MARCUS: Sure. Let’s start with the mining companies. They’re huge corporations, and diamonds are less than one percent of their business – nothing but a hiccup. At the start of the current economic crisis, they responded by drastically dropping the prices of rough diamonds. But when the panic wore off a bit, they wanted better margins. So now they’re raising the price of rough diamonds through the roof. They sell less, but they make more.

MOSELEY: So that chokes the supply of rough?

MARCUS: Exactly. So now look at the other end of the chain: the supply of finished goods. With gold prices so high, everyone is selling gold. A lot of the gold in the hands of the public is jewelry. For the last 100 years, people have been buying jewelry set with diamonds. Now they’re selling it to cash out the gold – and the diamonds? They’re left over. If all those diamonds start coming onto the market, it could depress prices significantly on the finished side.

MOSELEY: And the third problem is the diamond cutters?

MARCUS: That’s right. They’re caught in the middle. A diamond manufacturer’s fixed investment is his skilled workers. He must keep them employed to maintain his core manufacturing capabilities. It’s too expensive to lay them off and ramp them up as demand fluctuates. He must keep buying and cutting rough to stay in existence.

MOSELEY: So you’re saying that with rough supply dropping and prices rising, he’s hardpressed?

MARCUS: Exactly. And at the consumer end of the pipeline, this tough economy is shrinking the demand for luxury items. The cutter has a high-priced supply, relentless expenses, and dwindling demand.

MOSELEY: So what does he do?

MARCUS: Many diamond cutters are sightholders. They’re powerful businesses and they have responded as innovatively. Lev Leviev, for example, has acquired his own mines. Tiffany made a deal with another mining company and Harry Winston was bought by a mining company that wanted Winston’s brand. But there are limits to this strategy because it takes a lot more capital than even they possess to prospect for new sources. And despite today’s thin demand, existing mines are too limited in the long run. Without continuous prospecting, future supply won’t be elastic enough to meet the eventual demand.

MOSELEY: So digging into mines isn’t a full solution for sightholders?

MARCUS: It’s not. So most of them have become jewelry manufacturers, too. They sell directly to the big chain stores. And that squeezes the dealers out of their traditional market.

MOSELEY: So my question is, in a shrinking market, how many dealers can be supported by what is left?

MARCUS: That’s not just your question. It is the question.

MOSELEY: Well, what’s the answer, David? Is there a light at the end of the tunnel?

MARCUS: I really think there is. In the long run, the segment of independent jewelers must grow. Look, jewelry is very personal. Walmart is the biggest retailer of jewelry in the world, but see what they sell: mass products for a mass market – not artistic design. In the end, people will always want more design-specific services. Jewelry is style, fashion, not mass production.

MOSELEY: Of course, that’s the ideal. But how can dealers make people feel that way?

MARCUS: That’s a special role of the dealer and independent jeweler. That’s how we add value. De Beers did a fantastic job of marketing over the decades. They told the world that a diamond is forever, that you say you love her with diamonds. But now that De Beers influence is weakening, dealers have to maintain and rebuild the diamond mystique.

MOSELEY: That takes creativity – and marketing money.

MARCUS: Whatever it takes, that’s what it takes. Remember the anecdote about what the president of Rolex told the president of Timex? “You sell time. I sell prestige.” You can have clothes off the rack without fashion, but you can’t have fashion without style. That’s even more true of jewelry. Accessories can be mass-marketed. But an enduring token of true love – that’s jewelry. It’s an individual, custom-chosen, intimate gift – the quintessential expression of romance. That’s our trade. It’s the roots we must return to.

James Moseley is a freelance writer and president of TransGuardian.com, a provider of Transportation and Insurance Management Software to the diamond and jewelry trade.