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Happy April Fool's Day

Mar 31, 1999 12:52 PM   By Martin Rapaport
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Martin Rapaport

Magic is the illusion of a transformation of something from one state of existence to another — elephants in Las Vegas appear and disappear, rabbits bounce out of hats, girls get sawed in half, but we don't worry about it. After all, magic is just an illusion, a sleight of hand, a trick. Magic isn't real.

Perhaps in ancient times superstitious people feared magic because they didn't know it wasn't real, but in today's modern scientific world we don't go for hocus-pocus. Modern man does not believe in magic, he believes in science and science proves that magic doesn't exist.

Everyone knows you can't really turn lead into gold, or dust into diamonds. Modern man doesn't have time to worry about unnatural, bizarre events. Science has taught us that our world is based on an understandable natural order. Over the years, our fears that strange things can happen have diminished as our scientific understanding of the world around us has advanced. We've grown quite complacent and come to believe science is our great friend and protector. Science protects us from magic. Science protects us from the unknown, from things that threaten our stability and security.

Well guess what? Happy April Fool's Day everybody! We have all been fooled. The good old days when the purpose of science was to explain reality and provide security are over. Gone.

Finished.

In the new post-modern era the role of science is not to explain reality, but to create new realities. Science no longer explains the natural order of things, it changes the natural order of things. Science does not protect us from the unknown it creates the unknown. Science does not do away with magic it is the new magic of the 21st century.

The GE Process

Lazare Kaplan International (LKI) has concluded a ten year exclusive worldwide marketing contract with General Electric Corporation (GE) and will begin marketing diamonds treated by a secret GE process in the very near future. The irreversible permanent process can significantly enhance the color and brilliance of select types of rough and polished diamonds. GE and LKI both maintain that the treatment is undetectable and will remain undetectable in the future.

LKI’s Sheldon Ginsberg told RDR "We know the process is undetectable and have strong indemnification from GE on the permanent and undetectable nature of the process." LKI has sent hundreds, if not thousands, of the GE treated diamonds through the major labs including the Gemological Institute of America (GIA) and none were able to detect the treatment. LKI plans to sell up to $200 million worth of the “processed” diamonds over the next three years with only $30 million worth slated for the first year. LKI’s position is that the GE process is not a treatment but rather a new high-tech process that should be considered part of the normal diamond production process.

In talks with RDR, LKI went out of its way to emphasize that it expects the sale of the GE processed diamonds to have very limited impact on the marketplace due to the relatively insignificant amount of diamonds to be sold. Apparently, only a very limited amount of diamonds are of the type that respond to the treatment process. This means that LKI will only be able to use the treatment sparingly and that a very limited quantity of treated diamonds will be produced. It should be noted that reports from Belgium indicate that LKI and others have been buying up certain types of brownish color diamonds and its likely that the secret GE process has a particular affinity for improving the color of brown diamonds.

A new Belgian subsidiary company, Pegasus Overseas Limited (POL) has been established by LKI to be the exclusive seller of the treated diamonds. LKI plans to apply the GE process to rough diamonds before cutting. Almost all (99 percent) of the treated diamonds will be sold as polished with only a few GE processed rough stones to be sold. LKI will also apply the process to polished diamonds that lend themselves to treatment, but will limit the treatment to diamonds they own and sell. The treatment will not be available to the trade.

While LKI is ensuring full disclosure of the treatment to all of its buyers due to the fact that –– POL –– will only sell GE processed diamonds, there is no assurance that buyers of treated diamonds will not resell them without disclosure. Furthermore, due to the undetectable nature of the treatment, there is nothing to stop a buyer of GE processed diamonds from submitting the diamond to a lab and getting a diamond grading report that indicates the “improved” color without commenting on the fact that the diamond has been treated with the GE process.

It appears that GE and LKI are taking a position that since the GE process is not in their view a treatment, but rather a normal production process and furthermore since the process is undetectable and believed to remain undetectable, disclosure of the treatment process is not only not necessary, but not possible. From a practical perspective, if the GE diamonds are released on the market before there is a way to detect the treatment, it will be impossible for the industry to enforce disclosure. We are dealing with a fait accompli that raises critical issues regarding the integrity of the diamond industry and the ability of our industry to protect the authenticity of natural untreated diamonds.

In a recent press release the GIA has called upon LKI and GE to cooperate fully with GIA’s efforts to detect the GE process. LKI, GE and the GIA are currently in “friendly negotiations” regarding a confidential disclosure agreement that will enable GIA to learn all they can about the process. It appears extremely likely that GIA will have an opportunity to research the treatment.

Unfortunately, according to scientists contacted by RDR there is a strong possibility that GE and LKI are right. Even with GIA research the GE process will be undetectable. Furthermore, while LKI is willing to give GIA an opportunity to research the process before releasing the diamonds, it is very possible that GIA research will take a long time and given its fiduciary responsibility to GE, LKI will be forced to sell the diamonds on the open market well before GIA completes its research. The industry is well advised to brace itself for the possibility that GE processed diamonds will appear on the market before the trade has the ability to detect the treatment.

The secrecy surrounding the GE process has been heightened by the fact that GE has not applied for a patent which would make the process public. GE’s decision not to patent the process might be motivated by a desire to maintain absolute secrecy. Another consideration is that the process may not be patentable because it has already been used by others. For many years the trade has discounted unofficial reports from Russia that some diamonds were being color treated. In light of the disclosure of the “new” GE process such reports should be more thoroughly investigated.

A number of Russian scientists, particularly Orloff, have written about basic diamond research in the area of diamond classification and coloration. While much of the research into diamond coloration focuses on nitrogen content and how to alter or remove it, there is also research that focuses on certain types of brown diamonds that have a sort of color banding referred to by Orloff as slip bands. It might be possible to release the lattice defects in these stones, which releases “tension” in the stone, and removes the brown coloration. While the highly complex topic of diamond color science is well above the expertise level of this writer, we must say that in talks with scientists we were impressed by the overall level of research into diamonds and the lack of surprise by scientists that something like the GE process should come to the fore.

There are a number of speculative theories about what GE is doing. At the risk of sounding completely unintelligent, we will report on what we have heard from the scientific community. All the scientists point out that without seeing stones before and after the process, everything they say is pure unadulterated speculation. Most of the scientists think that we are dealing with a high pressure, high temperature (HPHT) annealing treatment, although at least one, Martin Haske, believes that this is not the case. There is also talk that the treatment is limited to type 2A diamonds and there are reports that the process may apply to more than the 1 percent of diamonds as indicated in our trade alert. At least one scientist communicated to us that he understands the process and believes after some research, detection will be possible.

Dealing With The Issues

The “new” GE magic brings a number of important issues to the forefront. Of primary importance is the issue of disclosure. From an ethical, legal and economic perspective it is obvious that the GE process must be disclosed. The Rapaport standard of disclosure is based on economic harm to the consumer. It can be shown that the value of a natural non-GE-processed diamond is greater than the value of the same quality diamond whose color was achieved through the GE process. Simply put the two stones in front of a buyer and ask which he prefers and how much more he is willing to pay for the untreated stone. Since the value of the treated stone is less and the treatment is not apparent to the buyer –– the “buyer” has a right to know and the seller has an obligation to disclose. From a legal perspective, it appears extremely likely that an unknowledgeable consumer buying from a knowledgeable expert (i.e., a member of the trade) would have a cause of action to claim the value differential between a treated and a nontreated stone and could probably make a good case for return of the stone and a full refund.

The fact that the GE treatment is currently undetectable is a very interesting aside. While it has great bearing on the practical aspect of how to disclose, it has no bearing on the requirement of the seller to make disclosure. Consider someone that has a perfect counterfeit $100 bill or Van Gogh painting. The fact that the item is a perfect undetectable counterfeit in no way removes the responsibility of the seller to disclose the fact that the item is not an original.

The argument that the GE process will remain forever undetectable flies in the face of technological reality. Call it Rapaport’s rule of technology. The technological level needed to create something brings with it the technological level necessary to detect. In other words, if science is “smart” enough to make something happen, by definition science is smart enough to detect it happening. In general, it is far easier to detect something than to create it. The use of paper currency is a good example. Scientists in say, Iran, are certainly willing to invest great sums to create counterfeit U.S. currency. At the same time the U.S. treasury is willing to invest large sums detecting counterfeits. If the technology of creation could get ahead, and stay ahead, of the technology of detection then paper money would cease to exist.

The point here is that over time there is no justification for “assuming” that the technology of detection will not develop. In all probability we should fully expect that at some time in the future we will be able to detect the GE process. When this happens, consumers will find out that they have been sold stones without disclosure and the industry will be held accountable.

In the short term, the industry is faced with the problem of how to disclose something that they cannot detect. After all, once LKI starts selling the GE stones how can we look our customer in the eye and affirm that the diamond we are selling them is not treated. We don’t know.

The proper solution, as in all difficult problems, is simply to tell the truth. If you don’t know if the stone you are selling has been GE treated –– say you don’t know. Obviously, it is in the best interests of the industry to narrow down the range of stones that are susceptible to treatment so that there are still a large population of diamonds that we can be sure are not GE processed. The secrecy of the GE process works against us here. It would be highly beneficial for the trade to know if, for example, only type 2A diamonds (which are rare) are treatable for then we would know all non-2A diamonds are free of the treatment and our industry could largely go about its business.

If we do not yet have a method of detecting the treatment, we should at least have a method of limiting the potential scope of possibly treated stones. While this may harm the market for a legitimate segment of untreated stones, we must make efforts to limit the damage and assure the broadest possible range of diamonds for which we can guarantee authenticity to buyers.

Regarding disclosure, in a perfect world where we have detection, disclosure can be very specific. In an imperfect world where we do not have the ability to detect a treatment a more general form of disclosure is required. Instead of saying this stone is treated we need to say this stone is of a class of diamonds that could be treated. Sure this may very well lower the value of certain classes of diamonds but that is the cost of being honest. Furthermore, if the value of certain types of diamonds fall as a result of responsible industry disclosure, the mining companies will have every incentive to invest appropriate funds in research to make sure that in the future the technology of detection keeps up with the technology of treatment.

Practical Perspective

From a practical perspective we should consider the possibility that the industry will not take a very enlightened approach towards disclosure. Furthermore, what if the GE people advance its technology and are able to treat almost all diamonds? What will happen to the market if and when a flood of better color undetectable treated stones appear?

If detection is unavailable over the medium term and a fuzzy sort of general disclosure becomes the order of the day then we can expect that GE treated stones will become close substitutes for untreated stones. In fact, it will be hard to prove that a stone is untreated and therefore the price differential for untreated stones will be minimized. Disclosure will not be the most important issue effecting the markets. Supply side considerations will take over.

In effect, we will be looking at an increase in the supply of better color diamonds. All things being equal the prices for better color diamonds will fall to reflect the increased supply of treated stones.

Once again the secrecy of the GE process works against us. Can the GE process turn K’s into H’s or perhaps K’s into D’s. How strong is the process? Ultimately, we will find out as stones enter the market. But in the meantime, all we have going for us is the statement by LKI that the amount of GE diamonds entering the marketplace will be severely limited and will not be enough to disturb the market.

If one looks out to the future, there might be legitimate concern that GE will expand the range of stones the process can improve. Ultimately, we may find ourselves in a world where all diamonds are of relatively high color because technology has made lower color diamonds extinct.

Over the long term, when and if detection of the GE process becomes available, we will see a significant correction in the market. Once detection rears its head, authentic high color stones will bring serious premium prices. There will be D’s and there will be D’s. Who knows, perhaps it is time to introduce new color nomenclature with “real” stones carrying a double letter as in double D –– DD, EE etc.

Obviously the labs have to go about their primary business of figuring out how to detect the GE treatment as quickly and efficiently as possible.

The mining companies and those with significant inventory levels of better color diamonds are probably well advised to consider finding ways to fund GIA basic research. Frankly, it is a shame our industry has been caught with its pants down.

In the meantime, in the view of this writer, GIA will have to disclose what it does and does not know. If it can identify the type of diamonds that are susceptible to the treatment then these stones should be flagged on the grading report with a statement indicating the possibility of treatment. If GE cannot identify specific types of treatable stones then it should issue a general statement on all grading reports qualifying their color grade. GIA simply has to do what they have always done –– call it like they see it.

While science and technology may appear far removed from the romantic world of diamond manufacturing, trading and jewelry sales, in fact diamonds are very much a high-tech product. There is talk of using diamond coatings for the latest super computer chips and new high-tech uses for diamonds in everything from space ships to laser guns. These new technologies will provide scientific breakthroughs that will undoubtedly spill over into our gem industry. The GE process is but a warning of things to come. We must recognize the need to stay on top of technology and find the proper way for our industry to support basic research in the detection of current and future diamond treatments. We must use new technology to authenticate diamonds, otherwise the value of diamonds may be destabilized every time a new undetectable treatment process appears. If we do not master new technology it will master us.
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Tags: Belgium, Consumers, GIA, Jewelry, Labs, Lazare kaplan, Manufacturing, Mining Companies, Production, Russia
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