Gadi Giladi was visiting stores in Arizona last September the day Lehman Brothers filed for bankruptcy. The salesman was sent away by jewellers who stopped buying as they watched television news of the crisis that axed four years of diamond price gains. "They wouldn't even let me open my bag," said Giladi, who carried pieces priced from $200 (R1 472.55) to $4 000, many made with tiny gems polished in India.
What Giladi saw in Phoenix that day, diamond polisher Mahesh Khoyani would not feel for months: an economic tsunami set off by Lehman's collapse that shrank Christmas sales by 20 percent at US jewellery counters; halved imports of uncut gems by traders in Belgium who could no longer get credit; washed away the livelihoods of 400 000 gem workers in India and shut mines in Botswana.
The industry - which employs 1 million people from Jwaneng, Botswana, to Surat, India, to New York's gem district - faced two more years of turmoil, and prices might not return to pre-crisis levels for a decade, said Richard Platt of WWW Diamond Forecasts in England.
Platt said prices for rough stones, up 40 percent since March, were "unjustified by retail sales" and would probably fall over the next 12 months. Polished prices would stagnate after a 4 percent rise.
That means more hardship in the jewellery business in the US, where sales have fallen every month this year to June and are not expected to recover soon; in Botswana, which is bracing for a 50 percent drop in diamond revenue this year; and in India, where 240 000 polishers and cutters may not be able to return to work for 18 months after the recession ends, according to Vasant Mehta of the Gem & Jewellery Export Promotion Council in Mumbai.
"We relied on diamonds, and they betrayed us," Vilas Khoyani said with her two sons, Diviesh and four-year-old Tushar.
Like housing in the US, diamonds spawned a bubble in which easy-to-get credit made buyers willing to pay more and created a false sense that these polished rocks were rising stores of value, said Christopher Ellis of Consensus Advisory Services.
Prices rose 38 percent from the end of 2003 through mid-2008, buoyed by growing US household wealth, which peaked at $64.3 trillion in the third quarter of 2007. Rough stones rose 81 percent in that time, said Platt. About half the world's polished diamonds are sold in the US, according to De Beers.
The aftermath of Lehman's crash laid bare how the credit glut pumped up valuations of the billion-year-old sparkling gems. In the six months after the bank's collapse, as credit markets froze, prices for rough stones fell 40 percent and those for polished gems slid 19 percent, according to WWW Diamond Forecasts and PolishedPrices.com, which provides pricing data.
Everyone along the supply chain had bought into the bubble, including Mahesh Khoyani, who was 29 when he died. He took out a loan last October, as disaster curled his way, to finance construction of a 400 000 rupee (R61 862) two-bedroom house for his family in his ancestral village near Rajkot, a city of 1 million in the western state of Gujarat.
Imports of rough gems to Antwerp fell 50 percent from October to August in dollar terms compared with the same period a year earlier, according to data from the Antwerp World Diamond Centre.
The value of polished stones shipped from India, where 11 of every 12 diamonds sold in the world are cut and polished, tumbled 59 percent in November from the month before, according to the gem council in Mumbai.
That was devastating for Mahesh Khoyani, a gem polisher since the age of 15, whose pay had jumped by 50 percent to 12 000 rupees in October with overtime. His factory in Surat, a city that is home to half of India's 710 000 diamond workers, closed on October 28 for Diwali, the Hindu festival of lights. It never re-opened.
By late December, the wave had rolled back to the source, in Botswana, where Goitseone Kgosi, 26, a contracted equipment repairman, lost his job at the Jwaneng diamond mine, the richest in the world. The pit, run jointly by De Beers and the state of the nation, shut for four months. "They told us that Americans weren't buying diamonds," Kgosi said in July. "I had to move out of the room I rented. I didn't have money for food."
Global diamond jewellery sales are down as much as 10 percent this year, after expanding to about $73 billion in 2007 and running at a similar pace last year before the slump began in October, according to analyst Russell Shor of the Gemological Institute of America.
Decades-old US chains have sought bankruptcy protection. Texas-based Zale Corporation, whose shares have dropped 73 percent since September last year, said it shut 118 stores in the quarter to July, bringing the number of closures in the first half of this year to 191.
In all, 1 261 US jewellery stores, wholesalers and manufacturers folded from January through July, a 53 percent jump from a year earlier, according to Dione Kenyon, the president of the Rhode Island-based Jewellers Board of Trade, which rates the creditworthiness of businesses in the industry. The total this year was expected to be about 3 000, Kenyon said.
Lehman's downfall dealt the industry a double whammy. First, it sparked a run on the $3.6 trillion money market industry, which provides short-term loans called commercial paper used by businesses worldwide to cover everyday expenses. That led banks to stop extending credit in general, hurting jewellery stores and diamond wholesalers worldwide.
The demise of what was once Wall Street's fourth-largest investment bank also wrecked the wealth of baby boomers who accounted for 40 percent of US jewellery sales, according to Nick White, a former chief operating officer at Zale.
The shockwaves rolled across the Atlantic Ocean to hit Antwerp's cutters and traders, also known as diamantaires, in October. Trading houses in Antwerp sell to buyers including Tiffany and Cartier.
October's price dive was exacerbated for traders because they had become creditors for their customers, said Martin Rapaport of the Rapaport Group. Stones were often sent to clients under a so-called memo system that allowed retailers and wholesalers to swell their stocks even if they did not have the cash to buy the gems outright, he said.
The practice mushroomed over the past decade as traders enticed customers to boost their own volumes to profit from rising prices, he said. In recent bankruptcies, chains had as much as 25 percent of their inventory on memo, according to Ellis.
Nobody can afford the old inventory-based system, said Rob Broedelet, the head of ABN Amro Bank's international diamond and jewellery group for the Americas. This year, credit to the industry was down to between 20 percent and 30 percent and people might be shifting to a just-in-time manufacturing and purchasing system, he said. "It's going to be potentially a major change."
As exports of polished diamonds from India plunged, more than 160 members of the council for the gem and jewellery industry decided to appeal to all diamond traders to stop importing rough stones for a month, according to Sabyasachi Ray, the council's executive director.
Imports of rough diamonds in December fell 91 percent from the same month the previous year, to $85.8 million, based on council data.
On the morning of December 28, Khoyani, who had fallen behind in his payments to the builder, left home in Surat to pick up a newspaper. Instead, he swallowed pesticide. He collapsed in his wife's arms on his return, Vilas said. He was dead when they got to a hospital at 10am.
"He was scared after hearing about the slowdown, but I had no inkling that he had lost all hope," the widow said.
At least 16 diamond polishers killed themselves between October 11 and March 20, said KM Patel, the assistant labour commissioner in Surat, citing a report compiled by the local government. Some 413 780 of India's 710 950 diamond workers lost their jobs, according to a February report by India's Reserve Bank. Almost half of those were in Surat.
In Botswana, Kgosi got his job back in March, before the April 15 opening of the mine. Even with three of Debswana's mines back in operation, the company said on September 8 it might produce only 17 million carats this year, about half the 32m mined last year and the least since 1994.
Botswana's economy would probably shrink 6 percent this year and might experience several years of "subdued growth", said Razia Khan of Africa economic research at Standard Chartered in London.
The way of doing business for diamond buyers and industry workers has ended and is not coming back, according to Rapaport.
For salesman Giladi, business was so slow in July he took the month off and went to Mongolia, spending $3.50 a night to stay with families in their tents in the countryside. The trip inspired him. "We need to trim down, not spend too much and be very careful," he said.
Vilas Khoyani is already doing that. She left Surat at the end of January and took her two children back to the village where her parents live. She cancelled the house her husband had ordered, leaving her with 100 000 rupees. "The money is not going to last for long," Vilas said as she held out a photograph of her husband. "I just want to live my life with dignity." - Bloomberg