The novel takes place just over two months from the end of Moonraker, which ended with James Bond taking a small vacation. When Diamonds Are Forever begins, M instructs Bond to infiltrate a smuggling ring, which is running diamonds from African mines to the United States. Bond's job is to travel down the "pipeline" as far as he can and find out who is behind it all. Under the name of Peter Franks, a petty crook already known as a diamond smuggler, he meets a mysterious "go-between" named Tiffany Case with whom he falls in love. Bond discovers that the smuggling ring is being operated by a ruthless American gang called "The Spangled Mob", which is run by the brothers Jack Spang and Seraffimo Spang. Also part of the Spangled Mob are Mr. Wint and Mr. Kidd -- two mysterious yet ruthless assassins.
As Bond learns throughout the novel, the pipeline begins in Africa where a dentist would pay miners to smuggle diamonds in their mouth which the dentist would extract during a routine appointment. From there, the dentist would take the diamonds and rendezvous with a German pilot who would transport the diamonds to London via helicopter. In London, Tiffany would get an assignment from a contact known only as ABC. She would then meet with "the hire" and explain to that person how to smuggle the diamonds to New York City. The "hire" is then instructed how to receive his payout, which is delivered via rigged gambling.
While undercover, Bond smuggles his diamonds into New York inside fake golf balls. He is given $1,000 and is instructed to bid on a horse named Shy Smile in Saratoga Springs to receive his full payoff. Bond learns from Felix Leiter (who has left the CIA due to injuries sustained in Live and Let Die and is working for Pinkerton's as a private detective) that the real Shy Smile is dead and that his identifying tattoo has been imprinted on another horse. They find that they are both investigating the same people and work together to turn the tables on the gig and get Shy Smile disqualified.
James Bond receives another $1,000 from the mob and is instructed to gamble four hands at The Tiara in Las Vegas -- a casino owned by Seraffimo Spang. After pressing his luck in The Tiara and turning his $5,000 payout into $20,000 in a game our roulette, Bond is driven off the road and is captured by the Mob and tortured, aboard Seraffimo's historic train in a recreated ghost town named "Spectreville" (Spectreville actually has no connection whatsoever to Bond's nemesis SPECTRE, which appears later in Thunderball.)
Bond manages to escape with the help of Tiffany Case, who has turned against the mob due to her strong feelings for Bond. (He had been trying to win her over with his charm since he met her.) They manage to escape the train and light it on fire, killing Seraffimo. They flee the mob to New York where they catch The Queen Mary to London. Unbeknownst, they are spotted and Mr. Wint and Mr. Kidd board the same boat. Bond pieces together their presence on the boat but they had already captured Tiffany. Bond climbs down the side of the ship with a rope made from sheets and manages to overpower them, killing them both.
In Sierra Leone, Bond stakes out the known contact point for the mine dentist. Rufus Saye (the mysterious "ABC" contact Tiffany had in London) arrives. He has been closing the smuggling ring, eliminating everyone involved. Later, Bond goes to Africa to stop the beginning arm of the smuggling ring. The man tries to get away, but Bond stops him by shooting down his helicopter, effectively ending the smuggling ring.
Diamond smuggling was a topic of great interest to author Ian Fleming. In 1957, Fleming wrote a non-fiction book on the subject, titled The Diamond Smugglers, which was published in the same format as his Bond novels and, as a result, is often erroneously listed as a Bond book. Additionally, author Geoffrey Jenkins claims that he had collaborated with Fleming on the plot of a novel featuring James Bond and dealing with diamond smuggling, titled Per Fine Ounce. This book is claimed by numerous sources including The Bond Files by Andy Lane and Paul Simpson as being commissioned by Glidrose Productions. The book completed circa 1966 but was never published.