“Investment grade” is a dirty term. While not illegal, the US Federal Trade Commission frowns on its use for the same reason they frown on “precious” and “semiprecious.” These terms hold no meaning. Not only does the term investment grade have no clear meaning, it has been horribly abused by fraudulent salespeople. Many people cringe when they hear “investment grade” and a dealer can instantly ruin their reputation by using the term.
The term investment grade is also inappropriately applied to high-end gems and jewelry. However, those are not necessarily “the best” investment. Gems of lesser value often appreciate more and are easier to liquidate (see rule #4 below). Low to moderate priced gems are the choice of many well-informed investors, but many an investor has also generated excellent returns in the rare, high-end, or unusual segments of the market. So how do you make money investing in gems? I’ve proposed below the….
Top 5 rules to follow when investing in gemstones
rule #1 – control your cost basis. You have to buy “right” which means having built-in profit on the day you buy
You can make money investing in gemstones, but your cost-basis in a given gem has to allow for a built-in profit the day you acquire the gemstone. You need to have a margin of safety, and paying the right price is the single largest determining factor in whether or not you will generate a good return on investment. As with any investment, this requires you to be knowledgeable and exercise a good deal of caution and common sense.
You cannot pay retail for a gemstone and expect to sell it for a profit in a few years. Buying low means seeking out wholesale sources. Do your homework. Your best prices come from “Primary” dealers; those mine and cut the stones themselves. Secondary dealers buy from other wholesalers, (usually primary dealers,) and resell them, still well below retail. In addition, you will get a better price by purchasing lots than single stones. Currently there are some good sources for both primary and wholesale dealers on the Internet. There are also wholesalers in most cities and listings for them in the trade magazines.
If you are knowledgeable enough, you can shop for preowned gems at flea markets, pawnshops and estate sales. You can also develop networks of jewelers who wish to sell or otherwise liquidate colored gems they come across. Sometimes you can find gems considerably below current values. You must have the expertise to identify gems, be able to distinguish between natural and synthetic stones, and be prepared to do a lot of legwork. Some people get a thrill from the hunt and greatly enjoy this method.
For example, I was offered this 6.42 carat eye clean “Spinel” for $155 delivered from a jeweler with whom I’ve done a lot of business. The color was described as “an unusual gray/green/purple” and he thought it looked more like an unheated Zoisite (Tanzanite) than a Spinel.
Here are the pictures he emailed me (click to enlarge);
This color is quite typical of Spinel. In any event, I knew that was a good buy on a larger spinel, even though the color was not ideal. He assured me it was eye clean, so I picked it up. And I’m glad I did. Turns out, it looks WAY better in person, and it’s actually an unheated SAPPHIRE! Not a bad deal.
Here’s what it looked like when my friend Dan Stair photographed it, as I received it. As you can see, even a good picture can add value… can you believe this is the same stone pictured above?
Click to enlarge photos.
Here are Dan’s notes (Dan is a gem cutter): “The stone marked as a 6.42 carat spinel is not a spinel. It appears it is probably a sapphire. The stone has the correct refractive index for sapphire, is dichroic and the inclusions look like what I see in a lot of sapphires. This one actually has a more blue color looking from the sides, so if it’s a sapphire, it came from a bit of an odd crystal. They are usually blue looking into the c-axis, and green from all other sides. This stone appears to be the opposite of that. The top is not too badly done, though it has some milds polishing streaks and micro chips on some of the facet edges. The bottom could be given a partial recut that would make the stone look a LOT better, with minimal cost or weight loss. Or, it could be completely recut. Using a different design might push more of the blue in from the sides and improve the color slightly. This stone has a nice, deeper tanzanite-like color and color shift to being more purplish under incandescent light. This whole stone could also be recut into a very pretty round with only a slight hint of gray…way better than most.”
Turns out we invested two hours to re-cut only the pavillion…. and here she is. My basis in this (now 5.80 carat) sapphire is $235 total. So, $40 per carat. On a stone that should wholesale for easily $350 a carat and retail for $1,000 a carat! If this type of deal is your cup of yogurt, I’m working on another post about re-cutting or re-polishing and how it can add value to a gemstone.
Your investment concerns need not be restricted to cut stones. Rough gems, mineral specimens and finished jewelry all hold potential for investment. Each of these is specialized, so you should focus your attention on the one that interests you most.
rule #2 – you are unlikely be able to hang on and recover from making a bad buy on a gemstone
As a rule, gems increase in value at the rate of inflation. This means you should assume that a bad deal today will be a bad deal in 3 weeks or 3 years when you eventually sell. When I make a bad buy on a stone or make a mistake, I tend to take my licks quickly and sell. Finding “a lesser fool” to own a stone at my inflated cost-basis is not something I’ve ever been particularly good at. Some people can do it, and if you are willing to hang on to a stone in perpetuity, eventually you may get lucky and run across someone willing to adopt your mistake. But my preference is to take my losses when I realize I’ve made a mistake, and move on to try and find the next deal.
Sometimes things turn out really well if you hang on, but in my experience, that the exception not the rule. Sometimes, things also get worse. One good example is blue topaz. They used to be rare and demanded a fine price. When the method of transforming common white topaz into blues became available, they suffered a considerable drop in value. Another example is tanzanite. After the primary source closed, it skyrocketed in value. For some reason, as of this article’s writing (December, 2013), Tanzanite has dropped dramatically in price and I’m regularly seeing medium grade cut material hit the market at $100 per carat or less, and top material going for $200 a carat all day long.
These all represent exceptions to the rule, for better or for worse. Regardless, Rule #1 applies… Lacking the means to predict the future value of a gem, your best strategy is to buy as low as possible.
rule #3 – you need sources that can sell your gems at retail prices, so they can at least pay full wholesale prices
Jewelry stores are a likely source, as are auction houses and online auctions. Note that, unless you own a business, you are not likely to get a retail price. Also note that none of these are as simple as calling your broker. You must be prepared to find your own buyers. If you have weak sales skills, you should not invest in gems. Most gem dealers purchase quantities of great material, they have good relationships with retailers (like jewelers) who call them when they need something, they send some stones from their inventory to the jeweler (a process known as “memo”), and jeweler selects one or none to purchase and sends the rest back. The jeweler will pay full wholesale in this instance because they already have a willing buyer, and the gem dealer will get full wholesale bcause they took the risk and held onto the gem and they had the sales channels to sell the gem when the opportunity arose. This does not negate rule #2, though… because rule #2 has to do with having too high a basis to begin with. If you have an appropriately low cost-basis per rule #1, hanging on to inventory can be a very nice way to maximize profits.
rule #4 – consider carefully how much you can markup certain stones before you buy them
Lower priced gems receive a higher markup than expensive ones. Low priced gems are frequently marked up five times or more. For example, when a jeweler orders a stone for a customer, he may have a set minimum price. It does not matter if the stone costs one dollar or five; a jeweler may feel he needs a minimum of ten dollars to justify the labor of ordering the stone.
Other gems are usually marked up three times over wholesale. As things get more expensive, the markup can get lower. Anyone would gleefully accept a 25% markup on a $30,000 alexandrite. The diamond market is so competitive, that markups frequently drop below 10%.
Now consider this from an investment point of view. The greater the difference between wholesale and retail, the better your chance is of making a profit (see rule #1). It is also easier to find buyers for lower priced goods. However, you can take this too far. It may be easier to find 25 buyers for $200 stones than one for a $5,000 gem, but it might not be easier to find 5,000 buyers for a one-dollar stone. You just have to decide what type of business you want to be in.
rule #5 – consider whenther you can add value in a gem deal, perhaps by re-cutting, re-polishing, setting, marketing, etc.
There are two areas where gems take a substantial jump in price. One is between rough and cut; the other is between loose gems and finished jewelry. This involves more effort, but is one of the best ways to increase the value of your gems.
With an investment of labor, a lapidary can turn low value rough into high value finished gems. The tricks here are to buy your rough at a price that allows enough markup to justify your labor and learning to cut in a reasonable amount of time. Likewise, an experienced lapidary can re-cut an existing gem and often improve it’s optical properties and therefore it’s desireability.
If you are not a gem cutter, you can have others do the work for you. (See our Recommended Suppliers for gem cutters.) Again, you need to do your homework, but this is one of the most direct means of adding value to your gems.
Setting the stones also requires special skills, but frequently less labor. You can also contract out this work if you are lacking the skills to do it yourself. Finished jewelry has the advantage of a larger market than loose gems.