Sunday, March 22, 2009

Investing In Gemstones, Part I: The Market



by Richard W. Wise, G.G.
© 2009


Bye, Bye Bling:


Perhaps it’s the tenor of the times. Increasingly I find myself fielding questions about gems as an investment. With government printing presses working 24/7, many people are concerned that deficit spending, coupled with Government stimulation of the credit markets in the U. S., Europe, China and Japan, will eventually lead to hyperinflation. With stocks, bonds and real estate in the tank and currencies at risk, people are thrashing about looking to find a safe financial haven. In uncertain times, investors turn increasingly to hard assets. Luxury per se is out, but investment is definitely in. (pictured above left a 1.01 vivid pink diamond from the 2008 Argyle tender)

The Problem:


Stocks and bonds trade in an orderly market. One share of General Electric common stock is just like another. Stock Exchanges guarantee that their members can trade stocks at the going price anytime the exchange is open. This gives stocks the advantage of liquidity. Stocks and bonds trade at established prices and these prices are posted and available to the public. Exchanges operate on volume so the commission on any given trade is very low.

To say that gemstones do not trade in an orderly market is something of an understatement. There are no exchanges to facilitate trading. There are gemstone price lists, but each sapphire is a unique natural creation and so, therefore, is its price. Gems normally pass through several sets of hands before reaching the collector and the price spread between wholesale and retail can be as broad as the Grand Canyon.

Liquidity and the Auction Market:


A decade ago auctions were controlled by dealers; fully 90% of gems and jewelry sold at auction was purchased by dealers. The buyer profile, as I pointed out in my book, Secrets Of The Gem Trade, had begun to change in the early days of the new century. Evidence suggests that this trend has accelerated. As of 2003, according to Gloria Lieberman, Chairman of the Jewelry Department at Skinner’s Auction House in Boston, dealer purchases had shrunk to 60% with consumers making up the other 40% of buyers. The trend has accelerated in the last few years. “Today,” says Lieberman, “the buyers are 60% retail.”

Gary Schuler, Director of Jewelery at Sotheby’s sees a similar trend. He notes that between 65--70% of his buyers are private individuals. When it comes to finer stones the dollars split about 50/50, he says. Why is this important? Because it opens the market, giving consumers and investors direct access to the resale market and thus a degree of liquidity that did not exist in the past.

That is the upside. The downside is that access comes at a cost. Auction houses typically charge sellers between 17-20% of the hammer price and buyers pay a similar percentage. Still, it is all about the price. Both dealers and retail clients purchase gems and jewelry at auction and the market continues to function.

Schuler believes that jewelry and gemstones are a store of value but cautions: “I do not believe in jewelry as an investment” and admits that ‘sophisticated private individuals’ do compete with dealers at Sotheby’s.” “Fine, loose gemstones still go to the trade” says Lieberman; however, a fine gem mounted in a Tiffany setting may go retail. “With the internet, it is easier for privates to compare prices,” Lieberman says.

Both Schuler and Lieberman see a softening of prices in some areas of the market. Colorless diamonds, a market which has become highly speculative over the past few years, has suffered the most according to Schuler. He has seen some softening in colored diamonds but almost none in high quality colored gemstones. Stephen Hofer, author of Collecting and Classifying Coloured Diamonds disagrees; he sees continued strength in prices for very fine colored diamonds.

Can gems be purchased as an investment? “Absolutely” says David Walker, CEO of Shreve Crump and Low, the venerable Boston Jeweler. “There are opportunities in a soft market; the important thing is the time horizon.” However Walker sees hyperinflation around the corner. Asked about a time frame, he suggests buying and holding for a minimum of five years. “You need a knowledgeable guide,” says Walker. Gemstones exist in a complicated market - it is no place for the uninitiated.

Next Installment: An Investor’s Strategy: Stay tuned.

Thinking of investing or just trying to find a beautiful gemstone. Want to know more about it? Consider the connoisseur's guide. 120 carefully selected photographs showing examples of the highest quality gems to educate the eye, including the Rockefeller Sapphire and many more of the world's most famous gems. Consider my book: Secrets Of The Gem Trade, The Connoisseur's Guide To Precious Gemstones.


“Wise is a renowned author... He’s done a marvelous job of this first book
, monumental work, a tour de force...My recommendation: Buy this book”.
Charles Lewton-Brain, Orchid


whether you like to know what the best colour is in Tanzanite, or how to grade a Diamond, you will find it in this book. No other book I read before dealt with this topic is such detail as Richard Wise's masterpiece."

A. Van Acker, FGA
Amazon June 2005

"Secrets Of The Gem Trade: The Connoisseurs Guide To Precious Gemstones by Richard W. Wise is an impressive new reference for dedicated dealers and collectors of gems, gemstones, and ... pearls. Introducing and descriptively exploring each and every gem covered in the easy-to-use reference, Secrets Of The Gem Trade contains an illustrated summary of each stone inclusive of its history and general information, hue and tone, saturation, which may be noticed as the finest, an understanding of the particular gems rarity, and the caution for synthetics and how to depict them, however depending upon the stone there may be description of clarity, color fading, multi-color effect, etc. Secrets Of The Gem Trade is very highly recommended to anyone interested in gemology as a superbly organized, authoritative, comprehensive, and easy-to-follow reference."



Midwest Book Review
April 2006

Only $39.95 in paperback. Read a couple of chapters online an order: We recently discovered about a dozen copies of the out of print hardcover: $79.95 signed by the author www.secretsofthegemtrade.com.

Buy it on Amazon: www.amazon.com

21 comments:

Africanuck said...

Hyperinflation, yes that is on it's way, isn't it?

As always, I imagine that the exceptional doesn't lose it's value. I was interested to note in a recent auction that I was following here in the UK that the two items that I noted in particular went for two to three times their estimated prices. Many of the "ordinary" lots didn't even get a bid.

Hard assets, gold, exceptional stones and exceptional real estate. Much better than a Maddoff fund or keeping it in a rapidly depreciating bank account.

Richard W. Wise said...

Julie,

Yes, hard assets are back.

I will attempt to lay-out an intelligent approach to investment in the next two posts on this topic.

Best,

Virgilio Elcullada Luib Jr. said...

Martin Rappaport Youtube videos tells that top quality diamonds especially the larger sizes are going up in value bcoz of the higher demand and scarcer supply.

There are 11 million millionaires worldwide. There are billions of people in countries whose people can now afford to buy fine gems and jewelry in places like India, Chine and Russia.

I think D-Flawless diamonds will go up in value as well as fine quality diamonds. However poor quality diamonds will go even further down in price. I predict diamonds will still lead the majority of gemstones desired and sold followed by pearls. Bcoz they are timeless and they never go out of style. The old adage "You can never go wrong in black or white."

On the other hand I'm quite interested in antique jewelry designs excavated in The Philippines. I'm planning to study jewelry design and re-create antique jewelry with a twist and using colored stones and pearls. I really have an affinity on archeological pieces of jewelry bcoz I love history.

Richard W. Wise said...

Virgilio,

Larger translates into rarer and you can expect the price to be higher. I will go into this in detail in my next posts.

Cheers and thanks for your input.

TOC said...

My experience suggests to beware of anything sold as an 'investment'. Having spent 30 years plus in the financial services/investment arena, I have found that anything that 'Needs' to be 'Sold', probably will put the 'buyer' at the disadvantage and the seller with a nice pile of cash. IMHO, gems present many pitfalls as an investment.

For purposes of the following comments, our 'investor' is one of the 'regular' folk, not those that are in positions to acquire high end, one of a kind pieces at auctions and such.

IMHO, the are three core challenges that prevent gems from rising to the status of 'investment'. These inter-related challenges conspire together, creating a sticky web of obsticals for our would be investor.

The primary issue with gems functioning as investments is that there is no liquid and generally available market for disposing of the investor's 'investment'. Being that 'investors' are not in the gem trade, they have no flow of potential buyers with which to interact. Selling or 'distributing' their investment takes a knowledge of the trade that our investor just doesn't have. And should they need a 'quick' sale of their investment, they will likely take a huge haircut for the privilege of a quick transaction.

The second challenge starts at the point of purchase/sale. Since our investor is not in the gem trade, they find themselves acquiring their 'investment' at or near some retail level of pricing structure, which includes all the layers of the distribution system. As most who have experience in the trade know, you make your money when you buy, not when you sell. Thus, our investor starts from a disadvantaged position from the get go.

The third challenge arises as the first two begin to tighten their serpent like grip on our investor's 'investment'. The third challenge is the time, effort and work our investor must engage in to 'distribute' their 'investment' back into the market place. Odds of our investor finding a retail buyer are slim to none (...and slim just left town), since they have a non-existent viable and available marketplace, so there is little chance our investor can get 'best price'.

Therefore, to 'liquify' their investment, our investor must work with some member of the gem trade (who knows that they make their money when they buy). Our investor is also competing with the other sources available to the trade. Assuming the stars align, and they find someone in the gem trade who wants their material, they are left to sell back to the gem trade at discounts to then retail pricing of anywhere from 30% to 50%.

The math just isn't on the side of the investor. What has to happen to prices to reward an investor? If prices were to rise 100% (double) over a 5 year period, a $1000 'investment' will rise to $2000. Selling back at a 50% discount means that investor made 0%. Selling back at a 30% discount will net the investor $1400, or less than 10% per year. Not a great return given the risks.

I haven't been collecting long, but my research suggests that pricing as a whole haven't been doubling every 5 years. That being the case, it means the holding period for our 'investor' is going to be at least 7 years, perhaps longer.

An alternative for our 'investor' is to become more knowledgeable about the gem trade and gems in general. This allows them the opportunity to buy several layers deep into the distribution system, avoiding the retail level all together. IMHO, our 'investor' is now no longer an investor, but has become a market participant, but is still left with the significant challenge of finding a market for their material when its time to 'distribute'. Its VERY easy to buy, but finding a buyer at a price that is beneficial for our 'investor/market participant', is still a relevant issue.

There are many reasons to acquire and own colored gemstones at all ends of the spectrum. I am just not sure that 'investment' is one of them. In my journey as a 'collector' if I can eventually distribute portions of my collection at the prices I have acquired them at (or even a small profit), I believe that I will have done well. As good as I have done in acquiring some of my collection, I have no delusions of grandeur that I will achieve a return on my collection that will allow it to rise the the status of 'Investment'.
_________________
Stonecollector

Perfect Diamond™ said...

So if a material as eternal as diamond is not an investment for you then how much more stuff like paintings, leather goods, cars and real estate properties?

In 2005 I bought an estate B.zero Bulgari ring 18kt white gold weighing about 8.1 grams for 5,500 pesos but today I can pawn it for almost 8,000 pesos!

With signs of wear and tear and some dirt from gardening and scratches from rock climbing and some dents from dropping the ring still it goes up in value!

Do you think Hermes leather bags will increase in value once the leather starts to detoriate? Do you think the Mona Lisa will lasts forever when the color paint starts to get faded? Do you think a Ferrari will will still look hot once the car starts to rust? Do you think qa house and lot lasts forevr too and during times of war no one will be interested in a property in a warzone. And you need a lot of money to maintain these so called investments but platinum and diamonds you can put them in an acid, spit on them and put them in a toilet bowl and they will still SHINE FOREVER.

The Hope diamond, The Regent,Koh-I-Noor,The Splendour, La Peregrina Pearl, etcetera. They prove that gems and jewelry are worthy investments.

As a poor gem connoisseur I like to acquire things that are extraordinary bcoz there are a lot of people out there who wants to own something no one will ever own. Thes extraordinary things are always in demand bcoz they have the most beauty and rarity with so many people wanting them but only one or a few will own them. It's called true love. Once you fell in love then you don't want to lose that person. You want to be with that person forever...

Richard W. Wise said...

TOC,

Your points, particularly one and two are valid. I believe I have begun to address them in the post.

The auction market, as I point out, does provide a venue for liquidation though a thorny one since both buyer and seller are charged a premium, which, taken together, can be as high as 40%.

As you point out, if a person is to invest, he or she must break through to the wholesale market. This is not a difficult as one might think. For example, over the past decade the web has imploded the diamond market, reducing margins by as much as 70%.

plong said...

Mr. Richard W. Wise

Is it true that a Golconda diamond will double in price versus a non-Golconda stone?

Which do you think will costs more? A 3ct Ideal Round Brilliant D-Flawless or a 3 ct Ideal Round Brilliant D-IF?

And how much would a 0.32ct D-IF Asscher cut Golconda diamond would cost?

plong plong said...

I was reffering to which would costs more a 3 ct D-Flawless Ideal round or a 3 ct D-IF Ideal Round Golconda diamond?

I saw a 3 ct D-Flawless Ideal RB at Bluenile once that cost $350,000?

please reply...

Richard W. Wise said...

Plong Plong,

Thanks for your comments, but please be advised that I do not provide a pricing service or publish price guidelines.

Richrd

plong said...

I'm so sad...

Look oh :-(

Anyway how about sapphires? What color is a Kashmir Sapphire? Is it cornflower blue? or violetish blue?

Richard W. Wise said...

Plong,

Sorry for your sadness. Want to see the color of Kashmir? Follow this link: http://www.rwwise.com/products/id|1080

Of, consider ordering my book! www.secretsofthegemtrade.com

Best,

Richard

Karen said...

Richard,
This article may be germane to your discussion: http://www.ft.com/cms/s/0/984dd0da-1a6f-11de-9f91-0000779fd2ac.html?nclick_check=1

Richard W. Wise said...

Karen,

Is this the same link? The other seemed to bring me to an index page:

http://www.ft.com/cms/s/0/984dd0da-1a6f-11de-9f91-0000779fd2ac.html?nclick_check=1

Richard

Karen said...

Richard, yup.

Anonymous said...

Mr. Richard W. Wise

That Kashmir saaphire must have cost $25-$30,000? Can't afford it.

Unfortunately I don't have a credit card required to purchase books online.

Plong

plong said...

Mr. Richard W. Wise

Can you contact National Bookstore? It is the biggest bookstore in The Philippines and I think they might be interested buying your book in bulk orders. I even bought Brilliance! The American Jewelry Design Council book from them and I'm planning to buy The Diamond Handbook by Renee Newman and The Hope Diamond.

I always wanted to read your book bcoz it offers not only diamonds but a diverse collection of gem information and pictures.

Richard W. Wise said...

Plong,

We are working on Asian distribution. Secrets can be published on Amazon.com and shipped anywhere in the world.

Our publisher, Brunswick House Press also has a website: www.secretsofthegemtrade.com. They will be pleased to ship you the book.

plong said...

Unfortunately I don't have a credit card. That's the only way to purchase a book online.

Also National Bookstore books are way cheaper than Amazon or anything else online bcoz their secret is to buy huge volumes and they will get huge discounts which they will pass on to their customers.

I really believe a lot of Filipinos will be interested in your book since a lot of people here also likes gems and jewelry and also mineral collectors.

The CEO of the National Bookstore is a very nice woman. I think you'll make a good deal from her.

Richard W. Wise said...

Plong,

Suggest you approach the nice woman who heads up National Books. If she would like to place an order Brunswick House would be more than happy to see the book in the Philippines. The book is currently being reprinted and will be available in bulk in June.

If she orders a case of 20 copies, we will send you a free copy.

Dick Sage, the President can be reached: sage@secretsofthegemtrade.com.

Best,

Richard

plong said...

I'm trying to contact the CEO although I am just a nobody and I doubt her people will sent my email to her. But I'll try to place an order of the book and if they don't have it they tend to order books they don't have when someone is requesting it just like when I request the book East Of Eden by John Steinbeck though I'm no longer interested about the book because I have already seen the movie which is more direct to the point and I love it!