Friday, April 10, 2009

Investing in Gemstones, Part II; A Strategy:

By Richard W. Wise, G.G.

©2009

Avoiding the Con:

There were a number of phony gemstone investment schemes in operation during the hard asset investment craze of the late 1970s and early 1980s. Until Congress put a stop to it, investors were purchasing, gems, antiques and Shaker rocking chairs as part of their IRA portfolios.

To avoid prosecution many gem investment scammers set up boiler room operations in Canada, but sold mostly to gullible U. S. investors. The pitch was simple and ingenious. To keep buyers from seeking an outside appraisal, the gems arrived in sealed packets with a microfilmed “certificate of authenticity”. Buyers were warned that breaking the seal would invalidate the certificate and negate affect potential resale.

Over the years, several victims have sought me out to appraise their purchases. In all cases, the gems were wildly overpriced stones and of a quality best described as aquarium gravel. One medical professional confided that he had bought in because the telephone salesman assured him that he (the salesman) could double his money immediately by selling the gemstones in Japan. When I asked the victim why he didn’t just suggest that the salesman get on a plane to Tokyo, he shrugged and smiled sheepishly.

Gemstone price data is very difficult to come by. Historically, the gem trade operated in almost complete secrecy. Price is based upon quality and size, but the first universally accepted diamond grading system was not in place until the 1950s and price lists only became available in the early 1980s. Colored gemstones present additional difficulties, price guides exist, but they are handicapped by the lack of a universally accepted colored gemstone grading system and price guides that do exist lack data on larger, finer gems. Most of the information for this article was patched together from numerous sources, auction records, the author’s experience and anecdotal information.

Buy the Best:

One statement that can be made categorically is that lower grade commercial quality gemstones are not viable investments. There is really no such thing as a five thousand dollar investment gem. Historically, larger finer stones have appreciated at a much higher rate than the great unwashed.

According to connoisseur and author Benjamin Zucker, in 1976 an eight carat fine Burma ruby was worth $36,000 per carat and a twenty carat fine quality Kashmir sapphire was worth $25,000 per carat. In 2007 an 8.67 carat fine Burmese ruby sold for $425,000 per carat (pictured below left). Taking that as a bench mark, the price of a fine eight carat ruby enjoyed a 5.4% annual increase over the past thirty years. Kashmir sapphire has enjoyed a similar escalation in value. I recall two twenty carat plus Kashmir gems that sold at Sotheby’s in 1981 for $25,000 per carat. The current record holder, a 22.66 carat Kashmir, sold for $135,000 per carat in 2007 an increase of 4.5% a year (pictured above right). An eight carat Burma ruby is significantly rarer than a large Burma sapphire and in this comparison; the higher degree of rarity appears to be reflected in the average percentage increase.

Emerald is another matter: In 1976 Zucker notes a price of $6,000 per carat for a one carat gem Colombian emerald. According to National Gemstone, emerald prices peaked in 1995 at about $8,000 per carat. The discovery, in 1994 of the massive La Pita emerald deposit, brought a flood of finer grade Colombian emerald into the international market. Emerald fell precipitously in price in 1996, and prices remained almost static for ten years. Emerald regained its previous market high in 2005 and has appreciated approximately 20% since.

Diamonds are an interesting case study: In 1968 a one carat D Flawless round brilliant sold for $1,400.00 wholesale. By 1976 that same diamond was worth $6,500.00. As the glamor stone of the investment craze, the D Flawless had its ups and downs in the decade the followed, it toyed with $70,000.00 in 1980, but even so, today, that same gem sells for $19,400.00 increasing a hefty 7.6% per annum (provided you didn’t buy in 1980). By contrast a relatively mundane one carat J VVS went from $550 in 1968 and 1,500 in 1976 is worth $4,500 today an increase of 5.4% per annum.

Diamonds, however, operate in a controlled market. The steep rise in diamond prices is due to correspondingly steep rises in the price the DeBeers diamond cartel charges for rough diamonds. According to Gem Market News (GMN), between 1968 and 2003, De Beers increased rough prices by 1200%.

Gem prices have remained relatively strong in the current downturn. GemVal, a website that offers gemstone appraisals publishes a Gem Value Index (GVA) (graph at left) which reflects the aggregate price of gemstones in the market. The GVA The index which started in July of 2005 (100%), peaked 126.8% in April of 2008 and currently stands at 123% showing a 3.8% dip over the past year.

Liquidity:

As indicated in Part I, the auction market is today the default source of liquidity. How does the investor obtain the best possible price upon liquidation? Strategically speaking when it comes time to sell, the investor wants to dazzle the auction house. It is wise, therefore, to purchase larger, finer, rarer gemstones that will excite the experts who control the auctions. These are the professionals who create the pre-sale buzz. If the people at the auction house are excited you can bet that that excitement will be communicated to potential buyers and translate into a higher price and a better yield.

Gems such as the one carat J VVS diamond are readily available in the wholesale market and will receive very little attention at auction. With the buyer/seller premium hovering at 40%, chances are it would sell well below wholesale. At 50% of wholesale, the annual long term appreciation would be cut to 2.7%. If the investor has purchased the stone in the last ten years, he will probably take a substantial loss.

The D Flawless would have a much better chance of selling above its wholesale price, but even the best one carat colorless diamond in the world is far from rare and readily available on the wholesale market. The one carat D Flawless has done well over the past thirty to forty years, but that is a long horizon. Over the near term, it’s price has remained static, hardly moving at all for the eight years between 1996 and 2004 while prices for both ruby and sapphire doubled.

There are many rare gemstones, but with a few notable exceptions, the investor is wise to stick to brand names such as ruby, emerald and sapphire, type II and colored diamonds. Gems of this degree of rarity generate both excitement and desire on the part of both wholesale and retail auction buyers. Just prior to the record setting ruby price in 2006 (ruby pictured above left), quoted prices in Bangkok for ruby of that size and quality were somewhere in the $300,000 per carat range. At that time there were no actual gems of that quality available for sale. Two possible nominees for the list might be Paraiba tourmaline and natural pearls. Other stones, like internet start-up companies, may provide more potential for appreciation, but at a much greater risk.

The investor thinking about liquidation should consider the timing. Timing is important. Auction house divide gems and jewelry into categories; “important”, “very important” and “magnificent” are the three categories dearest to the investor’s heart. Important auctions attract important buyers and the larger, rarer and finer the stone, the more prominent will be its place in the auction catalog. The date is also important: Auctions held close to the Christmas holidays bring in high-end retail buyers.

Next Installment: The New Precious Gems and Buying for Rarity, The Breakpoint:

Rarity should play a role in the investment decision. Beauty drives demand, but rarity drives price. It’s not enough that it be a fine gem, it must be a fine gem of a rare size. At what point do size and rarity coalesce? I’ve chosen the term breakpoint to describe the size where rarity drives per carat prices dramatically higher. Next installment I will discuss the breakpoint and make some suggestions as to which of the "new" precious stones might make good investments. Stay tuned!


Basel World 2009

By Marisa Zachovay

Basel World has been a confirmation for many in the colored gemstone industry that the global recession is a reality and it will be here for a while. The luxury market is not immune and attendance at the show was definitely down, though no one is willing to give any numbers just yet. In past years, finding a table or corner to eat lunch just outside Hall 1 was virtually impossible unless you had a “late” lunch. This year, there was a plenty of room although it was a bit cold to be outside, thank you very much. One exhibitor noted he was able to read the daily fair newspaper completely from cover to cover. Definitely less traffic!

The window shoppers stayed home. The US buying contingent was certainly fewer in numbers. But the visitors that did come were buying. And they were bargaining! Buyers had the upper hand and were milking it for all they could. Some colored stone dealers commented that their private customers were also missing. Finished jewelry was reported to be moving better than loose gemstones.

In colored gemstones, there were the usual goodies to be expected at the show. Hot pink spinels, neon tourmalines, and luscious emeralds were all available in the best qualities possible. An interesting suite of rough emerald in graduating sizes and with graduating color within the rough from green to colorless was available for a creative designer to play with.

Overall the mood was quiet with most exhibitors having arrived with low expectations and leaving with satisfactory results although of course “not the same as the past few years.” Now that we are over the “deer caught in the headlights” freeze from last fall, the industry is waking up and realizing it will have to reinvent itself and discover new markets and strategies for the future.


Bio: Marisa Zachovay


It is a pleasure to introduce Marisa Zachovay to GemWise readers. Ms Zachovay is a trained goldsmith, gemologist and world traveler. She published an article in German and subsequently in English in the Extra Lapis journal, Emerald – What is the value of emeralds. She also wrote for International News in Gems & Gemology about chocolate pearls. Ms. Zachovay has traveled to countries such as Madagascar and Colombia as an instructor and to give seminars. She is a member of the Gem & Mineral Council of the Natural History Museum in Los Angeles, California and a Certified Gemologist with AGS.




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

7 comments:

Virgilio Elcullada Luib Jr. said...

There are 2,000 known gem species and a lot of them are extremely rare but like beauty pageants they are cut to only a few competing for the crown of being "Most Beautiful and Most Expensive".

If the Gem & Jewelry industry will market all the gems then the competition will be stiff and might reduce the price of the other gems as there are plenty to choose from.

The only thing that survives are those that possess the best combination of Beauty, rarity, durability and current fashion or demand. The traditional gems like diamonds, rubies, sapphires, emeralds and pearls are always in demand and prove to be as always beautiful and popular in people's eyes. The connoisseur's eyes take a deeper look as they tend to include emotional value into the stone such as history, pedigree, place of origin and the way their heart beats in its presence.

For me Type IIa diamonds and colored diamonds, pigeon blood red rubies, blue cornflower Kashmir sapphires, colombian emeralds, natural pearls, perfect South Sea cultured pearls, black opals, imperial jade, alexandrite, the finest paraiba tourmaline, bixbite among others are always exciting, intriguing and they have the best value when it comes to perfection, purity, colorlessness, rarity, durability and color. I think these are gems that the Gem & Jewelry industry should focus their marketing and promotion. And we don't really need to tell people how beautiful they are. Their beauty speaks for itself. Beauty is indeed the number criterion.

One In A Million said...

Beauty is indeed the number one criterion.

Although diamonds are generally thought of as not rare except for TypeIIa and some fancy colored ones they are not as common as rocks on the road.

White diamonds also don't have competition. CZ, Moissanite, zircon, white sapphire among others don't look much like diamonds. Synthetic diamonds are usually colored. So I guess the demand for white diamonds will never dip to an all time low.

However lab created colored stones are readily and affordably available. I always wanted to own a pigeon blood red ruby, colombian emerald, kashmir sapphire and bixbite but I can't afford natural varieties so my only option are the lab created gems which looks as good as the finest of the above mentioned colored gems.

Pearls also don't have much rivals. Majorica doesn't look much like the finest pearls.
Coincidentally white diamonds and white pearls are the most popular of gems. What makes a gem popular? Like we always said beauty is the no.1 criterion maybe the two gems are the most beautiful in people's eyes creating huge demand. And they are used on many occasions and today diamonds have been used as accents in cars, dog jewelry, cellphones, pens, Victoria's Secret Fantasy bras and everything else.

Honestly I've been waiting for the moment when high quality colorless synthetic diamonds will be available in huge quantities because I find the Apollo diamonds still quite pricey. When this happnes I believe it will have a huge impact on diamond prices. I'm not afraid of that. I already own the finest diamond I desire and can afford but I can't get enough and I don't have the money so I'm waiting for the synthetic. But if colorless and single refractive Moissanite and non-fluorescent will be avilable then much better.

Colored stones manage to hold their value even though lab created ones are avilable so I guess the finest natural untreated white diamonds would survive too. It's about pride of ownership. You cannot be really proud of something created inside a laboratory which can be mass produced. You can only wear them as accessories and lie to your friends they are real but everytime you look at the genuine article they will give you the kind of feeling that is hard to describe. It took Mother Nature 3.3 billion years to create the finest gems and by knowing that it is real then you want to treasure it because it is irreplaceable.

Richard W. Wise said...

One In a Million,

You are correct, most synthetics copy the finest. Why not?

You are also correct that no one will know that you have a synthetic gemstone, know one that is except yourself.

RW

Anonymous said...

Fascinating. The world of gemstones has always been a place to win or loose your heart and your fortunes.

Amanda said...

Thank you for this information! 





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Robin Arora said...

Thank you for the helpful information regarding gem species. Ruby Gemstone is known as the King of Gems and is my favorite from all.

Ruby Stone said...

Your method of describing about king of the gemstone is truly fastidious, everyone can be capable of simply understand it, thanks a lot.