May 14, 2011

Investing in Gemstones With Clarity and Caution

The Gemval Aggregate Index has outperformed the Dow Jones Industrial Average for the past five years or so.

With continued volatility in the dollar and concerns over inflation , don’t be surprised if some of your clients ask you about investing in gemstones.

Anecdotally, at least, gemstones appear to be attracting more interest as a potentially profitable collectible. Part of that interest stems from headline-grabbing auction results, such as the $45.6 million sale of a rare pink diamond at a Sotheby’s auction in Geneva last November.

It’s not just the rarest stones increasing in value: Overall gem prices have increased steadily in recent years, as well. For example, from July 2005 to May 2011, the Gemval Aggregate Index, which tracks prices for 26 gemstone standard specimens, has outperformed the Dow Jones Industrial Average while avoiding the equity market’s volatility.

Some experts have expressed a bit of skepticism over the Gemval numbers but agree that gem prices have been heading higher. “There’s no question that stones have gone up,” said Richard W. Wise, a graduate gemologist, president of R. W. Wise, Goldsmiths Inc., in Lenox, Mass., and author of Secrets of the Gem Trade: The Connoisseur’s Guide to Precious Gemstones.

“There have been auction records for Kashmir sapphires, for colored diamonds, for Golconda diamonds, one after another over the last few years, Burmese rubies, Colombian emeralds. Of course, these, bear in mind, are auction records so that’s only one portion of the market but there’s no question that gemstones have increased in value,” Wise said in an interview.

Does it make sense for your clients to move into investments that sparkle? Probably not, he says, unless they have access to wholesale markets or are very long-term investors, because the spread between wholesale and retail is wide.

“You can’t pay 50% above wholesale to a jeweler and be talking about buying a gemstone as an investment,” Wise explained.

When selling, most sellers are forced back into the retail channel where they can expect the price they’re offered to be substantially below the prevailing wholesale cost. Owners of more valuable gems and jewelry — which Wise calls “important stones”— have a better chance of working with an auction house. However, he adds, that market typically is limited to stones worth more than $500,000.

It is possible to make investment profits with gemstones, says Wise, by buying exceptional stones at a fair price and holding them for at least 10 years.

Paying a fair price — i.e., closer to the dealer’s or jeweler’s cost — requires spending more money so the dealer/jeweler will reduce the mark-up. If your client wants to create an investment portfolio of stones with low acquisition costs, Wise says $5 million is a good starting place to hire a jeweler with his experience and expertise.

“Five million dollars and we can talk a small (mark-up) percentage,” he says. “You guarantee me that you’ll buy $5 million in gemstones, I’ll be happy to work with you for 10%. But you’re going to pay me that 10% on the $5 million even if you don’t spend the $5 million ... Otherwise, it’s not worth it to me – or to anybody else either.”

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