Gems: from hobby to investment

In the 1980s, the family heirs to a ranching business in Texas discovered they owed the IRS about a million dollars. To pay the bill, either had to sell the family business or sell off the gem collection their father's gem stach. He had kept hundreds of gems. The family was fine with this option. They had always thought Warren Hancock was a little crazy for spending all that money on colored diamonds.

They shipped off the lot to Sotheby's in New York, hoping that selling them might make a dent in the tax bill. Sotheby's picked out three and sent back the rest. On April 28, 1987, an agent allegedly representing the Sultan of Brunei bought the largest of the trio, a .95-carat red diamond, for $880,000, plus a 10 percent buyer's premium.

That set a world record of $926,000 per carat. With the sale of other two stones, Sotheby's was able to send the Hancocks a check that covered the taxes, along with some serious change left over. The Hancock Red remains a standard in the world of colored diamonds -- as revered as the Hope Diamond among gem collectors.

Hancock had bought all three diamonds from his local jeweler and paid retail prices for them, an investment of less than $20,000 combined.

Those are the kinds of stories that fuel the desire to invest in gems. But the people who live and work in this circle make it very clear: Buying gemstones should be something you do because you like them. It should never be a major part of an investment strategy.

"If you want a nice sapphire for your wife, you want to buy the best sapphire on earth," says Richard W. Wise, a graduate gemologist and author of Secrets of the Gem Trade: The Connoisseur's Guide to Precious Gemstones. "That's very nice and I'm sure your grandchildren will appreciate it. But if you buy it at Tiffany's and think you'll turn it over for a profit in 10 years, you're deluding yourself."

Financial adviser Fred Siegel of New Orleans tells people who call his radio show to inquire about investing in gemstones that they should stay away from them unless they already have enough money saved for retirement in a well-rounded portfolio.

"If you're taking care of that, fine, then it can be a nice investment," he says. "Gems have nice stories with them, and they're beautiful. Get a good gemstone and you have something of beauty. But it's not like a stock and some other things that you can tell the value quickly."

In fact, gemstones are about as far from stocks as you can get. Stocks, bonds and CDs are perfect markets, with known values at any given time and set prices; investors can buy and sell whenever the market is open for trading, Siegel says. Gems are an imperfect market, with a sale possible only when there is a willing buyer and all prices open to negotiation. Other imperfect markets include real estate, art and antiques.

"Does it mean you shouldn't invest in imperfect markets?" Siegel says. "Not at all. You either have to gain the expertise or get help from someone who is an expert that you really trust."

The expertise includes an understanding of how stones are bought and sold.

"The average jeweler will sell a stone for two or three times what he paid for it wholesale," Siegel says. "He'll buy a stone from an individual for half of wholesale. It makes it hard to make money unless you really know what you're doing."

As an investment class, gemstones and diamonds are considered hard assets, as are gold and silver. Hard assets as a group have a place in any investment portfolio, but generally not more than 1 to 3 percent, says Tom Cloud, president of Georgia-based Turamali Inc., who has been investing in gems and jewelry since the late 1970s.

It's definitely not an investment you make with an eye toward turning a quick profit, he says. Like many other experts in gemstones, he says investors should expect to hold the stones for 10 years or more to see a return on their investment.

When you're shopping for a stone, it's important to understand that many colored gemstones have been treated and enhanced. That's perfectly acceptable, says Antoinette Matlins, a noted Vermont-based gemologist and author of "Colored Gemstones."

"Emeralds have been oiled for thousands of years; sapphires and rubies have been altered through heat at least since Roman times," Matlins says. "Treatment processes allow you to have a product formed by nature but improved for clarity or quality. Had we not begun routine treatment, no one but kings and queens and the world's wealthiest would wear them today."
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Today, natural unenhanced rubies, sapphires and emeralds are among the rarest of all gemstones, Matlins says. If a seller says a stone is natural or unenhanced, make sure he has the certification to support that claim and make the sale contingent on an independent, third-party analysis. Walk away from any seller who won't submit the stone to a lab for a grading report.

In the United States, the most respected labs are the Gemological Institute of America, the American Gemological Laboratories and American Gem Trade Association Gem Testing Laboratory, she says. Many sellers will present their reports with the stone, but it's not uncommon for a buyer to then send the stone with that report off to another lab to make sure the stone in the report is the one that's being offered for sale.

The cost for the report starts at $100, plus shipping costs of the stone. For a 1-carat diamond, expect to spend about $330, with the cost going up with the size of the stone, says Robert Genis, editor of The Gemstone Forecaster, a quarterly newsletter for gemstone collectors and investors.

"That independent, third-party grading is the key to investing or collecting stones," he says. "If you look at all the auction catalogs where goods are selling for $100,000 to $200,000, they pretty much all have GIA or AGL certification."

The report won't tell you how much the stone is worth; that's the job of an appraiser. It will tell you what kind of stone it is, how much it weighs, how it's been cut, its color, tone and brilliancy, the imperfections in the stone on a standard grading scale, any treatments that have been done on the stone and the country of origin.

For detailed information on what the report data means for colored gemstones, visit the American Gemological Laboratories site. For diamonds, check out the GIA's tutorial. You can also learn about gemstone standards at Diamond Guide (click on the Buying Tools checklist), or check out the tutorial on gemstone clarity, color, cut and carat at the Pricescope Web site.

Much of a stone's value will be based on subtle color differences, Matlins says, that can change with lighting conditions. Before you buy a stone, look at it both in daylight and lamplight. Indoor light is the best light for viewing rubies because that light is at the high end of the red light spectrum. Buy a jeweler's loupe, a 10X magnifying glass that will help you detect noticeable flaws and polishing marks.

If you don't have the background or don't want to take the time to learn, you need a knowledgeable expert that you trust to make the assessments for you, much as you would a stockbroker or mutual fund manager for equity investments.

The people who don't want to take the time to learn about gems are in the minority, Genis says. Most of today's buyers are collectors with a passion for stones and want to know everything they can about them.

"Some of my clients would never part with these stones at any price," he says. "It's an addiction. They become obsessed. Thank goodness -- at least for me."