Investing in Gems - Part 1: Scams
"I keep getting calls from a 'diamond broker' to buy pink argyle diamonds because the mine in Australia is shutting down so I should BUY NOW. Is someone trying to scam me?"
The question appeared on a website open to public discussion. A respondent wrote back — and you can almost hear him sigh: There is no group of benevolent people out there just calling strangers to give them great investment tips. If anyone except your own trusted financial adviser, who has actually made money for you in the past, calls you to invest money, it's ALWAYS a scam.
Yet telemarketing gem scams keep resurfacing and thriving. Just last month the head of the impressively named Paragon International Wealth Management, Inc., was sentenced for defrauding some 200 victims in the U.S. and Canada over a period of five years. Paragon would make unsolicited calls persuading people to invest in pink diamonds. After the first small investment, the company would often send a real pink diamond, along with a legitimate certificate, as a show of good faith. Then larger investments would be urged, and more money would be "invested," but subsequent diamonds never appeared. People maxed out their credit cards and depleted their life's savings before the culprit was caught and the scam closed down.
In another instance, a woman in California received a phone call from a man who identified himself as representing the Zurich Exchange in Ontario, Canada. He offered to sell her a fully certified natural ruby for $1,650. She was interested because a few years earlier she had bought from another investment gem seller a sapphire that she was convinced was appreciating in value.
The caller said he had a Japanese investor interested in buying the pair of stones and she could make a handy profit. She sent in her money. The ruby arrived. It looked a bit fuzzy, she said, but it was sealed "to retain its value" so she couldn't be sure. However, it arrived with an official-looking certificate from Gem Identification Services. She subsequently bought two more gems. But time passed and the caller was never quite able to sell any of the gems for her.
Eventually she became suspicious and had the stones appraised. Experts estimated her ruby's value at $50-$400 per carat, rather than the $3,750 per carat the caller had promised.
In some scams, gems that are paid for simply never arrive. The fraudsters always have various excuses for delays in delivery, and they sometimes warn the purchasers to keep their investments secret. And many do. Victims are often embarrassed about being defrauded, have lost large sums of money, and feel they have no recourse.
Tourists are also an easy target. In one common trick, a new acquaintance—perhaps a tour guide, or the desk clerk at the hotel—lets the traveler in on a get-rich-quick scheme: buy rubies and sapphires in bulk here, where they are so much cheaper, and sell them at a profit when you get home. Payment must be in cash, because this is such a deal. Once the tourist agrees, the suggestion is to ship the gems direct in order to avoid customs problems. Needless to say, the gems never arrive, or they turn out to be glass.
Gems seem to have an aura about them that draws people in, so they readily hand over large sums of money. Buyers seem to believe gems have implicit value, and increasing value, without any knowledge of how gems fare in the marketplace and how their value is determined.
These stories carry some basic investment warnings:
- Ignore cold calls. Or strangers who have a special deal for you. As that web respondent pointed out, don't expect reliable investment tips from benevolent strangers.
- Don't buy gems from a company you've never heard of, especially based on a phone call from a stranger. Check out the seller.
- Never assume value. The only way you can know the value of a gem is from an appraisal by a trained gemologist appraiser who is independent of the seller.
- A "certificate" is only as reliable as the lab that issues it. Anyone can put a masthead on a sheet of paper and pass itself off as a gem grading lab. Check out the lab.
- Don't be convinced the gems will increase in value based on the word of a stranger.
In short, a potential gem investor must be wary to avoid deliberate cons, untrustworthy sellers, and misrepresented gems.
But: What if a gem is of good quality, purchased at a reasonable price from a reputable source, and has a reliable lab report and appraisal? Is that a good investment? This is the topic for our next JII.
With scam purchases, the sales receipt is obviously of no relevance in substantiating the worth of the gem and would be a poor basis for insuring it.
What about the certificate? The document that the ruby purchaser received was (purportedly) from Gem Identification Services in New York City. The president of GIS said, "Our function is to provide an identification of stones and a cosmetic description of their appearance. It is not a quality analysis."
The document the buyer should have gotten was a proper appraisal, describing the gem in detail and giving a realistic valuation. And the gem should not have been sealed, so the buyer could get an independent appraisal to verify the gem's quality and valuation.
The best appraisal includes the JISO 78/79 appraisal form and is written by a qualified gemologist (GG, FGA+, or equivalent), preferably one who has additional insurance appraisal training, such as a Certified Insurance Appraiser™.
On a damage claim, ALWAYS have the jewelry examined in a gem lab that has reasonable equipment for the job and is operated by a trained gemologist (GG, FGA+ or equivalent), preferably one who has additional insurance appraisal training, such as a Certified Insurance Appraiser™.
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