Investing in Gems – Part 2: Is it a good idea?
Gems and jewelry may seem like good investments. These are small items, quite valuable for their size, relatively durable, and easy to store. And if they're valuable now, they're bound to be worth more as time goes by.
Surprise: that last statement is not true.
Our last JII gave examples of scams in which a consumer is seduced into purchasing ("investing in") gems with a promise of high returns from their future sale. Those were deliberate frauds. The overpriced gems were of low quality, the promised future sale never occurred, and sometimes the gems that were paid for never even appeared.
But how about if a consumer buys:
- from an honest jeweler
- who is selling at an appropriate price
- and the gem has a reliable appraisal and lab report.
Isn't that a good investment? Well, if investment means making a profit later, probably not. Here are some considerations.
Emerald became the "in" gem
Gems do not automatically appreciate in value.
Gems and jewelry are commodities. Regardless of their purchase price, they are subject to market forces, and the market can be fickle. Prices of gems and metals fluctuate due to political crises, weather events, technological breakthroughs, and cultural trends.
A gem can become popular because a movie star wears it, for example. The emerald earrings and matching ring that Angelina Jolie wore to the 2009 Oscars transformed the emerald market. Emerald dealers reported a surge in sales, and it's likely that retail prices increased to take advantage of the popular interest while emeralds were "in."
But at least a diamond is (valuable) forever – isn't it?
Alas, the value of mined diamond has been plunging over the past several years, due to competition from lab-grown diamond. LGD is chemically and optically the same as mined diamond but way below mined diamond in retail price, sometimes as low as 10% of the price of mined diamond of similar quality. That low price tugs at the pricing of mined diamonds, with the result that the valuation of both mined and lab-made diamond is still in flux.
Since valuations can go up or down, insurers are wise to update diamond valuations at least every couple of years.
Not all gems are valuable.
Words like ruby, sapphire, emerald and diamond do not connote value; they are just names given to minerals. The people who fell prey to gem scams were taken in by a false association. It's the quality of a gem that determines its value in the marketplace, and quality can range from spectacular to trash. It takes an expert to determine quality and assign an appropriate valuation.
Burmese ruby ring
Spectacular gems are rare.
Some singular gems known for their extraordinary beauty, such as Burmese rubies and Kashmir sapphires, will likely hold their high value or gain in value, but such gems are rare and are high-priced to begin with. The vast majority of gems sold in jewelry stores and on web sites are not in this category.
Published auction prices might suggest that gems are a smart investment because the value rises each time the item is sold. But those auctioned pieces were exceptional to begin with, and often they were owned by a famous person, so provenance adds to their allure. Again, the vast majority of gems are not in this category.
Older is not necessarily better.
What about Great Aunt Maud's exquisite diamond and ruby necklace? Make no assumptions. Just because jewelry has been in the family for years doesn't mean it's valuable. Jewelry styles may go out of favor. Regardless of age or sentimental value, a piece that's considered "old fashioned" may have no buyers in today's market and therefore be of little value. Even the cut of a gem can be outdated, as new technologies and expertise allow for more attractive cutting of the stone.
"Antique" or "estate" jewelry needs a current appraisal to attest to the quality of the gems and jewelry and to assign a valuation in the current market.
Uncut diamond
Uncut stones are a bad risk.
Occasionally a naïve buyer will purchase a chunk of rough gemstone. The piece is of a good size, low-priced, and—the seller tells the buyer— "you can always have it cut later." Many consumers don't realize how much color, clarity and especially cut determine a gem's valuation. Not to mention how difficult and expensive it is for a lay person to simply "have it cut."
Insurers should always be wary of clients who want to insure uncut, unpolished, or unmounted gemstones that are being held for some future use or sale. The intention may be deliberate insurance fraud.
Loose gems are a bad risk.
Jeweler's Prayer
Sometimes consumers will buy loose gems at what appears to be a bargain price. Then they wonder why they have difficulty getting the stones insured.
Are you familiar with "the jeweler's prayer"? Suppose the owner of a loose gem is admiring his purchase when he happens to drop it. The precious object buries itself in the nap of the carpet or hits the floor and bounces—where? Suddenly, the owner is down on hands and knees with very great concentration.
Loose gems are too easy to lose. A commercial jewelry business has dedicated surfaces for examining stones, good safes with controlled access, and strict record-keeping, all of which guard against casual losses. The average consumer has none of these, so many insurers consider covering loose gems a bad risk.
Finding a buyer
When it comes to gems and jewelry, consumers are really outside the marketplace. A consumer who buys jewelry at retail and expects to resell the item at a profit some time in the future is basically in competition with jewelry businesses and internet sellers.
This is not an advantageous position to be in, since jewelers buy at wholesale and internet sites are bargain-oriented. Also, jewelry retailers have a sense of the jewelry market and trends, while the average consumer lacks this experience and expertise.
When clients want to insure jewelry they've bought as an investment, be cautious. Be especially wary about gems or jewelry purchased under unusual circumstances, such as by mail order or while traveling or in a deal through some personal contact.
For "investment" jewelry, as for all items of high value, it's important to have an appraisal from an appraiser independent of the seller. The most reliable appraisal is written by a qualified gemologist (GG, FGA+, or equivalent), preferably one who has additional insurance appraisal training.
A jewelry "investment" that doesn't work out well may turn into a mysterious disappearance. In case of a loss, the insurer is the buyer. This possibility is worth remembering when you are faced with insuring jewelry bought as an investment.
The appraisal's valuation is based on the current replacement cost. It does not say anything about value at some future time, perhaps 10 or 20 years from now. It's unwise for an insurer to automatically increase valuations from year to year. Since accurate valuation can rise or fall, we recommend updating the valuation of gems and jewelry every couple of years to keep premiums appropriate.
Be cautious regarding jewelry purchased at tourist locations or from secondary sites like eBay. These sellers may blur the valuation difference between mined and lab-made diamond, or offer poor quality gems, counting on consumers expecting bargains and being naïve about quality.
If you have reason to believe the lost jewelry was "an investment," be especially cautious in settling the claim. Use every means possible to substantiate the quality and value of the jewelry, and utilize your SIU department.
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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