In this article we expand on a niche; investing in gemstones. This builds on the ground layer laid out in our very first article.

In 1 Alternative ways of investing we briefly discussed purchasing jewellery as a form of investment, here we take a good look at a part of that jewellery; the stone set in it. We use diamonds as an example very often in this article, for no other reason then their fame and level of specialised valuation, in theory every stone can become an investment. A difference with the earlier article is that this one does not consider the precious metal value of the jewellery that the stone is set in, it only deals with the stone itself.

It should be noted that there are genuine differences between stones, semi precious gemstones and full gemstones; in this article we will ignore this, since it is about the monetary value of all stones and not a geological survey. When it comes to colour, we only assumes natural cases, as any stone can get any colour with the right treatment: Colourless emeralds are damaged on a microscale and dyed green to increase their value.

4C

These parameters (cut, clarity, carat and colour) are largely known for determining the value of non-coloured diamond, but they also apply to other stones, even to coloured diamonds, also referred to as fancy.

Cut

This refers to two distinct but combined features; shape of the stone (in which it was cut) and quality of the cutting itself. Each stone has its industry standard cut, to optimise light effect when viewing it, for diamonds this is a round brilliant, while emeralds have a cut form named after them. In practice, it is likely that the cutter examines the stone and determine which shape it should have largely based on how many carats it can have without showing severe faults or losing clarity. If a choice has to be made between removing a mild grainy surface or less carats, the grainy surface will remain there.

Quality of the cut is pretty standard; a botched job is botched job. For investment purpose, the highest cut is not per definition the best choice, because the premium goes up exponentially.

Clarity

Some stones are never fully clear, but still highly desirable, such as emeralds. Prices sky rocket for nearly clear samples of the right colour and such. Others are fully opaque but still worth quite a bit. It really depends on the stone whether it should be clear or opaque. Translucent is in between clear and opaque, there are few stones in which that is considered optimal; amber is such a stone although there is nothing stone about it (it is petrified tree sap).

As with cut, the higher the more expensive and with big steps for the absolute top. A completely flawless stone truly is very rare.

Carat

A common way of referring to the weight of each stone, a single carat is 0,2 grams (metric system). This is weight method largely a industry habit from many centuries ago, but understandable as 5 carats does sound better than 1 gram. Larger/cheaper stones can be expressed by more common weight standards, as the amount of carats become huge. Please be aware that even the finest diamond, below 0,25 carat, will be retired to the industrial use pile, without added value to you; there is no value for any stone below 0,25 carat!

Colour

Each stone has its most desirable colour, usually a local variety due to adding of a certain element (this is referred to as pollution, because it deviates from the pure chemical composition of a stone). Some stones have multiple colours, diamonds are largely valued for having no colour, while a gorgeous natural blue variant is worth considerably more (we are talking absolutely no hope of purchasing such a stone without a millionaire inheritance, or winning the lottery).

Desirable colours

As stated above each stone has its known colour, but there are general colours that are valued highly; blue chief among them. This is seen in two of the original big five: Diamond, sapphire, emerald, ruby and amethyst. Sapphire is generally considered, and highly priced as, blue, despite its rarer and, according to some, more beautiful yellow variant. Amethyst is not entirely blue, likely purple, but pretty close in resemblance. Naturally blue diamond are valued even greater. One thing to note with the big five in gemstones, rubies are actually sapphires in a pink (officially it should be the colour of pigeon blood) colour, so there really only are four and amethyst was removed after finding enormous deposits of it in South America.

A good example of colour being deemed more important than rarity is amethyst; there is a green variant found in only one place, that is not worth more, it depends on the quality.

Blue is not the only common colour, also red and colourless. Red makes sense psychologically, as it infers authority and is highly noticeable. Presumably because of the evolutionary connection to fire. Colourless is also understandable because of its neutral tone and will fit anywhere. For champagne coloured diamonds, there was a massive marketing campaign some years a go, that still results in a higher price.

Profit per supplier

The reason that gemstones are so expensive is partially profiteering, not least the jeweller who sells it to you, but there are many more steps:

1 First a miner sells it to the mine owner, or gets paid a measly wage. Doubt the miner gets paid much for any stone found, even a high value piece.

2 The mine owner sells it to a broker.

3 The broker sells it to a artisan who turns it into a jewellery stone, the type you see in fancy shops. Despite not adding value, the broker does have a commission percentage.

4 Now the stone goes to the goldsmith, for setting.

5 He sells it to the jeweller.

In all these steps some form of value added tax is accumulated, and possibly import/export tariffs. This all on top of regular costs and profit markups. In addition, the jeweller does not sell a lot of jewels to a lot of people on a daily basis, which means a high profit percentage, on top of a huge insurance premium+security (insurers demand a lot of security to cover their risk).

Market expectation

Value is likely to increase, at minimum with inflation, particularly full costs of seller, assuming that average wealth does not decrease. If it does, prices will likely go down, due to decreased demand. Should also be noted that gemstones themselves are hoarded by large corporations, to keep prices up. If they were to release their full supply, a severe drop in prices would happen, crippling the market.

A large anti corruption investigation has in the past also reduced prices, but in the long term these actually increase growth and overall demand for pretty much everything; therefor increasing prices after a wait.

Rarity

Some stones are rarer then others, which does affect the value. There are also variances in rarity within stones: Gem quality stones are considerably rarer in some stones than in others. Diamonds for instance are not that rare, they are literally used on an industrial scale for their superior hardness. But a high quality diamond is very rare, though not as rare as you would think based on their exceedingly high prices.

Here are a few examples:

• Tanzanite is only found in a single foot hills region, so is exceedingly rare in the long term.
• Sapphires have two variants that are very rare; the colours yellow and padparadscha (a type of pink-orange, which actually should also come from Ceylon to be truly genuine).
• Quartz, though exceedingly common, to the point of it being a large percentage of the earth crust, certain variants and colours have their own gemstone name and some of them are rather pricey. If you are interested, look up how many variants are listed by their own name and you will be surprised.

Should be note that sometimes new loads are found, making the stone less rare and expensive. In the distant future, exploration of region currently deemed unprofitable, could reduce rarity for many stones.

Synthetics

Not that long ago we could only find stones in nature, currently humans can also make any gemstone. These stones are virtually identical (small variances do exist but these require a full professional analysis of the item). They are by no means fake, simply man made over natural. Quality does seem to have a higher baseline, as natural influences cause both most imperfections and irregular growth. This also makes them easier to work on.

The author does consider them to be full gemstones, but certainly understands the following: A man made gemstone is less valuable because it has not taken millions of years to form, or is of a limited supply. The latter is also why they are cheaper; anyone can buy or order one online, you actually have to be careful in avoiding them.

Anything stated above about value does largely apply, rarity is the main exception as synthetics have no real supply limit. They still have to be a good  quality and cut in a equally acceptable quality to be worth more than a few bucks: Lesser pieces do sell for lower prices just as natural stones. The difference in prices is just less dramatic because of the lower base price of synthetics. Flawless stones are still very rare, although that might change as production methods improve.

The example of a blue diamond being exceedingly more expensive is a good example of decreased rarity resulting in a decreased price: A synthetic blue diamond is not a lot more expensive than any other synthetic diamond of the same size and quality.