Making Money Investing in Gems: The Top 5 Rules

"Investment Grade" is a Dirty Term

Before we get to the rules, be aware that the term "investment grade" has no clear meaning when applied to gemstones. Like the terms "precious" and "semiprecious" stones, it's too broad and has too many exceptions. For example, a gem with excellent grades in all Four Cs may be beautiful and have a high price tag, but you may never recover your costs if you try to resell it. Nevertheless, such gems are sometimes described as "investment grade." The United States Federal Trade Commission (FTC) frowns on the use of the term. Although it's not illegal to use the term in advertising, it's been so abused by fraudulent salespeople that many consumers cringe when they hear it.

If you're a gem dealer or plan on reselling gemstones, you can ruin your reputation by describing gems as "investment grade." So, don't do it.

Now, let's get into the rules.

Rule #1: Control Your Cost Basis

You have to "buy right." It's possible to make money investing in gems, but your cost basis in a given gem has to allow for a built-in profit the day you acquire the gemstone. You must have a margin of safety. Paying the right price is the single largest determining factor in whether you'll generate a good return on investment. As with any investment, this requires that you be knowledgeable and exercise a good deal of caution and common sense.

Find the Right Sources

You can't pay retail for a gemstone and expect to sell it for a profit in a few years. Buying low means seeking out wholesale sources. Do your homework. Your best prices will come from primary "Tier 1" dealers, those who mine and cut the stones themselves. Secondary dealers buy from other wholesalers (usually primary dealers) and resell them, still well below retail. In addition, you'll get better prices by purchasing lots rather than single stones. Currently, you can find some good sources, both primary and secondary dealers, on the Internet. Most cities will have some gem wholesalers, and trade magazines carry listings for them, too. If you're knowledgeable enough, you can shop for preowned gems at flea markets, pawnshops, and estate sales.

You can also develop networks of jewelers who wish to sell or otherwise liquidate colored gems they come across. Sometimes, you can find gems considerably below current values from these sources. However, you must have the expertise to identify gems and distinguish between natural and synthetic stones. Plus, you must be prepared to do a lot of legwork. Those who love "the thrill of the hunt" will enjoy this method.

A Good Deal on a Spinel…

Here's an example of how some knowledge of gemology led to a good investment.

A jeweler with whom I've done a lot of business offered me this eye-clean, 6.42-ct spinel for $155. He described the color as "an unusual gray/green/purple" and thought it looked more like an unheated zoisite (tanzanite) than a spinel.

He emailed me these two photos.

This color is quite typical of spinel. In any event, I knew this was a good buy for a larger spinel, even though the color wasn't ideal. Spinels usually have inclusions. So, since he assured me it was eye-clean (with no eye-visible imperfections), I picked it up.

I'm glad I did. Turns out, it looks WAY better in person. Plus, it turned out it was not a spinel at all.

… Is an Even Better Deal on a Sapphire

My friend, gem-cutter Dan Stair, determined this stone was an unheated sapphire! He noted that the stone had the correct refractive index for sapphire as well as birefringence. (Spinels don't have birefringence). Although the stone had no eye-visible inclusions, the inclusions it did have, under magnification, looked like those found in sapphire.

Here's what it looked like when I received it, photographed by Dan Stair. As you can see, even a good picture can add value. Can you believe this is the same stone pictured above?

A 6.42-ct blue sapphire is much more valuable than a 6.42-ct blue spinel. Not a bad deal. But that's not the end of the story of this investment. We'll come back to it when we discuss Rule #5.

Look Beyond Cut Gemstones

You don't have to restrict your searches just to cut gemstones. Rough gems, mineral specimens, and finished jewelry all hold investment potential. However, each of these represents a specialized area of expertise, so focus your attention on the one that interests you most.

Rule #2: You're Unlikely to Recover From a Bad Buy on a Gem

As a rule, gems increase in value at the rate of inflation. This means you should assume that a bad deal today will be a bad deal in 3 weeks or 3 years when you eventually sell.

Finding Another Fool is Harder Than it Seems

When I make a bad buy on a stone or make a mistake, I prefer to take my licks quickly and sell. Finding another fool to buy a stone at my inflated cost basis isn't something I've ever been particularly good at. However, some people can do it. If you're willing to hang on to a stone indefinitely, you may get lucky eventually. You might find someone willing to adopt your mistake. You might even make a profit.

My advice: move on quickly and try to find the next deal.

Gems Might Rise in Value… and Then Fall Drastically

Sometimes, things turn out really well if you hang on. In the gem world, in my experience, that is the exception, not the rule. Sometimes, things can even get worse. For example, blue topaz used to be rare and demanded a fine price. In the 60s, a technique for turning common white topazes into blues became available. As a result, these gems suffered a massive loss of value. 

Remember, lacking the means to predict the future value of a gem, Rule #1 always applies. Buy as low as possible.

Rule #3: You Need Buyers Who Can Sell Your Gems at Retail Prices

Why? So they can at least pay you full wholesale prices for your gems.

Likely buyers include jewelry stores, auction houses, and online auctions. Keep in mind that, unless you own a business, you're not likely to get a retail price. Also, making connections to these potential buyers isn't as simple as calling your broker. Be prepared to find your own buyers.

You Need Sales Skills for Investing in Gems

Most gem dealers purchase quantities of great material and have it available. They have good relationships with retailers (like jewelers), who call them when they need something. The dealers then send some stones from their inventory to the jeweler, who selects one or none to purchase and sends the rest back. (This is a process known as "memo").

The jeweler will pay full wholesale in this instance because they already have a willing buyer. The gem dealer will get full wholesale because they took the risk and held onto the gem and had the sales channels to sell the gem when the opportunity arose. Establishing this type of business relationship and level of trust takes sales skills.

If you have weak sales skills, don't invest in gems.

Sales Skills Don't Negate the Rules

Rule #2 still applies, because Rule #2 has to do with having too high a cost basis to begin with. However, if you followed Rule #1 and have an appropriately low cost basis, then hanging on to inventory makes sense and can help you maximize profits.

Rule #4: Carefully Consider Your Markup Before You Buy Gems

Lower priced gems receive a higher markup (frequently five times or more) than expensive gems. For example, when jewelers order stones for a customer, they may have a set minimum price. It doesn't matter if the stones cost one dollar or five, jewelers may feel they need a minimum of ten dollars just to justify the labor of ordering the stones.

Markups May Decline for Expensive and Popular Gems

Other gems usually receive a markup three times over wholesale. As things get more expensive, the markup can get lower. Anyone would gleefully accept a 25% markup on a $30,000 alexandrite. The diamond market is so competitive that markups frequently drop below 10%.

Should You Focus on Lower Priced Gems?

Now, consider markups from an investment point of view.

The greater the difference between wholesale and retail, the better your chance of making a profit. (See Rule #1). It's also easier to find buyers for lower priced goods. However, you can take this too far. It may be easier to find 25 buyers for $200 stones than one for a $5,000 stone, but it might not be easier to find 5,000 buyers for a $1 stone.

You just have to decide what type of business you want to be in.

Rule #5: Consider Adding Value to a Gem Deal

In some cases, recutting and repairing gemstones can improve your profit potential. Polishing, jewelry setting, and marketing can also make your gemstones more appealing to your prospective buyers.

There are two processes through which gems take a substantial jump in price: between rough and cut and between loose gems and finished jewelry. These involve more effort, but they're some of the best ways to increase gem values.

From Rough to Cut Gems

With an investment of labor, a lapidary (gem cutter) can turn low-value rough into high-value finished gems. The trick here is to buy your rough at a price that allows enough markup to justify your labor and learning to cut in a reasonable amount of time. If you're not "cut out" to be a lapidary, you can have others do the work for you. Again, you need to do your homework, but taking a stone from rough to cut is one of the most direct means of adding value to your gems.

Gem Setting and Jewelry Making

Although setting stones also requires special skills, it frequently takes less labor than gem cutting. Again, if you're lacking the skills to do it yourself, you can contract out this work. Finished gemstone jewelry has a larger market than loose gems, so that will give you an advantage when you want to sell your investments.

Recutting Gemstones

An experienced lapidary can recut an existing gem and often improve its optical properties and, therefore, its desirability.

Let's return to that sapphire I discussed in Rule #1.

Gem-cutter Dan Stair evaluated the gem's cut. Here are some of his notes:

The top isn't too badly done, though it has some mild polishing streaks and micro-chips on some of the facet edges. The bottom could be given a partial recut that would make the stone look a LOT better, with minimal cost or weight loss. Or, it could be completely recut. Using a different design might push more of the blue in from the sides and improve the color slightly. This stone has a nice, deeper, tanzanite-like color and color shift (more purplish under incandescent light). This whole stone could also be recut into a very pretty round with only a slight hint of gray. It will look way better than most.

So, after investing two hours to recut just the pavilion (bottom), here it is.

My cost basis for this (now) 5.80-ct sapphire is $235 total, or $40 per carat. This stone should wholesale easily for $350 per carat and retail for $1,000 per carat!

Additional Reading for Adding Value to Gems

If this type of deal is your cup of yogurt, we have two additional articles that will interest you.

• Before and After: Pictures of Repaired and Recut Gems
• How it Works: Recutting Gems to Maximize Value