Collecting & Investing in World-Class Colored Gemstones

By Jason Stephenson  
Photographs by Wimon Manorotkul 

December 2008

As we watch the world financial markets fall and lumber along the bottom, we begin to consider the question, Where did this money go? Even the most brilliant financial wizards probably have a difficult time explaining every last detail and the reasons why. With all these questions in the air about investments, in the parlance of our time, it may be worth researching other areas in which to invest capital. Most financial advisors will suggest that a percentage of one’s portfolio be in hard assets, which can include colored gemstones…

Pala International is endowed with some of the industry’s top consultants and specialists in the world of colored gemstones, with 40 years of observing and experiencing the gem and financial markets as they take their course. Following are a few reflections on that experience.

Turning Gems Into Money: A Look Back

If we look far back in history we find gold and silver coins, and a variety of gems, were the means of bartering for goods and services. It was reported that Marco Polo first discovered paper currency circulating in the Mongol empire. The paper money was printed and signed by Mogul generals and accepted throughout the empire; punishment for counterfeiting was death. Polo considered this exchange of gold and rare gems for man-made rice paper to be preposterous, harboring doubts about the stability of such an intrinsically worthless monetary note. (Polo’s concern seems prescient as we look at the upside-down financial crisis that is plaguing the world today.) Nearly half a millennium later, King Louis XIV shared these same views, and late in his reign he rejected a proposal to convert to paper currency, but finally was forced to paper in 1701 only after he had bankrupted the country.

• See our reprint of Sydney H. Ball’s 1935 article, “A Historical Study of Precious Stone Valuations and Prices”

Although the inevitable evolution of the monetary system took hold, we find ourselves wondering in this time of crisis, What is the real value of money? Once we abandoned the gold standard, the value of money was based on the fiat monetary system, where notes are intrinsically useless and their value is based on trust in the system. We moved from gold and gems to paper money to electronic numbers. Our sense of value seems to be evolving farther away from real things, and is being driven by vast amounts of borrowing—and even insuring—notes that have no tangible backing.

Obviously we are too far-gone to return to the bartering system; however, we can learn from the meandering of markets and the fact that alongside the inflation and deflation of our currency, gemstones have steadily increased in value over time. With far greater historic stability than the stock market, gems have continued to captivate the human mind and hold an enormous sense of value.

We love our stocks in a bull market, but when they take a turn for the worst we loathe them and can’t wait to cleanse ourselves of the disappearing act. If we were to begin with a stock holding and a gemstone of equal value and were to follow their two trajectories, even if the stone were to lose value it still could be appreciated for its aesthetic qualities—something that can’t be said about most stock certificates.

Turning Gems Into Money: A Look Forward

“Money in a different form” — William F. Larson

Collecting and investing in gems can be a fun and exciting way to contribute to your understanding of the world around you while adding tangible assets to your portfolio that are beautiful to regard. Stop staring at your meandering mutual funds as if you’re actually going to sell out (which we all probably should have considered). Take a small portion of your hard-earned cash and buy some rock-hard assets. To help start this venture into another form of capital, here are five important steps to consider.

• Knowledge
• Focus and Funds
• Time
• Memory
• Gumption

KNOWLEDGE

Knowledge is the most important tool before, and during, your collecting process and its use can come full circle if and when you decide to sell. Gaining knowledge of the gem industry can be a very enjoyable endeavor, incorporating geography, history, geology, and sociology.

Learning and understanding the entire path a gemstone takes from genesis to marketplace can be a foundation for buying world class gemstones. Creating a world view of major gemstone-producing regions can add another level of understanding both above the ground and below.

Geologic processes that occur within the earth’s crust produce the environments by which gemstones are born. A topical understanding of rock types and formations that caused them can enhance your understanding of crystal formation and the ultimate faceted gemstone. Create a timeline of when and where gem deposits were finally exposed by man and new gem varieties were identified. Examples include the historic deposits of Burmese rubies and Russian alexandrite, and new discoveries of tanzanite in Tanzania and paraiba Tourmaline—first in Brazil, then in Nigeria, and most recently in Mozambique.

The evolution of the gem trade has taken place over the centuries right along with society as a whole. Meeting and relating to people with a fascination for gems carries on an interesting lineage of miners, entrepreneurs, businessmen, travelers, and explorers. Discovering and collecting gemstones has captivated the human race throughout recorded history. Books dating back to the 15th century and manuscripts dating back more than a millennium account for this fascination with gemstones.

From Marco Polo (1295) to Vasco da Gama’s (1499) explorations, gems have been a means of trade, a source of wealth, and candy for the imagination. Quests to amass collections of the world’s jewels, on the part of the Classical Romans to the relatively recent European royal families, have been endeavors at the heart of man. Prominent independent collectors, like J. P. Morgan and Tiffany’s Dr. George Frederick Kunz, have lead us into the modern age of collecting and expanding our appreciation for all varieties of gems. A collector today may not only have his or her ruby, emerald, sapphire, and diamond, but fine examples of spinels, garnets, tourmalines, beryls, and opals.

• A great place to start mapping the major gem producing areas is Peter Bancroft’s classic book, Gem & Crystal Treasures (currently out of print). There are a variety of books on gemstones for all levels of interest. Let us know if you need some help finding the right book for you
• Gaining an understanding of gems themselves can be acquired through training programs such as Gemological Institute of America's on-site and correspondence courses. Also see Pala’s Gemstone Buying Guides and our article on Enhancements
• Learning how to evaluate quality and corresponding market value has to be done at trade shows, jewelry stores, one-on-ones with gem dealers. Also see our article, “Judging Quality: The Four C’s”
• The Guide to Wholesale Gem Pricing provides unbiased information based on market research
• Pala International belongs to several trade groups, which offer their members useful information

FOCUS AND FUNDS
The sooner you can focus on the type of gem collection you want to assemble the better. Allocating the appropriate funds in the pursuit of a clear goal can enhance the overall value of a collection. For example, if you had a representative gem from all major gem localities within the U.S., your collection would be far more valuable than a randomly assorted collection of gems from all over the world. Collecting with a purpose will not only add value but will enhance the intrigue vis-à-vis other collectors. No matter the level of collector you are, there are a variety of gems at all price levels that can be bought and sold in the marketplace.

TIME
Time is of the essence when making decisions to buy.

New finds often are localized in small areas within a single mine or gem pocket, and the color and characteristic of the gem can be unique and rare both locally and globally. When a given section of earth is completely sorted through there may be only a quantifiable amount of material. If this material is a rare gem or a unique color variety there may be hidden value.

Granted, buying at any time can be a gamble, but buying a gem that is new can be a wise investment. A perfect example of this is the find of neon-blue tourmaline in the state of Paraíba in Brazil. When this material first hit the market, dealers and collectors were shocked that tourmaline could go for $800 a carat. Many passed on the opportunity but wished they hadn’t in retrospect. Today the original paraiba tourmaline from Brazil can command more than $20,000 a carat for larger, finer stones.

On the other side of the coin, being patient also can pay off. Letting the full bounty of a deposit unfold may be smart because a massive amount could eventually level off at a price the market can bear.

MEMORY
Creating a database of color in your mind is an invaluable tool when trying to evaluate a gemstone. Subtle differences in color can have a drastic effect on pricing. Specific colors and color combinations together with saturation within a species can have a dramatic effect on the cost. For example, the padparadscha sapphire, featuring a combination of pink and orange, can fetch over $12,000 per carat while straight orange sapphires are in the $2,000 per carat range. The ability to distinguish purity of color on the basis of hue, tone, and saturation can help you buy quality—maybe even pick out a unique and valuable color hidden within a large parcel of seemingly ubiquitous material.

Being able to recall a color that was very attractive and valuable and compare it to the gems you have in front of you is important for sniffing out quality.

GUMPTION
When it comes time to actually start buying, it takes courage and ambition to apply all your knowledge and simply go for it. Taking calculated risks in purchasing must be a tool employed in building a collection. Making a purchase can actually be quite gratifying—turning your money into a gem, sticking it in your pocket, taking it home, and admiring it, displaying it, and showing it off too all your friends and family can be quite a rush.

OTHER THINGS TO CONSIDER WHEN COLLECTING
 

EVALUATING QUALITY
Because gemstones are fashioned by nature, each one is a unique creation and there is no continuum of quality and grades; it’s more like a punctuated production from nature. Therefore standardization is more idealized, is not readily possible for gem material on the market, and is by no means an exact science. These factors give rise to a need for some expertise in the subtleties that define value and desirability.

There are four main laboratories in the U.S. that do bring standards to grading colored stones, but you will never see a buyer pulling out his quality measuring stick when buying rough or a large parcel of gemstones. Calibrating value is done by the well trained eye, which can see pure color and hints of clarity in a finished stone. GIA, AGTA, AGL, and AGS all have their own way of assigning descriptive terminology to legitimize and evaluate a gemstone.

TAXES

If you sell a gemstone at a profit, capital-gains taxes are due. Investors often defer the tax by exchanging stones rather than selling them for cash. For example, assume that you purchased a tourmaline for $2,000 that is now worth $4,000. You can make a tax-free exchange for another $4,000 stone that appears to have more investment potential. Or you can take your tourmaline now worth $4,000 and exchange it towards the purchase of a more expensive stone and pay only the cash difference, thus trading up and again deferring taxes.

EXIT STRATEGY

The only difference between a collector and an investor is the exit strategy. When it comes time to turn your gems back into money or incentives, keep these avenues in mind:

Auction Houses
Auctions can be another avenue towards circulation, making your gems visible to as many potential buyers as possible. Consigning your gems to an auction will take time—a few months or so—but it’s a venue that can potentially move some rare and unusual items that are beyond the scope of your average jewelry store.

Direct Sales
Consigning a single gemstone or a collection of gemstones to a retail or wholesale company is a good way to liquidate some of your investment. If you have the time to let your gems sit in a retail store window or circulate through the wholesale network of dealers, there is good opportunity to see some return on your investment throughout each year, similar to an annuity where the benefits are realized on a longer timeline. An agreement with the consignee needs to be struck so you receive the appropriate profits as individual items are sold. There are no guarantees on when or how much will be sold, which means you can have slow years as well as years that exceed your expectations. Hmmm… Sounds familiar…

Museums – Donations/Tax Incentives
Donations are a way to benefit from your investments and the appreciation accumulated on those items. Market values can be far beyond your original investment, which can lead to a high value for donations and enhanced tax incentives.

Exhibiting your collection at a museum gains public knowledge and interest in the nature of the collection and the individual behind it—in essence, branding your collection and marketing the status. Historically recognizable name brands have a far greater value than just their intrinsic value. Exhibiting brings attention to your name and adds value to the collection itself.

Beyond museums and store windows, taking professional high-resolution photographs can be a great way to document your collection and set up archives that may be used in books, in magazines, and on the Internet. Having your name attached to certain gems in print will again add value and establish the collection in the lexicon of the gem world.

As mentioned above, gemstones are a private and portable form of wealth. If you are moving or traveling outside your home country, gems can be a way to transport wealth across borders. You can carry large amounts of value in your pocket and go anywhere in the world. And an advantage to gemstone marketability is the global appeal—an appeal that knows few boundaries in space and time.

Attention Collectors

Now is the time for all good men and women to seize the day...and the times. Stop obsessing over your portfolio as its value meanders up and down. Jump into some hard assets and have something tangible you can enjoy every day. We can guarantee their stock won’t drop by half, and they won’t require a bailout. With just a little dusting and a some tasteful lighting, you too could be a collector of Earth’s treasure.

For more information…

To speak with a gemstone specialist at Pala International please contact Bill Larson, Josh Hall, or Jason Stephenson.

See also Pala’s Library to start exploring the ever-expanding world of gems.

And see this National Jeweler article, “Jewelry ranks as top luxury item among wealthy.”

Disclaimer

Please note that this article is for informational purposes and should not be regarded as financial or legal advice. If you plan to act on the information provided herein, consult a qualified financial advisor to receive the latest information on your options.