Posted on

The pros and cons of investing in coloured gemstones

Coloured gems as investment vehicles have attracted a lot of interest over the past 10 years, some have made healthy returns while others have had their fingers burnt so it is important to get the facts straight. The first point to make is that financial advice should only be given by a qualified financial advisor so this article is only intended to offer information on the diamond and coloured gem market and should not be taken as any form of financial guidance. For the purposes of illustration we will look at diamonds as well as precious coloured gemstones, which include emeralds, rubies and sapphires, and other gems. As we have discussed in earlier articles, coloured gems have been chipping away at the once near total stranglehold diamonds had over the precious stone market. Just as De Beers reorganised the diamond market in the early twentieth century and adopted the tactic of marketing and advertising their entire industry in order to grow their whole sector en masse, new entrants to the coloured gem market, such as Gemfields, are adopting the same tactics with the early indication of the same successes!

colorued-gems

(Diamonds and coloured gems come in an array of shapes, colours and sizes)

The Gemval Aggregate Index of the 26 leading gemstones has almost doubled in value in the past 10 years. However, as with all value charts, past performance is not a reliable indicator of future growth and as such should be viewed for information only. That said some interesting observations can be made. Overall, the gem market has seen near linear growth over the past decade, with the notable exception of 2008 where the global financial crisis lead to a modest dip of just under 3% before recovering strongly. This compares favourably with the near collapse of equity markets, illustrated below by the 40% slump in the Dow Jones Industrial Average (DJIA) and gems have shown less volatility than gold, which experienced a sharp correction in 2012 and 2013. Another point of note is the relationship between diamonds and the remainder of their sector. Diamonds account for over 90% of the precious gem market but there prices have begun to plateau in the past 5 years, whilst coloured gems, notably emeralds, have continued to grow in value at a steady pace.

index-gva-2index-djia-2 index-gold-2 index-dse-2

(Gemval.com Aggregate Index of the price of 26 leading gemstones and comparison indices)

The precious gems market

In the precious gems market idyiosyncracies abound and the key to a successful investment purchase is buying at the right entry price. The value of all gems depends on the interplay of the ‘4 C’s’ (Cut, Colour, Clarity & Carat). However the relative importance of each of the 4 C’s can differ greatly from one gem type to another. With most coloured gemstones, for example, it is the colour that is the principle determiner of price, whereas with colourless (or white) diamonds often it is the clarity that has the most profound influence. Consequently understanding the gem that you are purchasing and how it’s value is determined are crucial factors to consider. The GIA (Gemmological Institute of America) devised a standardised grading system for diamonds in the 1930s, covering the 4 C’s in depth. There is also a stardardised price index for white diamonds only, the Rapaport Diamond Report, which is produced weekly and effectively gives a recommended ‘retail’ price for colourless diamonds. Unfortunately no such report exists for coloured gems (See our earlier article: Buying coloured gems – 12 things to think about) although Gemfileds, the word’s largest emerald and ruby producer, are lobbying for such an index to be devised so watch this space!

gia-logo

(It is advisable to seek the advice of an expert and look for lab certified stones)

 Treatment and enhancement

There are a lot of misconceptions surrounding the issue of purchasing treated or enhanced stones and it has been a ‘hot’ topic in the industry for many years. In fact there is nothing wrong with buying a treated or enhanced stone per se, providing the seller has informed the buyer that it has undergone a treatment or enhancement. It is interesting to note that over 90% of the worlds corundum, including rubies and sapphires, have been heat treated in some way so it is very difficult to find one that is entirely natural and the heat treatment itself is not dissimilar to the conditions the stones experience when they are under the ground. It is estimated that over 90% of emeralds have also been treated and when this is carried out by way of a light application of cedar oil there should be no appreciable change in the appearance of the stone over the years. Coloured diamonds are also heat treated in many cases to deepen their colour or remove small inclusions. It is always worth ensuring that a stone is certified before you buy it and scrutinise the certificate carefully for any information regarding treatments or enhancements that may have been applied to the stone.

laser-drilled-diamond

(Here we can see a diamond before any after laser treatment, in an extreme example)

Colour & origin

 With coloured stones these are the two most important factors. In general (with the exception of white diamonds) the deeper the colour the rarer and hence more valuable the stone. It is impotant to note that precious gems come in a wide array of colours and tones and it can be easy to misidentify one stone as another, this is especially common between pink sapphires and rubies, blue sapphires and aquamarine and pink diamonds and pink sapphires. Some emeralds can be confused with lighter-toned green beryl, which is not a precious stone at all. National and regional associations have arisen with many precious stones and these can dramatically affect their value. Good examples of these include: Burmese rubies; Kashmir sapphires; Sri Lankan sapphires; Argle pink diamonds (from Western Australia) and Colombian emeralds (from the Boyacá Department of Colombia, including Muzo, Chivor and Coscuez). Again a stone’s certificate should state its origin so it is worth reading this carefully to ensure you are armed with the facts.

fancy-color-diamond-intensity_1642-e205e

(The deeper the colour the higher the value!)

Supply & Demand

 Diamonds and coloured gemstones are commodities and, like all commodities, their price is driven by supply and demand and their purchase is high risk, that is to say 100% of your investment capital is at risk. Demand for precious gems is high and rising and there are uncertainties on the supply side, which is placing an inflationary pressure on their price. Generally speaking emeralds are the most valuable of the coloured gems, followed by sapphires then rubies and this is largely driven by their relative rarities. Round cut, flawless, vivid red diamonds are the most intense manifestation of wealth on the planet (nothing smaller is more valuable) and they can fetch in excess of £3 million per carat! Coloured gem market organisation initiatives by the likes of Gemfields (akin to those of De Beers in the diamond sector in the twentieth century) are pointed to by some commentators as an indicator of potential future price gains and these voices include Jean Ghika of auctioneer Bonham’s.

supply-demand

(Supply & demand curves for diamonds over the past 10 years – Source: Rapaport)

Some of the auction sale prices achieved for the rarest diamonds and coloured gems are eye watering! Below a just a few examples:

 

  • In 2014 Sotheby’s auctioned a 28.18 carat, emerald cut Kashmir sapphire ring for $5.1 million;

 

  • Sotheby’s also set the world record auction price for an oval cut Burmese Mogok ruby of 29.62 carats for $7.34 million;

 

  • In December 2011 Christie’s auctioned Elizabeth Taylor’s jewellery collection, including pink and blue diamonds, rubies sapphires and Colombian emeralds, for a record $156.8 million;

 

  • In May 2016 the world record price per carat was set by the “Oppenhiemer Diamond,” a rare 14.62 carat vivid blue diamond which sold for $57.5 million in Geneva ($3.93 million per carat);