Investing In Gemstones for Long-Term Gains

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Buying gems or buying jewelry, which is the better investment? I've seen the movie Blood Diamond and have always thought that possessing a gemstone of high quality should be a good investment. As I started researching the merits and drawbacks to purchasing gems and jewelry as an investment I quickly realized, just like the movie, the best opportunity to be rich would come if I found a gem of great value.

Purchasing gems and jewelry was prefaced wherever I sought information, with the warning, let the buyer beware, and let the seller beware, too. Coming out of the gates, this investment idea appeared to be filled with challenges.

The first challenge is you need to become extremely knowledgeable about gems in general, paying particular interest to the gem you are going to purchase or sell. Gems don't trade on an exchange similar to stocks. Each transaction is individually negotiated. There aren't any gem police like the Securities Exchange Commission (SEC) to monitor each transaction, making sure the buyer and seller adhere to the rules of a fair and orderly market.

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The one authority that will be involved in your transaction is the taxing authority where the trade takes place. In the USA, the Internal Revenue Service wants their share of any profits that become present after a sale of a gem. If you make a bad trade buying or selling a gemstone, chalk that up to experience. Your research and the party or parties you choose to assist you in this endeavor are extremely critical if you want to execute a successful trade according to your own definition of success in the matter.

Let's use diamonds as a point of reference for this discussion. Diamonds are one of the most valuable precious stones available to purchase and sell. How is the value of a diamond determined? Color,clarity, size (carat), and cut are the usual criteria to determine the quality of the diamond. The supply of diamonds is controlled by the De Beers a family that has maintained dominance in the mining and production of diamonds worldwide.

Without going through a regurgitation of facts and stories about how the De Beers acquired this position of dominance, we can cut through all of that and present this fact: From the time a diamond is mined, sold to a wholesaler, polished and cut, the actual price paid for that stone may have been marked up at least 3 or 4 times by the time it gets to be viewed by you the average consumer.

This creates a situation where the price you pay for a diamond is determined by how much of that markup the seller is willing to give up or how comfortable you, the buyer, are paying the marked up price to be the owner of that particular stone. The price is determined with each individual transaction. If you are in the market to buy a diamond you need to do your best to find out the prices that are being paid according to the quality of this type of gemstone.

Gems are not part of a market with great liquidity. It is very difficult to sell a gemstone, especially for the price you paid for it. It could take many years for that stone to appreciate in value to a price where it can be sold for a reasonable gain. The appreciation of gemstones runs similarly to the rate of inflation, about 2% annually, thus making the quick flip transaction very rare. Owners of pawn shops are some of the people that may get that opportunity.

Buying gems as an investment does have some limitations. Before you make the purchase you have to accept that your purchase price needs to be the very best possible, and you have to be willing to possess the gemstone for at least 5 years to see it possibly gain 10% in value, bearing in mind that you purchased a marked up item and that 10% gain may not benefit you in that same 5 year time frame. A realistic time frame to see that gem sellable at your purchase price may be 30 years.

Because the retail market of gem sales is so unregulated, there are many that will resort to fraud to take your money. You must be wary during all the facets of your purchase to protect your interests in realizing a gain from your purchase.

The investment opportunity with gems appears to be available if you can make a purchase near to the time the gemstone is mined from the ground. By the time a gem reaches the retailers the purchase price forces you to hold that gem for a very long period of time in order to allow the gem to appreciate in value.

The most popular gemstones are sapphires, rubies, colored diamonds,  alexandrites, and spinels. If you are interested in pursuing gems as an investment, a good beginning will be informing yourself about all the processes of bringing these types of gems to the retail market. Buying precious stones will most likely always be a buy and hold, for an extremely long-term investment strategy.