Investing in gems for fun and profit
By Pat Curry • Bankrate.com

In the 1980s, the heirs to a ranching business in Texas discovered they owed the IRS a million dollars. To pay the bill, they could sell the family business or sell off the gem collection their dad had stashed away for years. He had hundreds of gems. The family was fine with that option. They had always thought Warren Hancock was a little nuts anyway for spending all that money on colored diamonds.

They shipped off the lot to Sotheby's in New York, hoping that selling them might make a dent in the tax bill. Sotheby's picked out three and sent back the rest. On April 28, 1987, an agent allegedly representing the Sultan of Brunei bought the largest of the trio, a .95-carat red diamond, for $880,000, plus a 10 percent buyer's premium.

That set a world record of $926,000 per carat. With the sale of other two stones, Sotheby's was able to send the Hancocks a check that covered the taxes, along with some serious change left over. The Hancock Red remains a standard in the world of colored diamonds -- as revered as the Hope Diamond among gem collectors.

Hancock had bought all three diamonds from his local jeweler and paid retail prices for them, an investment of less than $20,000 combined.

Those are the kinds of stories that fuel the desire to invest in gems. But the people who live and work in this circle make it very clear: Buying gemstones should be something you do because you like them. It should never be a major part of an investment strategy.

"If you want a nice sapphire for your wife, you want to buy the best sapphire on earth," says Richard W. Wise, a graduate gemologist and author of Secrets of the Gem Trade: The Connoisseur's Guide to Precious Gemstones. "That's very nice and I'm sure your grandchildren will appreciate it. But if you buy it at Tiffany's and think you'll turn it over for a profit in 10 years, you're deluding yourself."

Financial adviser Fred Siegel of New Orleans tells people who call his radio show to inquire about investing in gemstones that they should stay away from them unless they already have enough money saved for retirement in a well-rounded portfolio.

"If you're taking care of that, fine, then it can be a nice investment," he says. "Gems have nice stories with them, and they're beautiful. Get a good gemstone and you have something of beauty. But it's not like a stock and some other things that you can tell the value quickly."

In fact, gemstones are about as far from stocks as you can get. Stocks, bonds and CDs are perfect markets, with known values at any given time and set prices; investors can buy and sell whenever the market is open for trading, Siegel says. Gems are an imperfect market, with a sale possible only when there is a willing buyer and all prices open to negotiation. Other imperfect markets include real estate, art and antiques.

"Does it mean you shouldn't invest in imperfect markets?" Siegel says. "Not at all. You either have to gain the expertise or get help from someone who is an expert that you really trust."

The expertise includes an understanding of how stones are bought and sold.

"The average jeweler will sell a stone for two or three times what he paid for it wholesale," Siegel says. "He'll buy a stone from an individual for half of wholesale. It makes it hard to make money unless you really know what you're doing."

As an investment class, gemstones and diamonds are considered hard assets, as are gold and silver. Hard assets as a group have a place in any investment portfolio, but generally not more than 1 to 3 percent, says Tom Cloud, president of Georgia-based Turamali Inc., who has been investing in gems and jewelry since the late 1970s.

It's definitely not an investment you make with an eye toward turning a quick profit, he says. Like many other experts in gemstones, he says investors should expect to hold the stones for 10 years or more to see a return on their investment.