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The rich rewards of gemstone investing

11 October 2017

 

 

 



Dwindling supply and rising demand is intensifying the value of precious stones, writes Ben Hurley.

For thousands of years, gemstones have won hearts, fuelled conflicts, been buried with kings and queens and used to safeguard wealth. Their allure continues to this day, and the rarest of stones are proving to be a resilient investment for the cool-headed who do their research.

It’s an exciting time of year for gem enthusiasts. A select group of diamond connoisseurs, collectors and wealthy investors have placed sealed bids for 58 extremely rare diamonds after an invitation-only roadshow displaying them in New York, Hong Kong and Perth.

Every year at the Argyle Pink Diamonds Tender, around 60 of the most sublime coloured diamonds from Rio Tinto’s famous Argyle mine in The Kimberley are put up for sale. And this year the excitement was especially high. One of the world’s rarest diamonds was expected to change hands for a price nobody but Rio Tinto and the buyer would know, but definitely worth millions of dollars per carat.

Dubbed the Argyle Everglow, the stone is a 2.11-carat red diamond. In the world of coloured diamonds, fancy red diamonds are the rarest of the rare. A mutation in the crystal lattice causes about 0.03 per cent of the diamonds mined globally every year to appear pink, and a tiny fraction of these are reds. Most are smaller than a carat, or two-tenths of a gram.

Only a handful of red diamonds exist in the world, and fewer than 20 carats of certified fancy reds have been sold at the Argyle tender since it was launched in 1984.

And they are set to become rarer still. The Argyle mine, which produces 90 per cent of the world’s pink diamond supply, is expected to close in 2021. Experts say it’s hard to see value dropping on these stones, they’re just so hard to come by.

“If you get a colourless five-carat flawless diamond, it’s a valuable stone. But there are sellers who will compete to sell it to you which means you can bargain on price,” says Russell Shor, senior industry analyst at the Gemological Institute of America, an independent and non-profit organisation.

“You get a five-carat pink diamond and, if you don’t buy that one, no-one is going to have one behind you to offer a lower price. Those stones … it’s not to say they don’t fluctuate in value like artworks but really they are up in the fine-art category.”

 

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A diverse and burgeoning market

For some, gemstones seem a frivolous waste of money, or something in the domain of collectors and enthusiasts. But precious stones can be a very savvy investment for those that take a focused, dispassionate approach as they would with any other investment class.

With government bonds delivering paltry returns and investors searching for high yields on their capital, there is evidence wealthy investors are on the hunt for more esoteric assets to diversify their portfolios. Knight Frank’s luxury investment index of selected collectible luxury asset classes, such as coloured diamonds, cars and wine, for example, rose 157 per cent in the 10 years to March 2017.

Demand is also rising for tradable luxury items in the massive markets of China and India, says David Fardon, chief executive officer of diamond retailer Linneys and former manager of sales and marketing at Argyle Diamonds.

“Sales are still dominated by Australian, European and Japanese clients,” Fardon says. “But in the last five to 10 years there has been an emerging number of buyers from China, India and surrounding areas.”

Of course it’s not all about diamonds. Sapphires from Kashmir are in circulation but virtually out of production. Emeralds from Colombia and rubies from Myanmar are both still being mined, although there remain some ethical concerns about the production line in Myanmar.

There are also opals and pearls, as well as a range of stones the wider public rarely hears about, such as red spinel, demantoid garnet, green tsavorite and paraiba tourmaline. All can fetch good prices, but the valuation process is nuanced, differs from stone to stone and is best not left to the untrained eye.

 

It's not all about diamonds... sapphires come in a diversity of colours and can reach very high values.

Unlike stocks, bonds or property, information about the market value of precious stones is hard to come by.

 

Doing your research: prices and performance

It is unlikely we will ever know the exact figure the Argyle Everglow fetched this year.

Unlike stocks, bonds or property, information about the market value of precious stones is hard to come by. While auction houses like Sotheby’s and Christie’s make their results publicly available, owners of stones worth millions of dollars don’t broadcast the prices paid in private transactions – by far the most common exchange method.

“There is an enormous amount of business being done privately,” says Damien Cody, managing director of Cody Opal Australia and vice president of the International Colored Gemstone Association.

“Opals are not often seen at the auction houses but they are traded and sold to some of the most famous jewellery designers around the world, and also sold privately to collectors and investors.”

But we can learn a lot from the sales that are made public, and they point to rocketing demand for one-off specimens.

In April this year the 59.60-carat Pink Star diamond–the largest internally flawless, fancy vivid pink diamond ever graded by the Gemological Institute of America – sold for $US71.2 million at Sotheby’s in Hong Kong.

It broke a record for the most expensive gemstone ever sold – a record set only one year ago in May 2016 when a 14.62-carat blue diamond called Oppenheimer Blue sold for $US57.5 million at a Christie’s auction in Geneva.

The previous November in 2015, a 12.03-carat blue diamond called Blue Moon of Josephine sold for nearly $US50 million to Hong Kong billionaire Joseph Lau, who reportedly bought it for his seven-year-old daughter. Sold at a Sotheby’s auction also in Geneva, it became the first diamond to sell for more than $4 million per carat.

An index produced by Argyle with consultants Gemdax, published in Argyle publication Rare and Collectible, tracked the tender prices of Argyle pink diamonds since 2000. They had more than tripled in value by mid-2015 and outperformed the S&P 500, Hang Seng Index and Dow Jones Industrial Average.

Last year, Rio Tinto’s 2016 pink diamonds tender delivered a record average price per carat, the company announced, without disclosing that price.

The Australian opal sector is relatively small and fragmented, says Cody, and obtaining figures is harder still. He says he has seen opals traded and sold in excess of $50,000 per carat. And in his industry the dealer finds the buyer, not the other way around.

“The dealer knows who around the world is looking for a very fine opal,” Cody says. “They might have something, or wait for the right stone to come up and take the stone to that buyer.”

Cody says for a number of particularly good specimens, he has bought and sold the same opal several times, each time for a higher price.

“We have sold many stones twice and a few stones more than twice,” he says. “People who want the very best often come to us or other dealer with quite specific needs and if they are not coming out of the ground on a regular basis then we go back to the market.”

Some customers have had a 70 per cent return in five years, he says, but a 50 per cent return is closer to the norm.

Even among red diamonds — the most expensive and rarest diamonds in the world — the 2.11-carat Argyle Everglow is an exception.

 

Putting a value to a stone

Valuing stones is an incredibly nuanced business. Cody says Cody Opal looks at eight different factors when evaluating an opal. The most valuable items display an ostentatious range of colours or a pleasing pattern.

The most sought-after pattern now is “harlequin”. The stronger the definition of the pattern, the more desirable the stone. Those that display a pattern reminiscent of Chinese characters also fetch strong returns.

For other stones it is about subtle hues and changes in colour. The Gemological Institute of America uses the “four Cs” method to classify diamonds: clarity, colour, cut and carat weight (often confused with karats, which measure the purity of gold).

Subtle differences in colour can have a major impact on value. Most diamonds have tints of yellow or brown, according to the institute, and these are of lower value than colourless diamonds.

Most diamonds have internal “inclusions” or external “blemishes” which affect their clarity. They are graded on a scale with quaint gradations such as “Very Very Slightly Included”. The position of an inclusion in the stone can also affect the value. Diamonds graded “Flawless” have no visible inclusions or blemishes and are most sought after.

But ‘clarity characteristics’ have some advantages. They can help gemologists separate natural diamonds from imitations, and can help identify individual stones.

The cut of a diamond is also highly important because of the way it affects the play of light within the stone.

And while carat weight is important, it too is nuanced. The increase in carat weight can lead to an exponential increase in price due to the increased rarity of high-carat stones, thus making price-per-carat a sometimes misleading measure of market value.

Symbolic weights can also enormously increase the value of a stone, so for example a 1.01-carat diamond will probably sell for a much higher price than a 0.98-carat diamond despite having a negligible visual difference in size. For many buyers a 0.98 carat diamond ‘just isn’t quite there’.

Some stones are very valuable but also very hard to sell. An enormous tennis ball-sized rough (uncut) diamond uncovered by the Lucara Diamond Corporation in Botswana failed to sell at a Sotheby’s auction last year. The 1109-carat rock – one of only two diamonds more than 1000 carats to have ever been found – failed to meet the $70 million reserve price. But at the end of September 2017 Lucara announced the huge diamond, known as ‘Lesedi La Rona’, sold for $US53 million to a British jeweller.

In some cases providence draws a price level far beyond the intrinsic value of the stone alone. The Duchess of Windsor’s pearl necklace sold for $US3.625 million at a Sotheby’s auction in New York in 2007. The Cartier Collection bought Barbara Hutton’s jadeite necklace for a record-breaking $US27.44 million at Sotheby’s Hong Kong in 2014.

 

The huge diamond, known as ‘Lesedi La Rona’, sold for $US53 million to a British jeweller last month.

Click to view full infographic

 

Getting started in gem investing: pointers and pitfalls

Needless to say there are plenty of ways to lose money on gems, and scams and tourist traps abound.

Relatively cheap stones can be heat and pressure treated to remove internal blemishes or even change the colour. This can make a cheap stone appear highly valuable. Laboratory tests such as those performed by gemological institutes can tell the difference.

“You really need a third-party adviser,” Shor says. “The Gemological Institute of America doesn’t advise people whether this is better than that colour. but we will tell you whether it’s synthetic, natural, treated or untreated. We won’t rate the colour because that’s up to the buyer in the market.”

A reputable gem dealer with a long history in the trade is a good place to start. Auction houses such as Sotheby’s and Christie’s provide reputable and independent specialists.

Most stones are sold loose and stored with certificates of authentication. Some go into jewellery and these can also show value growth if they are from famous designers or fashion houses such as Van Cleef & Arpels, Cartier, Tiffany & Co and Harry Winston.

Fine jewellery items often reappear years later at auctions and sell for higher prices, says Sharma. “We are seeing from the 1920s onwards there’s a lot of appreciation today for fine craftsmanship,” he says. “We are living in a digital world so connections with the old world where things are handmade is quite thrilling for us.”

Despite their hardness, diamonds do scratch and when rare stones are put in jewellery it is probably best not to wear it too often. Some stones need to be stored in the right conditions, such as opals which can crack or shrink if stored in a dehumidified environment such as many safe deposit boxes.

Shor recommends giving buyers as few excuses as possible to criticise the stone, and this will reduce volatility in the stone’s value.

“Asian buyers tend to buy flawless stones on the investment side,” he says. “It’s like anything else, when prices are going up people want everything, and when they are going down they get very picky. So if you have to sell in a down cycle you don’t want to give anybody an excuse to be picky.”

And hold onto them long-term, he says. Selling is an expensive business when you include the auction house’s cut from you as a buyer and then as a seller, along with various taxes.

Ben Hurley is a professional business journalist, specialising in Asia and property, based in Taipei.

 

 

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