Advisors should note that reported returns were gross, not net. Transaction costs for gemstone auctions, such as auction house commissions, average 10% each way, much higher than fees for buying and selling stocks, bonds or gold. In addition, the authors found that gem returns for the study period were positively correlated with the stock market, suggesting the existence of a stock market "wealth effect."

Although the potential for gains can be substantial, the downside to investing in gemstones is the relative lack of short-term liquidity. To avoid having to sell at a steep discount, experts recommend allowing three to six months to find an appropriate buyer who will pay what the stone is actually worth.

With adequate lead-time, clients who want to exit their positions can sell to dealers, jewelers, auction houses or private buyers. For truly exceptional collections, donation to a museum could provide tax benefits. 

Besides higher transaction costs and lower liquidity than for diamonds and gems, the costs of storage and insurance for them can reduce profits, which are, meanwhile, subject to capital gains taxes. However, clients can make tax-free exchanges, if they trade their gems for stones of equal value, or defer taxes if they trade up.

In addition, advisors must caution their clients to avoid "conflict stones"-those that are traded to fund a war. For example, the U.S. currently bans imports of rubies and jade from junta-ruled Myanmar (Burma), although there's no prohibition on buying or selling stones that are already in the U.S.              
            
Gem Hounds
Colored diamonds, Burma or Kashmir sapphires, Burma rubies and Colombian emeralds are currently the most popular with sophisticated investors, according to Robert Genis, president of National Gemstone and editor of The Gemstone Forecaster, a quarterly newsletter for gem collectors and investors. Genis calls these the "Big Four." "These are stones that have a long history of being traded. They're the Rolls Royces of the gem world," he says. 

A 30-year industry veteran, Genis has traveled extensively in search of rare gemstones for clients. He says few wealthy individuals purchase white diamonds, as most of these stones are not actually rare. Those who do buy colorless diamonds seek out one carat or larger "D-Flawless" gems, the highest quality available. 

Genis says most connoisseurs invest in colored diamonds, the rarest of which are red. Approximately 30 of these magnificent stones are known to exist in gem qualities, and they almost never become available for purchase. When they do, they can command over $3 million a carat. Next in rarity are blue, pink, green, orange and purple, which sell for millions of dollars per carat at auction. Yellow and brown diamonds are considered second tier, although Genis likes the outlook for yellow diamonds. "Yellows can look like the sun. They're just gorgeous. There's more upside potential. Browns violate the first precept of high-end gems. They should be beautiful, but they're ugly," he says.

Serious collectors and investors buy only natural gems and avoid stones that are treated in any way, Genis says. He says 95% to 99% of all gemstones are treated through heating, irradiating, oiling and fracture-filling.

High-quality untreated Colombian emeralds can command $25,000 per carat or more. But they're not easy to find. Genis had one client who was "obsessed" with emeralds. "He loved green stones. Only green stones. For ten years, once a year, I went to Colombia to look through 10,000 stones to buy him one. Each stone took two weeks to find," he says.

Overall, the keys to successful gem investing are buying important stones below retail from primary dealers or wholesalers, holding them for three to five years, and in some cases ten years or more, and obtaining industry-recognized grading reports from major laboratories to ensure the stones are authentic and investment quality.
American Gemological Laboratories (AGL) reports are the gold standard for colored gemstones. The Gemological Institute of America (GIA) is the reigning authority on colored diamonds and white diamonds.