RISK! How to Deal in High End Gems and Not Lose Your Shirt – or the Gem

Last November, I was approached by an Australian customer to source an engagement stone for her.  She wanted a Ceylon sapphire, 4 carats, emerald cut, no heat, with cert.  The budget: $15,000.  Needless to say I don’t have those kinds of stones lying around.  Not in that price range for sure, but I also don’t have the kind of inventory in larger sizes that allows for such specifics.  Nonetheless I was intrigued to see if I could make this happen.  But where would I get the stone, how would I ship it, and what if the customer didn’t like what I picked?  Would I be saddled with an expensive gem that I couldn’t use, and a huge tab?

This little anecdote illustrates how much risk is involved in buying and selling gems.  There are risks concerning storage, transport, theft and last but not least, enormous risks of financial loss.  How is this risk managed?  Part of the answer is easy: you can get insurance, you can have a safe, and you can get an alarm system.  But that’s not the whole story.  Most insurance companies have a high deductible and demand high premiums, so it only pays to have it when you carry high end inventory.  When I looked for insurance for my jewelry business, I was offered a deductible of $5,000 at a premium of $5000 per year and a $50,000 insurance max.  This basically made no sense for me.  I don’t own anything that’s $5000.

4 Carat Sapphire, Ceylon, No Heat

The most interesting risk calculation, however, involves risk of return.  What if the customer isn’t happy with her purchase?  Who pays?  In cases like this, the safe spot is that of middle man.  You memo out a gem the customer might be interested in, and you work out the terms of the memo.  Most memo agreements are only 1-2 weeks, longer terms involve either strong relationships or good references.  A purchase, in the gem trade, cannot be refunded.  I think the reason is simply that even a gem trader may not own all of his inventory (yet).  Or more precisely, he may not have it paid off.  So as he makes sales, he pays his bills, and his own supplier is waiting for that to happen, because that supplier may be in Sri Lanka or India or Africa without access to a wealthy market.  So, until the gem is with its final owner without return, everyone may have to wait.  The risk of loss or breakage, meanwhile, remains with the person who has the stone in their possession. 

Let’s now return to my Aussie customer.  We proceeded with great caution in conducting the sale.  I first investigated possible gem candidates.  I put word out and my search led to an Indian gem dealer who requested some reference before dealing with me.  After passing that test, and having a nice chat in his office during which he evaluated my gem expertise, I looked at the stones, snapped some pix, and forwarded specs, prices, and certs to my prospective buyer.  She preliminarily chose one stone and I went back for more pix.  After more back and forth on Etsy, her asking certain questions about the stone, my trying to answer them, she decided to purchase.  I memo’d the stone, which I ran by my own lab for a quick second look (because I, too, needed to be sure about the seller). 

Hand Shot of the Sapphire

I collected the money via PayPal, then shipped FedEx but through a private insurer. This cost $100 with a $10,000 insurance policy, and my customer had to pay hefty custom’s fees.  (But these were all things we sorted out before I even memo’d the stone.)  I got 1 month memo terms and promised to stay in constant touch with seller and buyer.  As soon as my customer had the stone in her hands, I let my seller know.  Before purchase, my buyer and I had negotiated a 2 week inspection and return period, which my seller had agreed to wait out.  The buyer loved her stone and all was good, no return necessary.  At that point I paid out the seller.  Longer returns are not feasible given the great complexity of these transactions.  These aren’t shirts from Macy’s.  They’re more like real estate transactions – as much as possible, the checking is done beforehand to minimize trouble.  By the time you sign the dotted line, you have 3 days to withdraw, and that’s it.

At no point during this complicated transaction was this gem at my house!  At no point was it in the subway.  I shipped it on the day I memo’d it and I had a friend with me to walk me over to the lab and to my gem dealer friends who shipped it.  They kept it in their safe, in a very secure building, until FedEx picked up.  To this end, some NY gem dealers actually have a lock box at one of the many banks that surround 47^th Street.  That way nothing leaves the area, which is generally very safe (practically every other person on the street is a security guard).  That way they can keep what they memo’d right in the bank in their secure lockup.

Almost every week people ask me if I can get them a “this” or a “that” to look at.  This I am happy to do but when the “this” goes much above $1000, it turns into a complicated matter.  Perhaps this blog entry helps explain why.

The Spinel Craze

As you have probably noticed, I put nearly a half a dozen Mahenge spinels on my site in the last 2-3 weeks, and almost all of them sold.  What is going on? 

Apparently the market on spinels is extremely tight right now.  While there is almost no interest in the Ceylon variety – mostly because they have grey mask, Mahenges but also Burmese reds are flying out the door.  The famous neon spinels are produced only in one location around the world (Mahenge, Tanzania), and Burmese reds, especially the slightly larger ones with open color, are also hard to find.  In general, gemstones that have pure and bright colors are more popular.  They simply catch all the attention, even in the smaller size.  I have earrings that use 3.5mm spinels as a connector gem, with chrysoberyls on the bottom.  Still, everyone asks about the little pink stones.  This would never happen if the gems were garnets.  So the market gets tight when supply and demand are no longer in sync.  Prices jump up, and right now they are jumping on a faster than quarterly basis.  Production of Mahenges is steady but not huge, and demand keeps outpacing supply.

So what makes a top quality Mahenge or Burmese spinel?  Both are judged primarily by intensity in color.  Burmese spinels should be bright, stop sign or fire engine red.  Many Burmese gems have an orange modifier but that is much less desirable.  Definitely they should not look like garnet.  They should be more pink than pyrope garnet but less purple than rhodolite.  The red of a top quality Burmese spinel is extremely pure, and it radiates out.

Burmese Spinels, Top Color

Mahenge spinels, the top color anyway, are neon pink.  Not baby pink, not orangy or rosy pink.  But straight bubblegum super strongly saturated neon.  The ones with the orange modifier are next, they can look peachy, almost like an intense padparadscha sapphire.  They would definitely rank above orangy looking Burmese stones, which end up looking less peach but more orange.  Washed out Mahenges are still expensive, but not generally of collector’s interest.

Mahenge Spinel with A Tad of Peach

Cutting for Mahenges should be top of the line, because that’s what most stones entering the U.S. are like.  For Burmese material, you will sometimes have to resort to native cuts, or older cuts.  Many are step cut, not brilliant or Portuguese.

Mahenge Spinel, Portuguese Cut, Top Color

Clarity should be judged the same.  A spinel should be clean or have only extremely minor imperfections. If it isn’t, it’s better to buy a cabochon.

In terms of price, both Mahenges and Burmese spinels are about equal.  Price jumps are every half carat, not every carat.  Retail (gem dealer retail, not store retail) for a .5-.99 ct stone is about $500/ct, for a stone that’s 1-1.5 ct it’s $1000.  Then $1500, and $2000 respectively.  Or more.  After that, astronomical.  Fuhgettaboutit, as they say in Brooklyn.