The recent $9 million lawsuit made by New Orleans Saints quarterback Drew Brees created a serious buzz in the diamond and jewelry community. Following the news, we received endless inquiries from jewelry stores, wholesalers and investment companies asking the FCRF to shed some light on the subject, with a particularly high volume of queries focused on strategies for meeting expectations when purchasing a fancy color diamond as an investment. (Click here to read the JCK article)
According to a lawsuit filed on April 2nd, Mr. Brees claims that a San Diego retailer did not “act in good faith” by selling him $14,535,004 worth of “investment grade” fancy color diamonds over the course of a decade with an allegedly unreasonable profit margin. An independent appraiser evaluated the jewelry at $6.5 million. (Click here to read the lawsuit)
The subject of fancy color diamonds as an investment is extremely complex; all of the aspects cannot be covered in this short article. Thus, we will generalize concepts in order to clarify the main points, starting with the definition of “investment” following with a basic understanding of the diamond supply chain, which are the two fundamental notions required to address the issue.
- Investment: “The investment of money or capital in order to gain profitable returns as: interest, income or appreciation in value.”
- Diamond Supply Chain: The industry’s supply chain completes four phases before the diamond reaches the end consumer . As the diamond passes from one phase to another, it will increase in value as it is transformed or improved in each stage or “stop” of the supply chain.
After briefly reviewing the “investment” definition, it is obvious that owning a luxury product such as a vintage car, a piece of art or a fancy color diamond will not singularly generate interest or income – but if we chose a luxury item wisely, it can appreciate in value. In regard to fancy color diamonds, the appreciation in value over time is indisputable. For example, the Fancy Color Diamond Index shows that pink and blue fancy color diamonds appreciated in 460% and 300% respectively on average, in the last 13 years.
So, why is it a challenge for the end consumer to profit from this appreciation?
The answer to this question lies in the fact that the end consumer is external to the supply chain and represents the final stop, or the end of the one-way street. This fact alone leaves the buyer without a tangible platform to trade or cash out for a profit, with the exception of the following two scenarios:
- As the supply chain is a one-way street, a jeweler will not be able to profit by selling back to a wholesaler, and a manufacturer, too, will not be able to sell back to the miner. This leaves the end consumer with only one theoretical (and un-realistic) option to profit from the appreciation: to sell it to another end consumer in order to benefit from the appreciation.
- If the end consumer has waited a considerable time for the appreciation in price to exceed the profit margin the retailer applied to the stone at the time of the sale, there is an opportunity for the end consumer to see a profit. Example: If the initial jeweler’s cost of a diamond was $1,000 and it was sold to an end consumer for $1,500, the end consumer would need to wait for the diamond to appreciate to $2,300 and will probably need to sell it back to the retailer at $2,000 (*Please note that the retailer will obviously want to buy a diamond below the price he can sell it for).
The good news is that in reality, this scenario actually happens quite often. For example, some fancy color diamonds that were bought at retail prices from the beginning of this millennium can be sold back to the trade for a decent profit. The fact that consumers bought fancy color diamonds as an object of beauty, enjoyed them, and were able to sell the diamonds back for a profit, makes it a win-win scenario. However, it is important to stress that a profit is gained only after a substantial amount of time has passed.
Misconceptions Lead to Lawsuits
The FCRF is involved in many B2B fancy color diamond valuations as well as the management of services regarding fancy color diamond legal disputes. Our organization encounters many situations where terms are misused or misunderstood, only to create unnecessary confusion, which can lead to lawsuits. Typically, these terms are either subjective or serve only one interested party. In this short overview, we would like to discuss and clarify some of these generic terms in order to avoid future misunderstandings.
Market Value: In many cases, this term is used incorrectly by jewelers and appraisers when they are asked to evaluate a fancy color diamond. In fact, there are three different market prices for every fancy color diamond. Each price category represents a different aspect of the supply chain for the same exact diamond.
These Market Prices below represent a subjective market price from three different points of view:
Market Price 1: Wholesale point of a view
- Wholesale Price: is the price set among wholesalers and manufacturers in the diamond bourses around the world. (please note that this price will include the margin of the manufacturer).
Market Price 2: Retail point of view
- Retail Buying Price: represents the amount the retailer is paying for a diamond. (please note that this price already includes the profit margin of the wholesale trader, who sold it to the retailer).
Market price 3: A private buyer point of a view
- Retail Selling Price: represents the end consumer’s buying price at the store. (please note that this price will include a substantial margin added by the retailer).
Investment Quality Diamonds: This term is often used subjectively, but only a fancy color diamond professional involved in day-to-day industry operations with a proven track record can evaluate future trends or determine if a diamond can increase in value. good gemological characteristics stated on the GIA report are not enough and will not indicate that the diamond is good enough to be resold in the future for a profit. There are many visual factors that should be considered when a diamond is bought as a long-term investment.
Professional Appraiser: A professional that evaluates a variety of items, primarily for insurance companies and estates, that is knowledgeable in fields such as antique jewelry; precious and semi-precious stones; precious metals, and so on. Professional appraisers are employed in many instances to appraise fancy color diamonds as well, but their fancy color diamond knowledge is limited, as are their sources, which are typically auction prices, internet and interviews with diamond dealers, located far behind on the supply chain.
And this where the problem begins, because neither of these sources represents the true retail selling price the end consumer paid for. Submitting those prices to private clients who ordered the evaluation would be inaccurate and will create a disappointment that might lead to a lawsuit against the retailer.
The concept of an “investment fancy color diamond” is elusive and may create aggravation if a seller doesn’t correctly manage the expectations of the buyer. Fancy color diamonds can be used as an investment only if they are traded at the wholesale level, which sharply contrasts with fancy color diamonds sold in a piece of jewelry to an end consumer. In that case, an “investment fancy color diamond” should be purchased mainly as a beautiful ornament that will retain its value for generations or as an asset class to preserve one’s wealth and generate a future profit.