Diamonds Update

Hearts On Fire, the Boston based diamond jewelry company, filed a lawsuit against Blue Nile asserting that the Seattle based online retailer infringes the Hearts On Fire® trademark.  Blue Nile is accused of using “Hearts On Fire” as a search term in its pay-for-click and sponsored link advertising on search engines.  Moreover, Blue Nile is alleged to also use the “Hearts On Fire” phrase in the text of those links implying it sells Hearts On Fire® diamonds.

One of many companies in the 1990s who created brands based on the Hearts and Arrows patterns, Glenn Rothman renamed his company after his trademarked “Hearts On Fire” brand.  Within the diamond industry, Glenn is known for his marketing success as he has promoted the Hearts On Fire® name to be one of the top brand names.

Jewelers are desperate for ways to differentiate their diamonds from the price competition of online retailers and the Hearts On Fire brand has benefited.  The power of Rothman’s marketing skill is evident in that consumers are willing to pay more than double for the brand.  Ironically, the Hearts and Arrows pattern not a requirement for brilliance and sparkle, but is more of a by-product.

The Hearts and Arrows pattern is a result of diamond cut with great optical symmetry when viewed under a Hearts and Arrows scope.  Many of the exceptionally cut round diamonds display the Hearts and Arrows pattern so there is nothing unique about the brands, other than the marketing.  In fact, cubic zirconia can be cut to display the Hearts and Arrows pattern so there is nothing intrinsically valuable about the pattern other than the consumer perceptions from the marketing.

Clients of Diamond Source of Virginia are happy to find the majority of round diamonds sold by the company display the Hearts and Arrows pattern.  This is a result of only recommending round diamonds with at least Very Good GIA grades, Excellent Holloway Cut Adviser ratings, and at least Very Good proportional symmetry.  What makes Diamond Source of Virginia client even happier is that they do not have to pay extra for the Hearts and Arrows pattern.  They can get exceptional beauty for less than half the price of the brand name diamonds.

No doubt, the Hearts On Fire lawsuit against Blue Nile will generate considerable publicity for both companies.  Only time will tell how much diamond buyers will hear and learn about Hearts and Arrows patterns and if the increased awareness of generic Hearts and Arrows alternatives will lead to greater sales for Blue Nile and Diamond Source of Virginia.

Online jewelry catalogs are a great place to get ring ideas when shopping for your engagement ring.  This is especially true if you have limited styles to view in local jewelry stores or just do not have the time to drive from store to store.

One of our favorite diamond ring and jewelry manufacturers, Leo Ingwer Inc., has an extensive selection of diamond engagement rings, anniversary rings, wedding bands, pendants, and necklaces displayed online.  Leo Ingwer is known for its workmanship, excellent quality and exceptional value.
 
While Leo Ingwer is a wholesale manufacturer and does not sell to the public, Diamond Source of Virginia can get you price quotes on item you see in online catalog.

Ladies Platinum Mountings
Ladies Engagement Rings
Ladies Remounts (ring except for center diamond)
Three Stone Rings
Diamond Wedding Rings
Antique Reproductions
Wedding Bands and Sets

You can also check out photos of some of the beautiful Leo Ingwer rings that clients have recently ordered from Diamond Source of Virginia.

 This week a local client told us that she was shopping at a jewelry store for diamond stud earrings.  She asked for certified diamonds and the jewelry storeowner told her not to get certified diamonds because they were so much more expensive.  He said it was his job to save her money and non-certified diamonds were the way to do that.

Here is what the jeweler forgot to tell the shopper.  The price difference between GIA graded diamonds and non-certified diamonds should only be the cost of getting the diamonds graded.  This is only about $50 to $100 for most diamonds and depends on the carat weight of the diamond.  Any remaining price difference can usually be attributed to the non-certified diamond being a different quality than the corresponding GIA graded diamond.  In other words, the true quality is not as advertised or there are attributes such as poor cut, laser drilling, fracture filling, or fluorescence that have not been disclosed.  Typically, it is the color and cut of the diamond that are lower because those tend to be harder for shoppers to identify under the intense jewelry store spotlights. 

Look at it from the jeweler’s perspective.  If they could price the diamonds a thousand dollars higher with a GIA grading report, they would.  Instead, they buy cheaper, lower quality diamonds and advertise them as being something better, or neglect to disclose all the characteristics of the diamond that impact value.  The jeweler is counting on the shopper wanting a “deal” rather than the truth.

If a client really wants to know the quality of the diamonds they are purchasing, we recommend they purchase a GIA grade diamond, which provides the most accurate description of color, clarity, cut, carat weight, measurements, fluorescence, and any treatments.

One treatment to enhance the clarity appearance of a diamond is laser drilling, which consists of using a laser to bore a hole in a diamond.  The hole, resembling a wormhole, is used to reach a dark crystal so that acid can be injected to bleach the inclusion and make it a lighter color. 

Laser drill holes are usually easiest to see from the side of the diamond.  The “wormhole” extends from the surface in a straight line down to the target inclusion.  The hole on the surface can often be felt if explored with a sharp pick or needle.

Sometimes the laser drill hole is then fracture filled with a liquid glass-like material to make the hole less visible.  Fracture filling is also used in diamonds without laser drilling when it is injected into fractures that reach the surface (feathers).  Companies that perform fracture-filling market themselves as being better than their competitors are, based on the proprietary formulas they use for the filler substance.  Most fillers react to heat, light, and other conditions, thus changing color or becoming more visible over time.

It is critical that laser drilling be disclosed to the consumer, even though the Federal Trade Commission Guides for the Jewelry Industry do not require disclosure.  Therefore, it is up to the diamond suppliers (wholesalers and retailers) to ensure that this treatment is properly communicated, especially to the consumer.

While the purpose of laser drilling is to improve the appearance of the diamond, there is still much debate over how to price these diamonds.  Obviously, the biggest danger to the public is if they purchase a diamond that has been laser drilled without being informed of the treatment.  Most consumers do not inspect their diamonds under a microscope and are relying on the word of the retailer or on the report from a grading laboratory.  The best protection to avoid laser-drilled diamonds is to purchase GIA graded diamonds because the GIA always indicates on the Diamond Grading Report if a diamond has been laser drilled.  Laser drilled diamonds should be properly disclosed and sold at a lower price.  Since most knowledgeable diamond shoppers avoid laser-drilled diamonds, they become very difficult to resell.

The laser drilling is not to be confused with laser inscription, which is the etching of the certification number on the diamond for identification purposes.  The laser-drilling process actually bores a hole into the diamond, while laser inscribing only darkens a thin layer of carbon molecules on the surface of the diamond and does not damage the diamond.

I received the following email yesterday.

We bought princess cut diamond earrings in Aruba a year ago & came to discover through obtaining an appraisal here in the US that one of the diamonds is glass filled.  We went to the most reputable jeweler here in town & he recommended that we look at your website to learn more about glass filled diamonds.  During the course of the past year, we have tried unsuccessfully to get our money back.  When that did not work, we then said that our friends who go to Aruba every March would bring the earrings & exchange them for us.  That did not work either as the jeweler told them that for us to get the quality that we thought we were getting to begin with we would have to pay more money.  Our question to you is “is the value of the earrings less than what we bought them for”?  We have thought about selling them to someone here in the US but wonder if anyone would buy them knowing they are glass filled.  What is your advice? 

This is a classic example of what happens when tourist purchase diamonds at tourist locations.

1) While shops at tourist locations might be a good value for local, handmade items, diamonds are a completely different product.  Those tourist shops are purchasing them from the same cutters and wholesalers that source our diamonds.  The false assumption is that these tourist location retailers are somehow lower price.  The online diamond retailers in the United States have the most competitive market in the world.  Shoppers from South Africa, India, Australia, Russia, and Canada find diamonds are less expensive on the US retail market than in these countries that mine and cut diamonds.  The real deals are the low single digit margins on most diamonds at online retailers in the United States.

2) We recommend that diamond shoppers purchase GIA graded diamonds to ensure they know what quality of diamonds they are purchasing.  The GIA does not grade diamonds that are fracture-filled because that is a temporary process.  The GIA would identify any permanent diamond treatments on their Diamond Grading Report.

3) Tourist location retailers rely on impulse buyers for their business and they are shielded from the buyer’s remorse because it is so difficult for shoppers to return purchases they realize were not as advertised.  Buyer beware applies when you purchase outside the borders of the US because legal resource is very limited.  There is no Better Bureau, Chamber of Commerce, or local TV station available to uncover unlawful or unethical business practices.  The Aruba shoppers are likely in for a surprise if they think they will get a refund if they take the earrings back to Aruba.  The fine print on the sale probably only allows a store credit, if even that, and how wants to purchase from someone you already know does not practice good business ethics.

4) The deals that seem too good to be true while on vacation or even at the local jewelry store should raise a big red flag.  If the prices are lower than online retailers, that simply means the quality is not as advertised.  Tourist location retailers are not giving their goods away and typically have higher overhead than online retailers have.  This is especially true of tourist thinking they can find a good deal in the Diamond District of New York.

Because the shoppers in the Aruba story above did not know the quality of the diamonds they were buying, they probably paid much more for what they bought than they should have.  Now that they realize their mistake, their options are limited because most diamond shoppers are now well educated via the internet on how to get the best values when shopping for diamonds.  They will only get pennies on the dollar if they sell them to a jeweler or pawnshop, and they will find it difficult to find consumer who will buy them for anything close to what they paid if they disclose what they know about the diamonds.  Buyer beware also applies if you are considering buying from an individual.  You might be able to find a deal if the individual needs to sell, but it is only a “good deal” if the buyer knows exactly what they are purchasing, and the price is appropriate.

Diamond price changes vary greatly by carat weight, color and clarity.  This is especially true for the price increases we have seen in recent years.

The chart below (click chart for larger view) shows the total percentage increase from the start of 2005 to the start of 2008 for round diamonds with various color, clarity and carat weight combinations.  I have focused on colorless (D, E and F) diamonds but similar trends are true for G, H and I color diamonds.

The following observations reflect the information in the chart.

1) Four and five carat diamonds have significantly increased in price more than lower carat weights. The one and two carat weight diamonds have increased relatively little over the three-year period and in some cases have exhibited no price increase.

2) The VVS2 clarity grade has experienced the highest price increase across almost every carat weight and color grade combination. 

3) Diamonds with SI1 and SI2 clarity have shown considerably lower price increases, especially for the three, four and five-carat weight diamonds.

4) Diamonds with Internally Flawless clarity have lower price increases than diamonds with VVS and VS clarity grades.

5) Diamonds with F color have experienced higher price increases than E color, which are higher than D color.

For consumers who have purchased colorless diamonds with VS2 or higher clarity in the past, the price increases indicated that the value of their diamonds has increased significantly.  As a result, they should consider getting their insurance appraisals updated to reflect the current values of their diamonds.

For consumers ready to purchase and wondering about the “investment value” of their purchase, the colorless, diamonds with VVS and VS2 clarity would appear to have the greatest opportunity for future appreciation, assuming that recent history is indicative of future performance.

As the number of affluent diamond buyers worldwide increases and the production of large diamonds (3 carats and above) decreases, the price of larger cart weight, high clarity diamonds is projected to explode.  This trend is especially true in the case where the diamond is unique in the marketplace and consumers are bidding up prices.  When cutters and wholesalers have waiting lists for particular types of diamonds, they can ask and get almost any price they want for the diamond when it comes on the market.

In previous blog articles, I have noted that diamond prices are projected to go up due to worldwide production diminishing while worldwide demand increases.  The last several years have already seen diamond prices move upward, especially for larger diamonds. 

With the increase in prices, an increased number of questions come from consumers concerning purchasing diamonds as an investment.  My first response in answering the question about diamonds as investments is to note that, like the stock market, there are no guarantees that prices will continue up.  That is what industry experts foresee but like other investments that have potential high rewards, there are always high risks.

Like any other investment, several components come into play to determine if it is a good investment.

• Can you purchase the investment with a low transaction fee?  In the case of buying diamonds, the transaction fee is the retailer’s margin.  A prudent stock investor would not think of paying a 50% transaction fee to purchase a stock, so the wise diamond buyer should seek a retailer with a very low price margin.
• Will the investment go up in value?  While there is no guarantee, large diamonds are expected to go up in value the next 5 to 7 years based on current forecasts of diamond production and demand.  These market forces are already in play and prices have been going up.
• Can you sell the investment when you need to and with a low transaction fee?  The typical consumer, who purchases a large diamond, must rely on a retailer to find a buyer for the diamond.  This is especially true if they are trying to get the maximum price for from the sale.  Finding another consumer willing to purchase the diamond, can take time and that is a risk if the seller needs the funds quickly.  Of course, the diamond can always be sold quickly to a wholesaler or retailer at a price lower than the market but that means a much greater transaction fee in terms of lost revenue potential.  If you pay a 25% fee to buy the diamond and a 25% fee to sell the diamond, the value of the diamond has to go up 50% to break even.

A common question we get is “what types of diamond makes the best investment”.  The answer to that question depends greatly on the amount the consumer wants to invest.  The potential price increases for diamonds varies with shape, carat weight, color and clarity (assuming similar cut, finish, fluorescence, and certification).  For the sake of argument, let us assume an unlimited investment amount and examine the type of diamond that has exhibited the greatest price increase in the last three years.

The following chart show the price increases for 3-carat, 4-carat, and 5-carat Round and Fancy Shaped diamonds with at least H color and VS2 clarity.  These categories have had the highest price increase from 2005 to 2008 (12/3/04 - 12/14/07).  It is a logical assumption that the types of diamonds that have shown the most increase the last three years will also be the types of diamonds going up in price in the next several years. Click chart to expand size of image.

Here are some of my observations based on information in the chart.

• While many consumers might think the D color, Internally Flawless diamond would have the highest appreciation; the chart shows that it is often lower than other possible combinations of color and clarity.  Keep in mind we are talking about percentage increases and not absolute dollar increases.  The D IF diamonds are the highest priced per carat but that is of little significance to an investor.  A wise investor does not buy the stock with the highest price per share, but looks for the greatest potential percentage increase in value.
• The chart indicates that VVS2 clarity is consistently the best performer regardless of shape, color and carat weight.
• The top performing combination of color and clarity was the F color, VVS2 clarity for four and five-carat weight ranges.
• Round diamonds have outperformed fancy shaped diamonds, but only by about 10% total over the three-year period.
• Four and five-carat diamonds outperformed three-carat diamonds by roughly 20% total over the three-year period.
• There was relatively little difference in price performance between the D, E, F, G and H color grades.  This is significant because there is a considerable price per carat difference due to color.  An investor with limited funds to invest would be better off getting at least four carats and target the VVS2 clarity with lower color than getting D color, IF clarity and a smaller carat weight for the same money.

In future articles, I will discuss the relative price performance for one, two, and three-carat diamonds, which are more representative of consumer purchases for engagements and anniversaries.  While these purchases tend to be gifts worn rather than buys for investment purposes, most buyers do have an interest in what past price increases might mean for the future. 

When we here the phrase “investment quality” with regard to diamonds, we know our client has been to a jeweler who has used that phrase in their sales pitch on a high color and high clarity diamond.  The irony is that the typical jewelers who are using this phrase are also the ones who are charging prices that are double or more our everyday prices.

When I think of good investments, I think of assets that are bought low, sold high, were easily sold, and that appreciated a desirable amount.  Diamonds are expected to appreciate the next 5-10 years because worldwide demand is increasing and worldwide supplies are decreasing so they satisfy that part of the good investment definition.

One challenge with selling diamonds is finding a willing buyer when you want to sell.  While every diamond shopper would like higher color and clarity, the reality is that bigger size, higher color, and higher clarity all lead to much higher prices, reducing the number of potential buyers.  Often an F color, VS1 clarity diamond is easier to sell than a D color, IF clarity diamond because there are many more buyers at half the price for the same carat weight.

For some reason many diamond shoppers who are seeking “investment quality” diamonds leave their common sense at home, with regard to the economics of their purchase.  If you asked most investors if they would be willing to pay 100% to 125% commission for a stock transaction, they would laugh at such a foolish question because they know the stock would have to at least double in value before they could break even.  Yet, these same savvy investors walk into a jewelry store, especially high end jewelry stores, and pay 100% to 125% premiums over what they have to pay for an expensive diamond ring.  They have just violated the key “buy low” rule of investing. 

When a customer buys at Tiffany’s, Cartier, or any high-end jewelry store, their purchase typically depreciates about 60% when they walk out the door.  If they hope to break even when they want to sell the item, they have to wait until the value appreciates the 100% to 125% back to what they paid.  The smart investor buys diamonds and jewelry the same way they buy stocks; buy at a low price, buy items that will appreciate, and buy items that are easy to sell.

My advice when purchasing a diamond ring is first to buy what the person wearing the ring will enjoy.  Then, with respect to investment value, buy a quality that will be in high demand and affordable to shoppers when you want to sell.  However, what is most important is to buy at a low price, not a jewelry store price, so you get to keep the appreciated value, not give it to the jeweler up front.

As the holidays approach and shoppers are busy picking up special gifts, it is time to give some attention to making sure you have adequate insurance for your personal valuables.  Most items you purchase are receive a gift are covered as personal property under your homeowners or renters insurance.  Therefore, your new flat screen TV, iPod, computer, golf clubs, sofa, or lamp is probably covered if your house or apartment is insured.

However, some articles (jewelry, coins, stamps, furs, firearms, and silver flatware for example) have limits to their coverage.  Since my business is diamonds, I will focus on the jewelry category.

Most homeowners’ policies have a limit of $1500 to $2500 for jewelry per event.  That means if someone breaks into your home and steals all of your jewelry, you only get the $1500 to $2500 limit of your policy.  While most policies cover damage and theft, many policies do not cover accidental loss so if you lose your engagement diamond ring you might be getting nothing.

To adequately protect your jewelry items, you need to add a special rider to your standard policy.  This rider, also called a schedule, typically required to provide a record of value that schedules the item’s coverage limit.  For jewelry, an insurance appraisal is often required to accurately describe and value the scheduled item.  Unlike most other property insurance, the scheduled property rider generally does not have a deductible.  The scheduled rider provides coverage for loss, damage, and theft.

Unlike your sofa, whose value automatically inflates each year with most replacement types of homeowners’ policies, the scheduled property rider for jewelry limit of coverage stays at the value listed on the insurance appraisal.  That means that if the value of your jewelry appreciates over time, the cost to replace your jewelry in the future could be substantially more than what you paid.  Make sure your insurance coverage keeps up with the replacement value of your jewelry.  Most insurance companies recommend updating jewelry insurance appraisals every 3 to 4 years.

The price of jewelry insurance varies by insurance company, value of the jewelry item, and geographic location but typically runs in the 1 to 2 percent of value range for annual premiums.  We are amazed at the number of clients who do not get jewelry insurance, thinking they will save a few dollars in premiums.  When something happens to their valuable diamond ring, they learn the meaning of “penny wise, pound foolish” the hard way.

This week a subscriber of our newsletter emailed asking for advice.  He put $1600 down payment on a ring at a jewelry store but the specifications of the ring provided were not what he had requested.   The jeweler refused to change the ring or refund the money.  Instead, the jeweler is forcing the consumer to take a store credit towards jewelry items that are “outrageously priced.”  There was no signed contract and the consumer does not know what to do that will help get his money back.

Here is my response.  I welcome other suggestions or similar stories that might be helpful to other shoppers.

I am sorry to hear about your situation with the jewelry store.  Unfortunately, this happens many times a day all over the country because we hear stories like yours on a regular basis.  There is nothing more frustrating than to be forced to spend money at a retailer who has lied to you and taken advantage of you.

I am a diamond retailer, not an attorney, so I do not profess to know all the options available to you but here are some suggestions you might want to consider.

1. Based on the stories we hear clients tell, jewelry stores take the toughest stand against young customers and women.  A good first step is to have someone who the jeweler might not feel they can bully (parent, attorney, etc.) accompany you so you have a witness to what is transpiring.  The earlier you do this the better to help document what is happening.
2. Be sure you are dealing with the storeowner.  Employees are often only following store policies. They can be more concerned about losing a sale than hurting the store’s reputation.  The storeowner can change the rules and could be more sensitive to public relations than a store clerk might.
3. If the jewelry store is a member of the Better Business Bureau, they are obligated to handle disputes through their dispute resolution services.  You can check out www.us.bbb.org for more details.  If the store is a member and is not ethical in their business dealing, the Better Business Bureau provides a complaint forum that gives you equal opportunity to voice your position.
4. Many cities have local television stations that have investigative reporters who check into consumer complaints.  The fear of bad publicity often allows them to find quicker and more satisfying remedies to problems than you can as a wronged citizen.
5. While not has powerful as a media reporter, you can increase the power of your complaint by voicing your concerns when the store is filled with other customers.  Storeowners know that negative word-of-mouth is much more powerful than positive word-of-mouth so you have more advantage if you have an audience.
6. Going to court should always be the last resort, but if you have tried alternative dispute actions and not succeeded, small claims court might be the answer.  If someone owes you money and you cannot settle things in any other way, you may decide to issue a claim through the county court.  Laws and procedures vary by state but if you do an online search for “small claims court” in your state, you will probably find the information you need to get started.  However, if you do not have any witnesses or written contracts, you might find that “buyer beware” is their finding, but you never know until you try.