Invest Like A Billionaire: Collecting Gems

Investing Advice

photo: alisamii

When Sweden’s Crown Princess Victoria wed on June 19, 2010, it was the royal event of the summer: 1,200 guests glided through the lavish ceremony and thousands of onlookers lined the streets to catch a glimpse of the fairytale couple as they rode in their horse-drawn carriage.

Topping Victoria’s look was a tiara made of gold, pearls and cameos, the center of which depicted Cupid and Psyche from Greek mythology.

Rumored to have been owned by Napoleon’s Empress Josephine, the Cameo Tiara has been in the Swedish royal family since the early 1800s when Josephine’s granddaughter Josefina married the future King Oscar I.  Victoria’s mother, Queen Silvia, wore it on her own wedding day too: a sentimental heirloom, as well as one worth millions, a tidy investment made a few centuries ago.

The same can be said for England’s Crown Jewels, said to be worth upwards of $30 million.

Jewels: Not Just for Royals

Investing in gems does not have to be relegated to rich royalty. You, too, can make money investing in gemstones, as long as you pick a strategy that works for you.

There are two main ways for retail investors to invest in gems: buy the hard asset or invest in a proxy, such as an individual stock or ETF. Both have inherent risks and variable rewards that depend on your level of risk tolerance.

Buy a gem

A stock can lose all of its value, especially if a technology or competitor comes along to make the company obsolete, but as the saying goes, “a diamond is forever.”

Gems have intrinsic value that withstands the test of time. Even with the global downturn decimating markets, the price of precious gemstones – emeralds, rubies, sapphires, diamonds – is at or above 2008 levels. As a rule of thumb, gems increase in value at the rate of inflation, so though you won’t get double-digit gains, you do get a store of security.

In general, however, if you are interested in buying gems as an investor, a jewelry retailer is not the place to go. Much as you like wearing your ruby pendant from Macy’s or diamond ring from Tiffany, those pieces have been marked up several times before making it on your finger or around your neck. Jewelry bought from a store is meant to make you pretty — but don’t expect it to make you rich. (Obviously, here we exclude pieces with collectible value, such as jewelry once owned and worn by celebrities or extremely rare stones.)

If you are seeking out gems as an investment, you will need to buy below retail: go to primary dealers or wholesalers who mine or cut the stones themselves. You can also look for pre-owned gems at flea markets, pawnshops and estate sales. It takes patience, and a little bit of luck.

(The Gemological Institute of America offers a gemstone buyer’s guide. If you are not a gem expert, find a gemologist to speak with before you make any purchases.)

If you buy popular gemstones, you have a better chance of reselling them for a profit later on. Some that are currently in vogue are color gemstones like emeralds, rubies, and sapphires. If you have the means, you will get a better deal to buy in lots than single stones.

When you want to sell a gemstone, auction houses, online auctions and jewelry stores can be potential buyers. If you make a profit, you will owe capital-gains tax on it — or you can make a tax-free exchange if you trade your gem for one of equal value, or defer taxes if you trade up.

Buy precious metals

You an also buy gold or silver hard assets. According to the World Gold Council, investment demand for gold soared more than 72% in 2008 and grew by an additional 90% through the first nine months of 2009.

Gold bullion coins can be found in a variety of coin shops and are both “liqiud” (meaning that there’s an active market for their sale and resale) and portable. You can even buy bullion bars of gold, silver and platinum in a wide variety of sizes, from small to quite large from dealers like Monex Precious Metals.

(Curious fact: In Germany and Abu Dhani, vending machines dispense gold bars.)

Of course, with the price of gold now at all-time highs, the question is whether now is the time to be buying it. Some believe precious metals will continue to go up in price, yet others say they are at their peak: research both arguments before you make a decision.

Invest in a proxy

If you don’t have the time or inclination to look for the hard asset, another way of investing in precious metals or gems is to invest in mining company stocks. (This also takes away logistical headaches of owning the hard asset such as insurance, storage, moving, and reselling.)

But as Morningstar analyst Harry Milling points out, precious metal stocks are highly speculative. “The stocks of gold miners were twice as volatile as the price of gold, and the average 2009 gain of the equity precious-metals funds that invest in them was 53.1% versus the 24% rise in gold’s price,” he writes.

In other words: while precious metal stocks offer the potential of high returns, it comes at a high risk.

To spread the risk, consider funds the invest a diverse array of miner stocks like the Vanguard Precious Metals and Mining fund (VGPMX) and the Fidelity Select Gold Portfolio fund (FSAGX).

You can also consider investing in commodity-based exchange traded funds (ETFs), which tend to be cheaper than actively managed equity precious metals funds. Some ETFs buy and physically hold gold bullion, enabling investors to invest in the asset, but not necessarily holding it physically. Gold ETFs also allow you to “buy” portions of an ounce of gold, which may make sense for investors who can dedicate smaller amounts to that particular asset: as of July 13th, gold stood at  $1,217.60 an ounce.

Investors are flocking to gold ETFs. Over the first half of 2010, investors sent $8 billion to three gold ETFs – SPDR Gold Shares (GLD), iShares COMEX Gold Trust (IAU) and ETFS Physical Swiss Gold Shares (SGOL)– according to Morningstar analyst Patricia Oey.

But it’s not just about gold. Silver can be used both as an inflation hedge and as an industrial component. A variety of silver ETFs are available, from ETF Securities Silver Trust (SIVR) to iShares Silver Trust (SLV). In addition, iPath Dow Jones-AIG Precious Metals Total Return Sub-Index ETN (JJP) and PowerShares DB Precious Metals Fund (DBP) invest not only in gold and silver but also other precious metals.

A gold ETF should not account for more than 2% of total assets according to Morningstar; and “a 4%-10% total weighting for all direct commodities exposure is sufficient, and the majority of that weighting should be split among energy, agricultural, and industrial and precious metals,” writes Morningstar’s Paul Justice.

Be sure to consult with your financial planner or adviser (if you have one) before making any radical portfolio moves.

Tatiana Serafin, a former staff writer at Forbes, now heads Global Markets and Ideas.

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