JEWELRY as an INVESTMENT for the Regular Person

 

Jewelry as investmentContrary to popular belief, jewelry can be a valuable and dependable form of investment — if it is acquired intelligently with a focus on current value.  In fact, for most of human history, jewelry was a simple, dependable and convenient means for storing wealth in a quasi-functional form.  Changes in economic models, global and domestic economies, the global fashion industry, advertising norms, and the commonality of person-to-person transactions have drastically impacted the usefulness of jewelry as an investment vehicle. These changes began in earnest in the 19th century and progressed very rapidly in the second half of the 20th century. As a result of these economic and cultural forces, jewelry investment has become less common for most of us.  However, jewelry investment remains an excellent way to store wealth and insulate yourself from inflation. How do you accomplish these goals? The answer may be pretty simple: make educated acquisitions of preowned jewelry.  And, we are talking about jewelry that can be purchased by the average person, as opposed to gems of exceptional rarity or museum quality pieces.

Before delving into the specifics, it is important to consider why someone would choose jewelry as an investment, as opposed to a more orthodox and modern form of investment. It really boils down to personal choice. People who enjoy wearing and collecting jewelry will derive infinitely more pleasure from a well crafted piece of jewelry than from another 10 shares of their favorite mutual fund.  Stock Certificates simply do not look good with a little black dress!

An often mentioned additional benefit to investing in jewelry is the peace of mind that comes with knowing that, regardless of what happens to your local economy, there will always be a buyer for valuable jewelry. The 20th century was riddled with examples of economic collapses that rewarded only those who held physical wealth – often in the form of jewelry (e.g. the fall of Saigon and the subsequent devaluation of the piaster).

Vietnamese Piasters 1967
1967 Vietnamese Piaster Notes

While it is exceedingly unlikely that developed economies will face such collapse in the 21st century, we acknowledge that there is a certain comfort to holding some wealth in physical form.  We do not, though, delve into that subject here.  If one is truly concerned about disasters and economic collapse, there exist an abundance of books and web articles dedicated to the subject. They all seem to conclude that silver bullion is the preferred means to hedge against such an outcome.

Finally, even the greatest jewelry aficionado would be wise to use jewelry investment as a single component in a balanced investment portfolio in consultation with a qualified investment professional. Jewelry is difficult to liquidate, does not generate income, and is subject to fluctuations in precious metal and gemstone prices. See the General Risk Disclosure at the end of this article for more information.

Understanding Value

In order to intelligently buy jewelry as an investment, you should first understand how jewelry is valued.

Jewelry Value

The value of a given piece of jewelry can be broken down into five elements:

  1. Inherent Value (the cost of the precious metal and gemstones used to construct the piece of jewelry – see our article on calculating gold prices for an example).
  2. Manufacturing value (the cost of the labor and skill required to turn the precious metal and gemstones into a piece of jewelry)
  3. Aesthetic value (the artistic appeal of the piece of jewelry – it’s intangible “beauty”)
  4. Marketed Value (the value added by a jeweler who makes the piece available to the consumer and stands behind the product)
  5. Fashion value (the value added by association with brands, designers, and fashion trends)

These five elements do not fit into neat and tidy boxes. Rather they overlap and bleed  into each other . Let’s look at an example.

Peridot Ring

This ring is crafted from solid 14K white gold and is set with diamonds and a high quality Peridot.

  1. We first consider its inherent value.

The inherent value of the ring is impacted, to some degree, based on the location we are in. This variable is particularly significant for gemstones.  The price of gemstones tends to be cheapest at the place they are mined and increases, often exponentially, as you move further away from the mine – both in terms of distance and the number of hands through which the stone passes before reaching the consumer.  This impact has lessened in recent decades as individuals in mining economies (e.g. South East Asia and Africa) have leveraged e-commerce sites to reach directly into consumer economies (e.g. USA).  For the purposes of this article, we are discounting this impact and considering only the value in our location (Metro New York).

The value of the gold in this ring is $66.00 (2.7 grams at today’s spot price)

The value of the diamonds is $3.00 (the average paid by NYC diamond buyers for 6 one point melee diamonds of commercial quality)

The value of the Peridot is $9.50 (the average sales price on eBay for a 10x8mm AAA grade Peridot less fees and costs).

Thus the total inherent value of this piece is $78.50.

2. We next consider it’s manufacturing value

A lot went into making this ring. The design for the ring had to be conceived in the mind of a jewelry designer and then put to paper. The raw gold had to be mined, alloyed, and cast in the shape of the ring. The stones had to be mined, graded and cut. The diamonds were likely cast in place but, the Peridot had to be hand set. The ring was then filed, finished and polished. Placing a value on this labor is difficult because the labor to create it was purchased in vastly different economies. The stones were mined in the third world, where daily wages are often equivalent to a few dollars. The casting and finishing was performed in a large developing-world factory. It would cost many times more to have the same item manufactured in the consuming market (here, NYC), but we will, for purposes of this article, assume that global labor will continue to be readily available. We (the authors) cannot accurately determine the exact cost of this labor. However, we can back into an approximation. Because we purchased the ring in at wholesale, we know the wholesale cost, on a semi-direct import, is $102.50. Thus the manufacturing value lies somewhere in the delta between the inherent value ($78.50) and the wholesale value ($102.50). That figure ($24.00) of course includes much more than manufacturing value. Mixed within it is also the cost to transport the ring, the cost to market the ring to wholesale buyers and the wholesaler’s profit. We are not privied to those numbers, so, for our purposes here, we will conclude a “manufacturing” value of $24.00.

3. Aesthetic Value

Any discussion of aesthetic value inevitably triggers the expression “beauty is in the eye of the beholder”.  And like most clichéd expressions, there is some truth in that statement . However, when it comes to jewelry, and most other artistic commodities, beauty tends to be defined, in a general sense, less by the individual and more by the culture and society from which the individual originates. Items of great “beauty” will therefore always be sold at a premium.

Importantly, aesthetic value is often dictated, in part, by the technical skill of the artist who created the piece. It is difficult for us to draw a line between where this issue goes to aesthetic value as opposed to manufacturing value.  For our purposes, the overlap is not especially important.

4. Marketed Value and Fashion Value

Marketed value is the value added by the vendor who makes the item available in a safe retail setting, guarantees the quality of the stones and metals, generally stands behind the product and often assists with the financing of the purchase.  In order to cover his or her overhead, the vendor usually charges somewhere between the 200 and 400 percent of the combined inherent and manufacturing value of the item. Our Peridot ring, for example, retails for $349.99 on Amazon (a multiple of approximately 350% the manufactured / inherent value of $102.50). Especially beautiful pieces (high aesthetic value) can command an even higher multiple.

These multiples may sound high, but it’s when we consider fashion value that things really get out of hand. If the example used here, the Peridot ring, was branded Cartier or David Yurman, the multiple could rise to 1200% or greater.  For especially fashionable (aka “hot”) pieces, the sky is the limit.

Cartier DY

 

Tying It All Together: Two Simple Rules

Investing in jewelry is simple once you understand how it’s valued. That’s why we covered that process first. If you live near the ocean or a large lake/river, you have likely heard the expression “Once you take a new boat  off a show room floor it  looses 25% of it’s value”. Well, that is generally true for boats (we know from first hand experience…..).  The same thing, in a way, is true for “fine” jewelry (by “fine” we mean made of gold or silver as opposed to costume jewelry). Once you buy a piece of new fine jewelry and take it home, it’s now “used jewelry”.  Because it is used, its value is now substantially less than what you paid for it.

This is pretty much the point where the boat comparison no longer works. A boat will continue to decrease in value the longer you own it –  until it essentially becomes a valueless hunk of fiberglass sitting on your front lawn. In most instances, you actually have to pay someone in order to dispose of it.  Fine jewelry, on the other hand, will always keep at least its Inherent Value.  Even if it is broken, the inherent value is tied to the material that it is made of – so – unless you “vaporize” it, it will always have its inherent value.  This is the first rule of simple jewelry investing: ALWAYS BUY JEWELRY MADE FROM GOLD OR SILVER. (We say “simple” jewelry investing because there is certainly a an investor market for collectible costume jewelry – but that market requires far more education and experience than we can impart here. )

Barring a total economic collapse, a piece of well made fine jewelry will also always have its manufacturing value. In other words   –   a pair of earrings, or a ring, or a brooch, will always be  worth more than a mere blob of gold or silver.

This all sounds quite peachy, but there is some bad news. The marketed value and fashion value of a piece of fine jewelry do not suffer the ages as well as inherent and manufacturing value. The marketed value dissipates as soon as you buy the piece. This is because you do not have the same ability to market the piece as a jeweler. The fashion value dissipates (sometimes rather abruptly) based on the fickle nature of “what’s in season”. For very hot designers (think pieces sold at Bergdorf Goodman) the fashion value might only last a single season. Consider the example below. This Paige Novick ring retailed in Bergdorf Goodman for nearly $600.00 in 2012. You can buy it now on eBay for about $35.00.

Novick

So what can we learn from this….. the second and absolute most important rule to smart jewelry investing: BUY PREOWNED JEWELRY!  By purchasing preowned jewelry, you are avoiding the steep loss of marketed and fashion value. For example, you could buy the Peridot and Diamond ring discussed above from Amazon for $349.99 brand new.  After owning it for a month, you would be lucky to re-sell it for 125.00. That’s not a very good investment! In fact it’s a total loss. Instead, you could buy it used on ebay, amazon, or from an estate jeweler for about $125.00 and then re-sell it for roughly price on ebay yourself.  The pre-owned ring will provide you the same benefits in terms of wearability and style, but without the loss in value.

The final rule to jewelry investing is: BUY WHAT YOU LIKE!. If you’re not going to wear or at least enjoy the pieces you buy, then you might as well buy gold or silver bullion. Bullion is easier to purchase, easier to sell, more durable, and tends to take up less space in the long run. The whole point to investing in jewelry is that you can have your cake and eat it too. You get to own an awesome fashion accessory that seconds as an investment.

General Risks Disclosure

Hunter Ridge Acquisitions, LLC supports the idea of buying fine jewelry for purposes of enjoyment while also having the added benefit storing value and preserving assets. However, because fine jewelry is made from gold and/or silver (precious metals) and some investors buy these metals for purposes of speculation with the goal of making a profit, our lawyer advised us that we need to provide the following important disclosure of risk: Every investment involves risks and Jewelry is not an exception to that rule. Prior performance cannot be used to predict future performance. In other words, just because people have successfully invested in Jewelry in the past, that doesn’t mean your investments will be successful. Investing in Jewelry may not be suitable for everyone. You should make sure you have adequate cash reserves and disposable income before investing in jewelry. Importantly, unlike CD’s or Bonds, an investment in Jewelry does not produce any interest, income or return. If you intend to make a profit or income from jewelry investing, the value of the jewelry you purchased would need to rise sufficiently to first cover the purchase price and transaction costs before you would make a profit. Jewelry investments are of course not insured by the Federal Deposit Insurance Company or any other government entity. Hunter Ridge is not liable directly or indirectly for any losses suffered by persons as a result of their purchases of jewelry, whether from Hunter Ridge or another jeweler.

Special Factors Affecting Prices and Value

Fine Jewelry is made from precious metals and the value of precious metals is impacted by whole host of economic issues over which you have absolutely no control. For example: sovereign debt, global disasters, currency exchanges, the number of dollars issued by the treasury, the amount of metal consumed for manufacturing and jewelry purchases and global trade arrangements and many other factors not mentioned here. You should weigh all of these separate factors before making the decision to invest in precious metals. The current spot price of precious metals can change by the second.

When you buy fine jewelry, you will almost always pay more than the spot value of the precious metals that make up the piece of jewelry. In other words, if a gold ring has a “spot” value of $70.00 you are likely to pay more than $70.00 to buy it. At the same time, if you try to sell that ring (for example at a “we buy gold store”) you are likely to be paid less than $70.00 for it.

 

 

 

 

 

 

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