An investor's best friend?

Most diamonds aren't forever, says Natasha Langan. Neither are most emeralds, sapphires and rubies. If you want to make money out of investing in gems, you've got to pick your targets very carefully.

There is something amazingly compelling about gems, and it isn't the fact that they sparkle when the light catches them. Glass and cheap garnets do that just as well. No, the real attraction of diamonds, emeralds, sapphires and rubies lies in our belief that their rarity makes them special, both in terms of glamour and price. We see gems as long-term stores of value - you can't go wrong with a diamond. If your life goes well, you can flash it on your finger indefinitely. And if it doesn't? Well, what's more portable and liquid in a time of crisis than a handful of gems? They're the smallest physical store of money around.

How much of this is true? In many cases, not much. It is absolutely true that over the long-term, gems have been an excellent store of value, in that they have provided a valid hedge against inflation and currency fluctuation. Like goldand silver, good gems tend to hold their real value in all currencies and can even provide an alternative to paper currencies. But that doesn't mean that all gems are a good investment - it's a minefield of artificial stone treatments, manipulated prices and various pricing structures that are far from transparent, just waiting to blow up amateur investors.

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Diamonds: common as muck...

Take diamonds. Think they're scarce? Think again. A quick look around at a few of the ring-fingers nearest to you should be enough to reassure you that diamonds are far from scarce. If there is at least one on the hand of every engaged and married woman you've ever met, where's the scarcity? There isn't any. You just think there is because that's what the diamond industry, which has been tightly controlled by De Beers since the 1920s, wants you to think.

In fact, diamonds are plentiful. Some 114 million carats of diamonds are produced every year and, with new mines coming onstream and others being expanded, that should rise to about 120 million in 2005. Given that the average engagement ring contains well under a carat, it's no wonder that there are enough diamonds not only for most of us to own one, but for virtually every modern factory in the world to be stacked with them. And 80% of the diamonds dug out of the ground end up being used in industry. Diamonds are the hardest natural substance on the planet - a perfect ten out of ten on the Moh hardness scale - which explains why so many are used as cutting instruments. It also explains why we first started using them in engagement rings - if you're going to wear a ring every day for 40-odd years, it needs to be tough.

So, if diamonds are so common, how did we come to think they were so special? The answer is that, until very recently, De Beers controlled about 80% of the world's supply, so during downturns in demand it would be able to regulate supply and stockpile them to keep prices high. This was backed up by the creation of demand. Catch-phrases such as "Diamonds are Forever" and adverts insisting men spend three months' salary on a ring for their fiance created the myth that diamonds are a scarce, valuable resource. And then DeBeers controlled distribution to keep it that way.

The good news is that there are now a number of challenges to the dominance of DeBeers in the diamond market, which has brought transparency to the market. The bad news is that diamonds are now being treated more as the commodity they are, and prices will not be as stable in future as they have been in the past. Rough-diamond prices have risen in the last year, on the back of Chinese demand, up 22% last year, but not all analysts are convinced this will last. There is, according to industry consultants Tacy Ltd, currently a large supply overhang of rough diamonds, which should keep prices down.

Only buy very special diamonds

None of this means diamonds are a no-no as an investment. Large or well-coloured ones will hold their long-term value: right now, prices of rare red and green, fancy diamonds are soaring. But, if you do buy, make sure there's something special about your diamond, that you know its provenance, and get it from a reputable dealer or auction house. Whatever you do, don't buy retail. You'll pay a mark-up of 500%-plus.

Pearls: gems you can trust

Even if there are a few good diamonds around, a better bet for long-term value might be pearls, says Virginia Blackburn in The Times. According to jewellery dealer Sheldon Shapirom, about 99% of the pearls he sees are cultivated, "which means the rarity value of real pearls makes them very valuable indeed". If you see them, buy them and keep them.

Emeralds: gems you cannot trust

First mined in Egypt since at least 330BC, the number of fine-quality emeralds around is limited. That means that a large percentage of the gems available on the market have always been treated to improve their clarity. However, in the late-1980s, emerald producers started to inject the gems with resins to fill any cracks. Today, the market is still considered untrustworthy and not one to invest in, says The Telegraph.

Real money in rubies and sapphires

Rubies and sapphires, which measure nine on the Moh scale, are both varieties of the same mineral - Corundum - but develop different colours, depending on the chemicals in the rock. However, they all score highly as an investment because of their relative scarcity. The major sources for rubies are Afghanistan, Kenya, Sri Lanka, Tanzania, Thailand, Vietnam and Burma. The best come from Burma, but many mines are now worked out and political instability has disrupted supply. Similarly, the best sapphires used to be found in Kashmir, but supply came to an end in 1925. All this means that good stones hold their value very well. Note, for example, that an untreated Kashmir sapphire ring is going on sale at Bonhams jewellery auction next week. It was bought about 17 years ago for £17,000 and its auction estimate is now £60,000 to £80,000.

Tanzanites: very rare indeed

Tanzanites, which are a vivid blue in colour, were discovered in 1967 in the foothills of Mount Kilimanjaro and are a thousand times rarer than diamonds, says Kate Reardon in The Times. The supply is still limited to just a 5km strip of land near the mountain and prices can be volatile. But given how few tanzanites there are around, they make an excellent investment.

Buying is fraught with danger So you should buy rubies, sapphires tanzanites and special diamonds, but how? There are pitfalls. Not only are many on the market fake, but you need a huge knowledge base to invest well. The cheapest place to buy gems is from merchants in producer areas, such as Thailand, but many amateur investors who brave the market there can end up being fleeced. However, there is no point buying retail in the West. Just as a new car loses 20% of its value as you drive it out of the showroom, so a ring bought new in a jewellery shop falls in value as you pop it on your finger. Retail mark-ups start at about 300% and only rise from there.

This suggests that the best and safest way to invest in gems is to buy vintage jewellery, the average price of which has risen by about 4% a year in the past 18 years, according to London-based Art Market Research. In the past, jewellery was bought mainly for its gem content, says James Sherwood in The Independent, and that's still the case. With vintage jewellery, you can usually be pretty sure that a gem has not been treated and you should also end up paying a fair price for it. There is, for example, a 1.92 carat coloured, diamond Tiffany ring about to come up for auction at Bonhams. The estimate on it is £8,000-£10,000. A similar ring, with only a 1 carat stone, would cost you £24,000 new.

However, investors are looking just as much for design and craftsmanship today. About 100 years ago, the craftsman's time was not as valuable as it is now, and that means they used to spend a great deal longer working on each piece than is generally the case today. The provenance of jewels from old master jewel-houses, such as Boucheron, Chaumet, Cartier, Van Cleef & Arpels and, of course, Faberg, greatly increases the value of the piece. And, even if it doesn't, you'll still have a beautiful piece to wear. All the major auction houses, including Bonhams, Sotheby's and Christies, have regular auctions of gemstones and jewellery. All have experts who will talk you through the pieces in the auction, allow you to view them and be able to provide you with detailed information - with the assurance that each piece has been authenticated by experts. The viewing and the bidding takes time and effort, but it should be worth it.

Bonhams fine jewellery sale: 9 December, New Bond Street; 19 January, Knights-bridge; 25 January, Oxford. Sotheby's Antique, Period & Contemporary Jewels sale: London, 16 December.