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The Top-Performing Alternative Investments: Gemstones

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Demand for colored diamonds and other precious stones remains strong, but this market is not for the faint of heart.

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One of the oldest investment strategies there is, gemstone investing, is not for the faint of heart or light of pocket. Its lengthy history means the field is chock full of closed-ranks experts who play the market like a Stradivarius, as well as scammers who play chumps for hundreds of thousands of dollars a pop. Nonetheless, the combination of emerging middle-class markets in India and China looking to flaunt their new wealth on fingers and around necks, and the suggestion that there are no fresh caches -- like the huge diamond deposits discovered in the Canadian Arctic in the 1990s -- left to be found, mean that appetite continues to grow for precious stones. Plus, it's in our magpie blood to collect shiny objects, like the colored diamonds that are all the rage at the moment.

How It Works: There are several strategies to gemstone investment, ranging from purchasing individual stones on your own -- as risky as gambling at craps, but perhaps the option offering the highest satisfaction -- to investing in a fund specializing in large, high-quality diamonds, such as Diamond Circle Capital (DIAM) to, well, playing the market in a fairly traditional way and buying shares in some of those touted Canuck mine operations.

Who's Investing and Why They're So Good at It: Aside from relatively new investment funds such as Diamond Circle, whose performance since its 2008 launch hasn't exactly set the world ablaze, most gemstone investors tend to be long-time gem specialists, often members of a tightly knit collection of families clustered in Holland, India, Brazil, Israel and New York. Otherwise, you need serious education to successfully wade into even the shallow end of the pool, or gain access to trusted, accredited and expensive gemologists. And the genuinely rare stones -- the ones that offer real appreciation possibilities -- are priced at a level that few can afford to invest in.

Multimillionaires looking for the next level after fine art? This is your scene.

What They're Making: Stories abound of Uncle Bobs and Auntie Sues who bought gemstones, put them in a vault and then died, leaving their heirs to discover that that $15,000 red diamond bought in 1955 was now worth $800,000. Take those tales with a 20-karat grain of salt. Most gems increase in value at the rate of inflation, and that's about it. And they're extremely illiquid: Unless what you have to sell is genuinely rare and one-of-a-kind, there's no way a gem buyer will give you anything near market value.

Why They Really Do It: For many, it's simply a fascination with the gemstones themselves. Those are the happiest -- gem collectors, rather than investors. For the super-rich who can afford to invest in the ultra-rare gemstones that do actually appreciate at any worthwhile level, it's the exclusivity -- the fact that no one but the super-rich can really play at this level -- that's the main attraction. And, from the exclusive Sotheby's auction to the risky gem-cut in Antwerp, there's an addictive thrill.

How to Get Started: Go to school and become a gemologist, earn hefty fees for your work in identifying genuinely valuable stones, and work your way up from there. Or, alternately, earn billions in an unrelated industry and then start collecting gemstones as a relaxingly expensive hobby.

Amateurs Be Warned: Even with an extensive education and years of experience, pros get routinely fooled by the wide variety of increasingly sophisticated fake and enhanced gemstones on the market -- and gem counterfeiters and fraudsters have been doing this for centuries. Unless you've invested a great deal of time and money into becoming an expert, don't do this on your own. As far as unsolicited approaches offering you exciting investment opportunities in gemstones, or cold-call gem-buying opportunities? Run away, very fast.
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No positions in stocks mentioned.
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