Perspective on the Gem Rough Market

Gem rough is expensive… Why? Is it really? How about some perspective.

The correct answer is that it depends on what part of the equation you are looking at and your perspective.

Here is a story (true) that illustrates what I am talking about. I know a guy that has told me (many times, while complaining about the current cost of faceting rough, and how dealers and miners are gouging poor faceters) that in the "good old days" he bought Pariba Tourmaline for $5/gram. This would be in the early 70's, when the mine was first producing and they were getting some nice material to market. I told him that was nice (wish I had, had the chance to buy some at that price), and asked him. "How many pieces did you buy?" "Well" he said "I only bought one or two pieces…" "Oh really?" I said "Why didn't you buy a bunch more, after all it was only $5/gram?" He replied… "Well it was expensive. That was when five dollars was worth something, it was a lot of money." Yes. Right guys, that is my point. The price of almost anything including gemstones is relative to when you buy it. Gas was $0.21 a gallon or less in those days and so on.

Here are a couple of observations I would make. First off this guy screwed up in a major way. He should have bought all he could afford. In fact he should have considered borrowing a little and buying all the top rough he could at the time. Of course it is too late now. Hind sight is 20/20 but it would have been a heck of an investment. My second observation is. What would he have made on this material now if he had been smart enough to buy? A killing is the answer. Pariba is selling now (2004-2005) for $10,000.00 a carat for quality stones.

Remember he thought it was expensive then in the early 1970's at $5/gram. Unless of course he only wanted a small profit (which he claims is only fair, after all people are gouging others on the prices of rough) in which case he could sell it for $10/gram and double his money today. Sound fair? I am willing to buy every piece of Pariba he has to sell at $10/gram sight unseen at that price. Uh huh, what do you think? Paribia is selling for $3,000 to $10,000 per carat cut, in today's market and it sells fast if it is quality material. If this guy, who could have bought Pariba at $5/gram had some to sell now. What price would he be wanting for it??? Do you think that maybe he would want more than $10/gram? Would he be gouging or just making the fair market price? I bet he would not sell it for $10/gram, and I would not expect him too.

By the way this same guy cuts a lot of CZ and told me not too long ago that he was selling his cut CZ at $80 to $150 per stone. Well I personally think that is a fair price knowing how much work cutting a stone is. But if he wants to not "gouge" his customers. Then why is he charging $100 for a piece of cut CZ that he only paid $.05/carat for? Sounds like price gouging by his definition to me. People can buy commercial cut CZ for $.20/ct easily.

Perspective. In reality. There is labor in cutting, but also mining and cleaning, grading, and selling rough too. It all takes time and money. Not counting investment of capitals and lots of other costs I will not go into. What is the perspective? Like I said it depends on where you are standing. When the shoe is on the other foot I doubt that this guy above would be willing to sell Pariba Tourmaline for $10/gram with a $5/gram profit margin (100% by the way) when he could get up to $10,000.00/ct in todays market. That is assuming he was smart enough to buy some then for investment. He was not, by the way.

Here is another example. Recently I saw a post where a guy was complaining about the cost of a rough blue Sapphire, $600 for a piece of rough that was 6.5 carats or so. This person thought that the price was high, (gouging was their word for it) and really expensive. Well maybe, and then again maybe not. If you thought it was expensive, read on there are a few questions that you should have asked instead of assuming that it was price gouging. Of course if the rough was not good quality, then yes is was too expensive. But this is true on any rough. I have not seen this particular piece of rough so this is just a hypothetical situation I am writing about. I am not implying anything about anybody or thing.

Questions. What color blue, Ceylon? Top quality blue? Is it clean? Is it well shaped? How many carats will it cut? Here is the most important question. Can I make money on it? You should be asking yourself all of these questions first. Not is it too expensive. If the answer to most of these questions was yes. Then you should buy it quick and say thank you to the nice guy that is selling it to you. Remember he could cut it easily and sell it for more money if it is good rough. In most cases that is what happens to the good rough. That is why it is hard to get.

Here is a reality check, the wholesale price of quality blue Sapphire is $400.00 to $1800.00 per carat (or more depending on the locality and size of the stone). That is the going rate at the AGTA (I was just there checking the prices). That is wholesale, usually a jeweler will double that cost (yes it is common, and if you knew what a jeweler's overhead was, you would wonder how they can make money just doing that). So if that piece of Sapphire rough was $600.00 and you could cut 2 carats out of it, then conservatively you could make $800.00, a $200.00 profit. Odds are you would do a whole lot better. What if you got $600.00 per carat for it? You would make $600.00 on the stone, unless of course you do not want to gouge and sell it for less. What do you think? Sound like a good deal? So was that price gouging? Like I said perspective… and of course depending on the quality of the rough.

Here are a few of my personal observations. You may or may not agree with me, but these are my opinions. Top quality rough is always expensive, or seems so at the time you buy it anyway. I think that all the time when I buy it, and I buy a lot. But down the road you will say "man I used to buy Pariba for $5/gram…" Think about that the next time you look at some top rough and thik it is expensive. My advice is, do not be a cheap skate and just buy one piece. How embarrassing to admit later that you could have bought all that Pariba for $5/gram and did not do it. I would hate to admit it and still be kicking myself for being stupid. The serious guys/faceters are buying rough not griping and complaining. Especially about the "good old days". As my father used to say the "good old days" were not always that good and they are gone. Serious cutters are asking themselves the questions I listed above and if they come out with enough "yes" answers they are buying all the rough they can get. If you snooze you loose. Good rough is hard to come by if you think about it too long you will miss the opportunity, especially if the price is reasonable. You will seldom be able to buy the big three (Ruby, Sapphire, Emerald) as rough in good quality that you can make much money on (at least in the short run). You will often be able to buy the native cut stones better and cheaper to recut. Even then, there is often not a lot of profit. I cannot get quality Sapphire rough very often and I deal directly with the miners in a lot of cases. If you think that the miners are selling good Sapphire rough for pennies, then you are sadly miss-informed. The miners know the prices and they get a fair profit for it in most cases. Often almost what the cut stones are selling for wholesale, that is one major reason there is no rough available. People have to cut it to make money.

There are buyers set up with card tables right at the mines buying the rough as it comes out of the ground. The miners often go from table to table to get the best price. There is competition for the rough right at the mine(s). Miners get a decent price and they know the going rate. Wouldn't you if you were a miner? Especially in the Internet age? The idea that the middle men are making all the money is ridiculous. Yes, they make some money, it is called earning a living, some do better then others. But that is life. Nobody gets into a business to not make money.

Are you giving your cut stones away to strangers free? I doubt it. Although my girlfriend gets her share. The reality of rough gemstones is. There is a certain point that a person (rough dealer, miner, faceter) will be willing to sell a piece of rough and a point where they will not. This point is usually pretty close to what the going wholesale rate is on the cut stones, especially if the rough is a commercial variety with a good market (Sapphire for example). This point often changes as the dollar amount gets large, but it still exists.

The hobby market is hardly a drop in the bucket to the gemstone/rough market. It takes money to make money and as the jewelry and gemstone market gets larger and larger, this will be even more of a factor. Big guys with the money are going to get more, and pay more because they have the market. Rough, if it is even available, is going to be more expensive, it is a market force and frankly rough dealers have no control over it. No matter what some people would like to think.

Sorry, all the hobby facters, rough dealers, cutters, pro cutters and anybody else on this side of the equation together are not going to have very much influence on the rough market. The big commercial interests (or goverments) will control the market and the ultimate price of rough. People buying a few select stones, are going to have to pay for the privilige. That includes rough dealers buying smaller amounts than the big guy too.

I can tell you that it is a poor businessman that sells a stone rough for $5 when he could cut it and get $10. What would you do? That is what is happening, not only at the dealer level but more and more mines and countries that have a lot of mines are developing their own cutting houses and marketing directly. Some are private parties buying direct at the mine(s) in the country where the mines are located and then cutting locally, but there are a lot of governments getting involved too.

Sri Lanka is a good example. They used to export rough and cut stones, now it is basically illegal to take rough out of the country (the goverment wants all the rough cut in the country for the extra profit). I have not seen a piece of Sri Lanka rough in a long time. What do you think the effect of this government law has been on the rough market? How about on the cut market? Right, things are more expensive and not available. Other goverments are doing this too, I am hearing about it and have seen it in many gemstone producing countries, prices are going to go up on rough, that is if it is even available.

I have said before that a lot of rough dealers are cutting their cherries (top stones) and selling them cut. Why shouldn't they? The only way a faceter is going to get that type of rough. is to make it worth the dealers/miners while. The dealer selling the rough for a little less money than he could get for the same stone cut, but without having to cut it. Then it is worth the dealer's while to sell it rough. Say, sell it for $8. to a faceter, instead of $10 cut into a gemstone. That is business.

As far as mark up, if you have ever been in business then you know that the market finds it's own level. If the rough is not of the right quality for the price then it will not sell. Buyers let their wallets vote for them. As far as a high mark up, well most businesses have about a 20-40% overhead (majority of them are in the low 30's) so you do the math. That overhead is not counting, income taxes (20-40% for the average person, FICA…), loss, and all types of other costs too numerous to list. Most people are making a living, some of them a very good living, but I would not say they are getting rich. Whether you like it or not this is how the market forces are driving gemstones/rough/supplies. You can always cut man-made materials… make your own laps, and faceting machines. But in general the market sets the price of about anything, and I know some people will not believe me but the customer is usually getting an honest fair price. Sometimes customers are getting prices so low the guy selling to them is going out of business, he just is not gone yet.