Buyer Beware

Marking Up to Mark Down

Most of us like to believe that we’ve gotten a great deal when we purchase something at 40% to 70% off. The desire to negotiate the "best price" is an almost universal trait of human nature. Sellers take advantage of this by creating the common marketing ploy of perpetual sales.

Consumer protection laws in many states allow a merchant to advertise a sale price for as many as 48 weeks out of the year, requiring items to be displayed at their "regular" price for only 4 weeks annually, usually in no more than 2-4 day increments spaced throughout slower selling periods.

Lesser quality items are often misrepresented and marked at an artificially high price where no sales are expected to occur to allow the merchant to offer extreme discounts year round. Constant advertising claims of "up to ___% off retail" are usually a good indication of this practice. Don’t let your desire for a "deal" override your common sense. Think about it, all businesses have fixed expenses that must be met in addition to the cost of inventory, such as building or rent, payroll, taxes, advertising and utilities. Contrary to advertising claims, no store of any kind can remain in business selling items for less than their cost.

A deal that seems too good to be true probably is. Don’t be taken in by this marketing ploy. When you encounter this practice, consider the "sale" price of the item to be more representative of its actual value.

Misrepresentation of Quality

Every legitimate laboratory and trained gemologist/appraiser will tell you that diamond grading is subjective. That being said, there are limits to subjectivity.

The accepted industry tolerance of clarity or color grading unmounted diamonds is within one grade (+/-). Mounted diamonds are graded within a tolerance of two grades (+/-) for color. Mounted diamonds are clarity graded with the stated grade being the highest possible grade and a tolerance for two grades lower (assuming that grade setting characteristics are hidden under prongs or bezels).

Gross misrepresentation of quality in diamond grading is usually tied closely to other shady selling practices. For instance, overstating the diamond grade/weight or metal quality makes it is easier for a seller to inflate the "retail price" of a piece of jewelry and offer the "substantial discounts" described in Marking Up to Mark Down.

Diamonds are often measured for proportion grading using Sarin technology that sends a laser through the diamond to measure dimensions and angles. Most people don’t realize that an unscrupulous diamond seller can recalibrate a Sarin machine to produce a better proportion analysis than the actual angles and measurements of the diamond would legitimately warrant.

Another deceptive selling practice made easier because of the internet, but certainly not unique to it, is the selling of a diamond of lesser quality paired with a respected lab grading report describing a higher quality diamond. In essence, the seller has switched the higher quality diamond represented in the report with one of lower quality.

Not All Lab Reports are Created Equally

In recent years, diamond grading reports issued by independent gem grading laboratories have become a staple in the buying and selling of diamonds.

Grading Reports are not Certificates

Diamond grading reports are often incorrectly referred to in the trade as "certificates". Certificate, as defined by Princeton.edu is "a document attesting to the truth of certain stated facts". The word certificate implies certain legal consequences, such as a warranty or guarantee of the grading on the report.

No gem lab guarantees their grading and most grading reports contain some version of the following disclaimer:

This report is not a guarantee, valuation or appraisal . . . [this lab makes] no representation or warranty regarding this document or the value of the diamond described herein.

Every legitimate laboratory and trained gemologist/appraiser will tell you that diamond grading is subjective. That being said, there are limits to subjectivity. The accepted industry tolerance of clarity or color grading unmounted diamonds is within one grade (+/-). Mounted diamonds are graded within a tolerance of two grades (+/-) for color. Mounted diamonds are clarity graded with the stated grade being the highest possible grade and a tolerance for two grades lower (assuming that grade setting characteristics are hidden under prongs or bezels).

Anyone can open a “gem lab” and they vary in size from single person operations to those employing hundreds of gemologists worldwide. The jewelry trade generally acknowledges that the most respected reports are the "Diamond Grading Report" and the "Diamond Dossier®" issued by the Gemological Institute of America (GIA) and the "Diamond Quality Document" issued by the American Gem Society (AGS). Because of their respected grading standards, diamonds accompanied by reports from these laboratories will generally have a higher value than those graded by other laboratories with all other factors being equal.

The reason for the difference in value among the reports is this: while most gem labs and jewelers use the same grading terminology for clarity and color originally developed by GIA, many apply the standards more leniently. Likewise, many of the independent gem labs produce grading reports stating values that are more correctly in line with "feel good" appraisals. Typically, the values stated on these grading reports are artificially high, allowing a seller to offer the appearance of a substantial discount.

The trade knows this and you should too.

In one dramatic example of optimistic grading, a client brought in a large diamond for appraisal and a custom ring.

A client brought us a 5 ct pear shaped diamond accompanied by a grading report/appraisal from a lab in New York City (that should remain nameless) addressed "To Whom It May Concern". The report described the quality of the diamond as G color and SI-2 clarity and the report was signed by an unnamed (illegible) Graduate Gemologist from GIA.

After inspection, it was our opinion that the color grade of the diamond was J and the clarity was I-2. The color was overstated on her report by three grades and clarity by two grades. (While we do acknowledge that diamond grading is subjective, no reasonable gemologist could possibly mistake the obvious inclusions present by definition in a diamond with I-2 clarity for the slightly included grade of SI-2.)

The report/appraisal estimated the value of the diamond in a solitaire ring at $84,085. The client stated that the purchase price of the diamond was $20,000. Our research indicated that the $20,000 purchase price was a correct and realistic replacement value for the diamond.

A side note - while a Graduate Gemologist (G.G.) should have a good foundation in identifying and grading diamonds and gemstones, not all are guaranteed to be competent as indicated in the example above.

Even the most respected grading laboratories undergo periods when grading standards shift. As an individual, you cannot be expected to know whether a lab report represents a correct grading or a fantasy. We do not buy our diamonds sight unseen. We do not buy our diamonds based solely on opinions stated on a piece of paper. Neither should you.

Selling of Financing

The selling of financing is a major profit center for many large and small chain jewelers. Most offers of interest free financing for limited time periods such as 6 or 12 months are straightforward. Be aware that should you extend beyond the credit term, the full accrued interest will be retroactively added to the balance. Be sure to read the fine print.

Offers of interest free financing for extended time periods, such as 60 months, may have hidden charges. The loan may have no official interest, but a monthly service charge is often added. Financing proposals that we have seen usually place the service charge between $8.00 and $13.00. These charges can add up significantly over the life of a loan.

Another practice is to sell jewelry for a "low monthly payment" while glossing over the actual price of the item and the interest rate charged. The interest rates are typically well over 21%.

A technique in the use of financing that borders on bait and switch can occur when a seller advertises both extreme discounts and extended term interest free financing. One of our clients recounted this tale:

During a transaction, the seller offered a sizable "discount' on a ring and a purchase price was agreed upon. When the conversation then turned to the extended interest free financing, the seller returned to the buyer with a monthly payment amount. Fortunately, the buyer calculated the monthly payment amount over the life of the loan and realized that he was being charged (less the monthly service fee) the full original undiscounted price. When the buyer pointed out to the seller that the amount charged for the ring was not what he had agree to, he was told that the discounted price was only valid if the purchase was paid in full immediately and that the price to purchase the ring over 60 months was the undiscounted price.

The moral of this story is, do the math and check the figures.

“Feel Good” Appraisals

The most common reason to appraise jewelry is to obtain insurance coverage. An appraisal for this purpose should contain a detailed description of the item with an honest evaluation of quality and a realistic estimate of the replacement value. Typically the most reliable indication of the value of a new item is the actual purchase price.

In a practice that is closely related to Marking up to Mark Down, many jewelers offer what we fondly refer to as the "feel good" appraisal. The buyer is presented with an appraisal that overstates the value by inflating the purchase price, sometimes by as much as four times, and contains only a minimal description. (In a note on insurance coverage, most insurers charge premiums based on the dollar amount stated on the appraisal but offer settlements or replacements based on the actual replacement cost indicated by the description.) These appraisals are a disservice to the buyer on both counts. The insurance premium paid will be higher than necessary based on the stated value while the minimal description allows the insurance company to fill in the missing descriptive information to their best advantage in the event of a loss.

Please also see Not All Lab Reports are Created Equally as many of the independent grading labs are offering grading reports containing values that are more correctly considered to be "feel good" appraisals.

In an extreme example of inflated valuation and questionable grading, a jeweler received a large pair of diamonds for a custom job and appraisal.

The client stated the purchase price to be $30,000 and later sent the jeweler a copy of the appraisal provided to her. The lab was located on 47th Street in New York City and has an impressive name and web site. The report was signed by a Graduate Gemologist from GIA. The description was minimal and the color and clarity grades were both overstated by two grades (represented on the report as F color and VS-2 to SI-1 clarity, our grading opinion is H color and I-1 clarity – a significant difference). The value was estimated at $124,000, more than four times the purchase price. The jewelers research indicated that the purchase price was a correct and realistic replacement value for the diamonds.

A side note - while a Graduate Gemologist (G.G.) should have a good foundation in identifying and grading diamonds and gemstones, not all are guaranteed to be competent as indicated in the example above.

 

Going out of Business Sale

A going out of business sale can be a tremendously profitable undertaking for a jeweler (or any retailer for that matter). These types of sales can also be run as moving sales or inventory clearance sales.

In the jewelry industry, there are consultants who specialize in promoting and running Going Out of Business Sales (GOB Sales). For these sales the consulting companies bring in large amounts of inventory such as distress and close-out merchandise from jewelers or domestic manufacturers and low quality merchandise, often mass manufactured overseas. The new inventory is then added to the jeweler’s existing inventory and marked up to an artificially high level to begin the process of the extreme markdowns.(See Marking Up to Mark Down)

Signs that an outside consulting firm is involved in a GOB sale include the addition of new personnel and new jewelry styles before the sale is announced and the continued presence of new inventory, even weeks into a sale. The business never actually seems to run out of jewelry. Be aware of quality, warranties and lack thereof and of rules of the sale before buying.

The jeweler will inevitably state that all sales are final - items are non-returnable for any reason. This allows the jeweler to make any statement regarding the sale or misrepresent the quality or condition with no fear of reprisal. Customers are frequently and falsely told that all necessary alterations, such as ring sizing, can be performed by anyone (often these rings are of a design or quality that prohibits resizing).

These are some examples of a jewelers experience in the aftermath of a local Going Out of Business Sale. In all of these cases, the clients were left with the jewelry and no recourse.

A woman purchased a watch that was marked "Paolo designed by Paolo Gucci" (which was the name of a legitimate watch designer – unrelated to Gucci). She was told at the sale that the watch retailed for $800.00 and purchased the watch for $400.00. Two months later, she brought the watch in to the jeweler to replace the battery. The crystal was damaged during the process, and when attempting to find a new crystal for the watch, it was discovered that the watch appeared to be quite used, not new.

The jeweler then contacted "Paolo designed by Paolo Gucci" and was told that their watches contained specific serial numbers which the watch brought to the jeweler did not have and that this customer’s watch was almost certainly counterfeit. Being counterfeit, no parts are legitimately available. "Paolo designed by Paolo Gucci" had not manufactured this style of watch for some time, but when last sold, it retailed for no more than $150.00. The jeweler then proceeded to research the watch on the internet and located several similar (assumed counterfeit as well) styles on Overstock.com for the selling price of $29.99.

One ring sold during the early stages of the sale was presented by a husband to his wife at Christmas. The ring did not fit her and several diamonds were loose, but not to worry, he was told that anyone could size a ring. The ring was a wide invisibly set style with some chipped and some loose diamonds that needed to be sized significantly and could not be done without great risk to completely damaging the band. Even though the GOB sale was still in effect at this time, the customer was told that she could not return the ring and that a new one in better condition and a correct size could not be obtained in its place.

One ring brought to a jeweler to clean and check after the sale was represented to the purchaser as a new ring. The ring appeared to have been used – diamonds were loose and the prongs showed signs of obvious wear.

 

Buyers often flock to going out of business sales believing they are the sharks taking advantage of a business in distress. More often than not, the sharks are behind of the counter. A traveling sales representative for a jewelry manufacturer who recently closed a third generation family jewelry store (in a different state) confessed that he made more money in a month during his GOB Sale than during the entire year preceding the sale.

With all this said, there are legitimate Going Out of Business Sales, but these sales definitely require the buyer to beware.

Reincarnation

A going out of business sale is sometimes just a stage in the life-cycle of an enterprise. For example:

A store holds a grand opening and then sells its merchandise for a few years while employing one or more of the shady practices already described. The store assures customers it will stand behind what it sells, even advertising its "guarantee". In a few years, it holds a going out of business sale and closes its doors. A few months later, a new store opens (sometimes even with the same name) selling the same merchandise. This store is very similar to the first store with one important difference; this store is no longer expected to honor any representations, guarantees or legal obligations of the previous store.

Often ownership has changed in name only or has merely been passed from one family member to another. This "reincarnation" clearly benefits the new business, not the old customers.

Counterfeit

The production and sale of counterfeit merchandise has become a problem world-wide and occurs on the internet or anywhere that buyers or sellers are transient (such as vacation destinations, fairs, street corners and going out of business sales). In an attempt to combat counterfeit merchandise, Tiffany and Co. went on line through E-bay and purchased numerous items of jewelry and giftware represented as genuine Tiffany and Co. merchandise. Of the items purchased 80% were counterfeit.

Watches purchased from a non-authorized source such as discount venues (domestic and overseas) and many internet sites may be counterfeit or may be illegally purchased from a gray market source with the original serial numbers removed to avoid tracing by the manufacturer. Be aware that most manufacturers consider a watch to be counterfeit once the serial numbers are removed and no repair work, parts, or support will be given to the watch by the manufacturer.

Buying Jewelry on Vacation

If you are going to buy jewelry away from home, buy from a reputable business. Many of the sales ploys described in preceding sections apply when buying away from home. Sellers in tourist or resort destinations know that their buyers are transient and that recourse is difficult should the buyer return home and discover that the quality, condition, or value of the item was not as represented.

Over the years, tales of synthetic stones represented as natural, counterfeit designer pieces and sky high prices paid for marginal quality cruise jewelry are too numerous to detail here.

The best advice that we can offer when buying jewelry on holiday is: buy the item because you love it or because it is a remembrance of a special occasion. Buy only what you are happy with even if you may later find out that the gemstone is synthetic or the value is not really twice what you paid.

Investment Diamonds

There really are no investment diamonds. There are no international markets where an individual can buy and sell diamonds like stocks and commodities. Numerous scams in the 1980’s touted the buying of diamonds as an investment.

An individual or ultimate consumer is buying a diamond at the "retail" level regardless of what a seller advertises. Unless that consumer also has a bricks and mortar store or web-site, inventory and a warranty, should they choose to sell the diamond, they will most likely sell at or below the wholesale market to someone who routinely buys and sells diamonds.

While the "value" of the diamond has not changed, the market level of the transaction is different which will almost certainly affect the selling price. If you are considering giving a diamond as a gift, purchase it as a gift without consideration to its resale value in the future.

Diamond Treatments

For as long as diamonds have been used for adornment, man has developed creative treatments to alter or improve color or clarity. Disclosure of any or all of these treatments by the seller is required by the Federal Trade Commission (FTC).

Fracture Filling

Fracture filling is a treatment in which molten high refractive index glass filler is drawn into surface-reaching feathers to enhance the apparent clarity of the diamond. The improvement in appearance can be dramatic.

Repeated ultrasonic and steam cleaning and the heat from a jeweler’s torch can damage the filler, causing it to degrade and making it appear cloudy over time. It is important if you own a diamond that has been fracture filled to inform a jeweler prior to having work performed on the piece.

Laser Drilling

Laser drilling was first used as a means to improve the apparent clarity of a diamond during the 1970’s. A concentrated beam of laser light is directed at a diamond’s dark inclusions which are subsequently bleached with acid to make the inclusion appear lighter. Because laser drilling is permanent, gem labs report them as clarity characteristics.

While laser drilling does not improve a clarity grade, it makes the diamond easier to sell by making a dark inclusion appear lighter. Early drill holes were large and more obvious; improvements in technology have resulted in smaller drill holes being produced. A new lasering technique, called internal laser drilling, produces tiny cleavages that form a step-like progression to the surface of the diamond, still allowing the inclusion to be bleached while resulting in a more natural appearance than the traditional drill holes. It is not uncommon for the bleached inclusion and drill hole to be masked by fracture filling.

High Pressure/ High Temperature (HPHT)

HPHT is a diamond color modification process that uses equipment and conditions similar to those used to grow synthetic diamonds. Some types of diamonds exhibit a brown color caused by distortions of the diamond’s crystal structure. High pressures and temperatures can eliminate the brown color by reducing or removing these structural distortions.