A Lab Index?

Peter Yantzer of the AGS Laboratory mentioned his idea for a “lab index” to me recently in Boston.  It’s certainly intriguing, even if I’m not 100% sure it could be pulled off. Anyway, I told him to send it to me, which he did, and I’m printing most of his email here as I think it merits discussion:

How does the industry handle the pricing of diamonds with reports from different diamond grading laboratories?  The diamond industry knows that the consistency and accuracy of reports issued by laboratories varies from lab to lab.  The industry solves this problem by assigning different per carat prices, like-for-like, depending on which laboratory issued the report.  For example:  Excellent Cut, H Color, VS1 Clarity and 1 carat in weight.  Manufacturers, wholesalers and retailers can get this information by subscribing to polygon.net or diamonds.net or other company.

The disparity in value can be very large.  It’s not unusual to see an asking price of Rap -15% for a diamond that has a top tier laboratory report.  The same ‘quality’ with a report from a lower tier laboratory might be listed at Rap -60%.  Doing the math and assuming a per carat price of $7,000, the asking prices work out to be $5,950 ( 7,000 x 0.85 ) per carat and $2,800 (7,000 x 0.40 ) per carat respectively.

An inexperienced and/or uneducated individual who was looking at both diamonds and their reports might easily be led to believe these two diamonds were equal in quality.  Nothing is further from the truth!  Something is very wrong with the grading of the stone with the asking price of $2,800 per carat.  Since it probably does weigh what is listed, then the problem has to be with the cut and/or color and/or clarity grading or all three.

Above, the consumer was not listed as someone who had access to the information.  Without information, the consumer is totally at the mercy of the retail jeweler.  Most retail jewelers are ethical and scrupulously honest.  I’m fairly sure that the retail jeweler is the entity that is ‘on the hook’ for any misrepresentation in quality – not the wholesaler, the manufacturer or the laboratory.  Without exposing himself to liability, how can a retail jeweler sell a diamond with a lower tier laboratory report?  Can he or she ethically say that this stone is an Excellent Cut, H Color, VS1 Clarity and 1 carat in weight?  I think not since the retail jeweler knows that there is something very wrong with the accuracy of the grading of that diamond.  Otherwise it would be priced closer to $5,950 per carat rather than $2,800 per carat.  Can he or she sell the diamond by disclosing to the consumer that the diamond has a report from XYZ laboratory but that the grading is inaccurate and the stone should have been graded differently?  How can he or she sell it if he or she discloses that the diamond is not graded accurately?  What are the answers to these questions?

What about unethical retail jewelers using ‘sharp practices’.  Robert M. Shipley, in founding the American Gem Society, forbade the use of ‘sharp practices’ because he knew that a knowledgeable jeweler could take a consumer ‘to the cleaners’ by using his knowledge unethically.  Let’s do some more math.  The diamond with the report from the first tier laboratory would sell for $7735 ( 5,950 x 1.3 ) per carat if the retailer could get a 30% margin on the stone.  It is probably not in the unethical retailer’s best interest to sell this stone.  Using ‘sharp practices’ he could sell the $2,800 per carat stone for $5,600 per carat, make 100% margin and sell it for less money than an accurately graded stone would cost an ethical jeweler.  All the unethical jeweler has to do is tell his customer that the diamond has a report from a gem lab that has, say, an international presence and that labs are labs.  He thereby assigns the purported value of the stone to the laboratory rather than to himself and in so doing misleads his customer.  In this example, the consumer has been lied to and paid far too much money for the purported quality.  However, the unethical jeweler has made more money ($2,800 versus $1,785 ) and far better margin ( 100% versus 30% ) by deflecting to the consumer the actual quality of the stone to the grading laboratory rather than to himself.  It’s pretty easy to see that there is a great temptation to not do the next right thing.

The crux of the problem is that the consumer does not have access to the information that jewelry industry has access to.  Nobody I know wants their prospective customer to know their costs.  So how can a consumer get meaningful information without knowing the retail jeweler’s costs?

The publication of an index could solve this problem.  This is how it could work:  Diamonds with reports from ABC laboratory, which is very consistent and accurate, would receive an index rating of 1.  STU laboratory might get an index rating of 0.8.  The consumer would then know that at a wholesale level, diamonds with reports from STU laboratory trade for 20% less than diamonds with reports from ABC laboratory.  Diamonds with reports from XYZ laboratory might get an index rating of 0.4.  That way a consumer would know that diamonds from this lab would trade at 40% of ABC laboratory reports.

The index could be published and continually updated by an industry publication or a national media publication.  The key to make it happen would be that polygon.net or diamonds.net or other data collection entities make the information available to the publisher.


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JCK News Director