News flash!!!  Lots of people are selling back their gold these days – and many jewelers have stayed profitable by responding.  The reason seems simple enough – "it's the economy, stupid".  It sure doesn’t hurt that gold prices are at all time highs as well.

What about diamonds? Aren't they also steadily increasing in value?  And, don’t our best clients have some diamonds in their jewelry boxes that they don’t need?  Of course!   

But, reselling a diamond just isn’t as easy as reselling gold, because the diamond trade is trickier.  Anyone with a scale, a test kit, and a checkbook can flip gold. It takes a lot more savior faire to properly assess diamonds – even more so to buy and sell them profitably.

On the supply side, I believe that most consumers actually “sit” on their excess diamond treasure because of a simple paradox – they know their stash is valuable, but they just as surely know that they will get gypped if they try to capture the real value.

Here’s what’s happening.  Pawnshops are picking up melee for free.  You know the drill, it cost more to cut them out of the setting than they are worth.  They also offer ridiculously low prices for larger goods, because they are aggressively hedging their own bad judgment.  Not to mention the fact that they don’t have access to “final” consumers of these larger stones.

It’s also no secret that eBay, Craigslist and other venues of consumer-to-consumer exchange don’t do so well in the diamond department because of “trust” and “security” issues.

On the demand side, that leaves the retail jeweler as the most likely buyer of “previously loved” diamonds.  However, even those jewelers who buy some diamonds OTC (over-the-counter) mostly do so reactively rather than as a strategy.

Again the reason is simple.  Most jewelers live by the proposition of “we do not finance broken romance”.  After all, it can be highly embarrassing – for either the jeweler or his guest or both – to quote lowball cash offers for a diamond.

Let’s face it, most jewelers also don’t have the liquidity to buy diamonds on the fly or to sell them very quickly.   That is why the memo trade exists.  That is why wholesalers can pretty much still dictate terms.  

All the above is what economists call “market failure”:  Any situation where a market does not efficiently allocate resources to achieve the greatest possible good, especially the absence of a market due to incomplete or asymmetric information.

Next up, the opportunities for getting these diamonds “out of the box”…