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Video: Diamond deal or dud?

By Correspondent
Dateline NBC
updated 12/11/2006 12:47:35 PM ET 2006-12-11T17:47:35
CONSUMER ALERT

This report aired Dateline 2005.

It’s just a polished lump of carbon, but really a diamond is so much more. It’s often the most precious and meaningful piece of jewelry people buy. Last year, Americans spent an estimated $30 billion on diamonds.

But how can people be sure of what they’re getting for their money? Is there such a thing as "a deal" when it comes to diamonds? A "Dateline" hidden camera investigation uncovered secrets about how diamonds are evaluated and sold.  

It's all in the certificate
All this begins with a card or certificate that often comes with diamonds when you buy them. It shows the grade, the quality  of the stone, and may also include a dollar appraisal. Diamonds that come this way are commonly referred to as “certified.”

Jewelers say it’s a reliable way to buy a diamond because the certificates reassure uncertain shoppers about the diamond’s quality and value.

To understand the information on those certificates, you need to know a little about how the experts grade diamonds.

It’s all about the four "C" s:

  • Carat, or the size
  • Cut, which is the depth and proportion of stone — the better the cut, the more sparkle
  • Clarity,  how many imperfections or flaws  the diamond has
  • and Color, — the whiter the diamond, the higher the value

The certificates that spell out the four "C"s come from independent labs. Jewelers gladly give them to you when you purchase the diamond. And the certificates often include dollar appraisals. 

Posing as shoppers
Two “Dateline” staffers posed as a couple looking for an engagement ring. We bought thousands of dollars worth of diamonds in several places— at New York’s diamond district, retail stores and on the Internet.

At most of the stores, clerks pointed to the appraisal as evidence that we were getting a bargain.

For instance, we bought a diamond ring at Zales, the largest jewelry chain in the nation. They said the ring we chose was on sale. It was selling for $4,000, but the appraisal said the ring was really worth more than $5,000. (That would be a bargain!)

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We also looked for a ring at Walmart, the country’s largest retailer. For a ring with an appraised value of $3,300, we paid just under $2,000.

So why would they sell it for so much less than the appraised value? The clerk told us it was because of Walmart’s retail clout that we were getting such a great price. That might be part of it, but repeatedly, we ended up paying substantially less than the appraised values. It appeared we had saved thousands of dollars, and had gotten some beautiful stones.

At Zales, we even got what the clerk told us was a perfect diamond. The stone was small, but we were told it was flawlessWe paid $999  for the diamond ring, even though its appraisal said it was worth $1,275.

We now had a cache of diamonds in our possession. In almost every case we were told we got a great deal — and key were those appraisals. 

But how do jewelers and gem labs come up with those appraisals?

It again goes back to those four “C”s of diamond grading. The appraisal is based on how the carat, cut, clarity and color of a diamond are judged.   

Testing the labs
But “Dateline” wanted to see just how accurate and reliable diamond grading really is, so we did something no consumer would do: We removed the stones from their settings and sent them to four different gemological labs.

Would the labs all judge the 4 “C”s of our diamonds the same way? Or even match the grading certificates we got when we bought the diamonds?

We enlisted the aid of Cap Beesley, master gemologist and president of American Gemological Laboratories. He graded the diamonds himself, double-checked that the diamonds we sent out were the diamonds we got back, and he helped us to understand the results.

And those results surprised us: Some of the grades varied significantly from lab to lab — and in fact, except in one case, none of the diamonds was graded the same by Beesley and the labs.

"Consumers basically believe that these grades are chiseled in stone when, in fact there is a high degree of subjectivity," says Beesley.

Consumers might believe the certificates are 100 percent reliable, but read the fine print. They say: “This report is not a guarantee”  and “Gemstone grading is not considered a science... results of any examination performed may differ.”

We even sent the stones back to the very same labs that supplied the certificates that came with the diamonds when we bought them. And even some of those results varied the second time around.

How can that be?

Diamond grading more subjective than it seems
It turns out the industry allows for a margin of error when it comes to grading — it’s called “tolerance.” Most of the variances on our stones were within that tolerance, but appraisals are based on grading, so those variations could really affect the value of a diamond.

A grade either way could be worth a thousand dollars — or more. "It depends on the size of the stone and the quality level, so it can be substantial," says Beesley.

Remember that so-called “perfect” diamond we bought at Zales? 

When we sent the loose stone back to the lab, and it came back with a much lower grade on one of those 4 Cs, specifically, the clarity. It therefore had a much lower appraisal. When we bought it our certificate said it was worth $1,275. Now the diamond was appraised for hundreds of dollars less.

“I think it’s probably one of the more shameful things in our industry — appraisals used as marketing tools,” says Don Palmieri, a senior member of the American Society of Appraisers. “You get a high appraisal, you walk out thinking you just got the last great deal. But you just got misinformed with that document.”

We asked Palmieri to review the appraisals that came with the diamonds. He said in most cases the appraisals were grossly inflated. “Those prices came from the market imagination, I believe, of the retailer and the laboratory,” he says.

Still, many retailers like to use those appraisal numbers as gospelAfter all, it helps them make the sale. 

Palmieri says the appraised value should never be taken as an absolute. Even the labs don’t claim to be providing anything more than an educated opinion.

Again, just read the fine print, which has lines like: "appraisals are bona fide opinions..." and “these values are not for investment purposes, nor are they an endorsement of the price you should pay."

Will this cost you money?
Relying on any appraisal that’s substantially more than you paid could end up costing you money if you pay higher premiums when it’s time to insure.

Kelly McDermott paid $8,200 for her ring but was convinced it was really worth $15,000 based on an inflated appraisal from her jeweler. And so she paid the insurance premiums based on that assumed $15,000 value.

But when she lost the ring, the insurance company said it would replace the ring or give her a check for what it would cost them to replace it — $8,900.

“Five years, I’ve been paying these inflated premiums and it makes me angry, because I should have the ring insured for what it’s worth,” she says.

Who's responsible: The retailers or the labs?
The retailers we talked to told us they rely on the professional expertise of the labs and referred us to them. The labs told us they strive for consistency and that the variances were generally accepted in the trade. (The lab that regraded the Zales diamond so much lower the second time told us the manufacturer might have accidentally switched the stone.)

“I can not talk to how other people are appraising,” says Jerry Ehrenwald, president of International Gemological Institute. “Appraisers are evaluating at the correct level for replacement for the purposes of insurance coverage.”

Ehrenwald says he bases his appraisals on accepted industry standards. But still he says, consumers shouldn’t rely only on the appraisal when they insure jewelry: “If the client pays less money than the appraised value, they should submit the sales receipt to the insurance company.”

Ehrenwald says consumers would understand the limitations of grading and appraisals if they spent more time reading — and less time listening to the sales pitches.

“The report should be read in its entirety so that the consumer is not dependent on what the sales person tells them. A sales person can say anything they want,” says Ehrenwald.

So how can you be sure of a diamond’s worth? The best way is to compare the diamond you want to buy with other diamonds that have similar physical characteristics, read the fine print on grading certificates and appraisals, and follow these words of wisdom from an appraiser himself: “That stone is worth what the merchant sold it for,” says Palmieri. “If it was worth more, the merchant wouldn’t sell it for the price they’re selling it for.”

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