Grading systems and 'gaming' them: An eternal story?

[oldminer]

I'm not spending millions a year on diamond inventory, but in the last 6 months we have appealed the color grade on 2 diamonds with the GIA and both times we received the better grade after they re-examined the stones. We don't do this lightly, but reserve doing battle for when we believe it is called for. It is done for the money that is on the table due to grading differences, and not to game the lab.

As far as trying to make sense out of the EGL vs GIA issue, we have a situation where gemologist/dealers can pretty much grade a diamond without any paper present and know how they are doing. If a report seems incorrect, then the price offered can be altered according to the knowledge of the expert buyer. However, when a consumer is buying a diamond based on the grading printed on the paperwork and not based on the way GIA would grade it, then the consumer is in no position to make a meaningful decision alone. They can hire an expert, believe what the seller says, or just wing it. Obviously, this is not as "safe" for them as buying a stone based on a GIA-AGS lab report. Our published study found that there was potential to get a great deal with an EGL report, but the downside is that the opposite potential also exists. It exists because some retailers flog bad paper as "a lab's opinion" and leave ther own , supposedly expert, opinion out of the representation of the stone. This is the real game that is going on and it is a high stakes game.

 

[Learning Slowly]

I know someone above said a new study would be a "waste", the present discussion, opinions, experiences, and etc, seem to indicate that a more systematic (quasi-scientific) study would be extremely useful in assuaging the opinions, evidence and etc. I don't think Gary intended for a "one stone" study to "prove" GIA stones were marked higher, but simply to complicate the general assumption stated that EGL stones are "bad" deals. And Yssie's observation is important to remember with respect to (semi)educated or astute consumers. If I can purchase a EGL Ideal D VS2 for $6500 that is really a GIA 3EX F SI2, I will have saved at least $1000. Yes, you can debate the impetus for wholesalers to send the stones to EGL or GIA, but if virtual stones have approximately uniform markup (within 1-5%) regardless of cert, then the consumer "could" still be getting the stone (while not what the EGL says it is) at a lower price than the equivalent GIA certified stone. I recently came across, in a B&M, a EGL Hong Kong certified (www.eglnwmi.com) 1.03ct D Ideal SI1 H&A for about $5000. HCA 1.8 (using % not angles). I've had a few people look at it, and it seriously looks borderline VS2/SI1 if not a VS2. "If" this stone is actually a D , it probably is a steal, "if" its a G SI2 (it's def not a SI2), its still a "good" buy. With regards to "gaming" the system, I was offered equivalent GIA certified stones and looked up virtual stones online. The B&M retailer is indifferent which direction I go (though the GIA's are much more expensive) as long as I'm happy with it. If I go with the EGL I will need to have it reappraised (and possibly GIA certified). All this ramble goes to my point that this stone needs to be 5 grades too soft for me to be getting ripped off. The retailer is still making a profit, and may make a greater profit off of the EGL than the GIA. But what do I care, if I'm still saving 10-15% off an equivalent stone. And the likelihood that this stone is 5 grades soft is NIL! Possibly 2, but I will wait for an official appraisal. And I will end with what I started. This lively discussion may suggest an updated study (hint hint) though I seriously doubt many want this to occur. Experiences are valuable, but sometimes can help indicate the degree to gaming the market asks for GIA vs EGL stones.

EDIT:
I wasp osting at the same time OldMiner was, and really appreciate his nuance of the situation.

 

[Rockdiamond]

Learning slowly, if you think you're more savvy in buying and selling diamonds than the cutters who submit these stones to EGL, by all means, go for it!
Just to clarify- my main goal in this discussion is consumer protection.
I have no stake in selling GIA graded stones over EGL- in fact, it is much easier for sellers to increase profits if they wish to take the tact you are suggesting- "Save big buying EGL!"
This also allows them to get rid of undesirable stones- so it's a big win for the seller. But it hurts consumers.
This discussion was started pointing out some very subtle differences in stones graded EX cut grade by GIA- indeed, many people on PS are sensitive to the most minute details with the GIA EX cut grade.
By buying EGL graded stones all this goes out the window. The subtle differences of cut simply can't be reliably discussed based on EGL grading. EGL cut grading, like color clarity grading is simply not considered by wholesale buyers- again, for good reason.

 

[John P]

In my opinion the problem with "soft" grades is the potential for abuse. I believe a D should be a D should be a D.

If I decide to purchase a 60-inch flat-screen with 1080p resolution Wal-Mart can't sell me a 50-inch, 780p with papers that say "60-inch, 1080p" according to some authority's "softer" standards. It would be considered abusive and fraudulent for them to represent products that way. Why is it different for diamonds?

My issue in the commercial mainstream is this (re-posted from an earlier thread):

BuyerBilly is ready to pop the question. He decides $5,000 should do it and starts to shop. After replacing his eyeballs from the sticker-shock he got at Tiffany's he seeks out some well-known local jewelers to find a loose diamond. He bumps his budget up (grudgingly) to $6000. For that amount he is determined to get a "1ct...no-less-than-G...no-less-than-VS2...ideal... After all, these diamond thingys are marked up, like, 100% right? Surely I can get one of these guys to come down to what I can afford!"

Enter our two dealers; StandupStan and FriendlyFred.

StandupStan's store carries diamonds with GIA reports. He has a 1ct G VS2 EX (conforms to AGS Ideal too) priced at $8000. BuyerBilly spends considerable time chumming with Stan, hoping he can charm-up a deep-discount... After much dialogue Stan offers his "very best deal" and cuts the price to $7600... BuyerBilly thanks him and walks away, mumbling under his breath.

The next day Billy walks into FriendlyFred's store and describes his requirements. Fred brings out a 1ct "quote...G VS2 ideal...unquote" with a soft grading report (it would actually be Hish SIish VGish @ stricter labs). It is also priced at $8000 but marked down in red ink to $7700. Hmm. BuyerBilly cranks up the charm machine again, hoping his forced-discount-telepathy will have better luck today. And lo & behold it seems to work! During their banter Fred says he can do something and bumps it down. BuyerBilly keeps pushing a bit more...ok ok...Fred says...but I'll need to speak with the manager. He returns in several minutes with "I can't believe it...you must have caught him on a good day, Billy." The stone has been slashed all the way to $6500! Yeah baby! Ok, sure, it's slightly over-budget but Billy is relieved to have what he wanted within reach; especially since Tiffany's and StandupStan's were so stubbornly inflexible. And when BuyerBilly sees the "Appraisal" written by FriendlyFred's GG (who works there in the store) citing value on the diamond for insurance purposes at $15,000 he is sold sold sold. "What a deal!" "Thank you Fred!"

Here's what Billy didn't know:

Diamonds with soft lab reports can trade at a meaningful % under diamonds with identical "Cs" from strict labs.

StandupStan bought the GIA stone for $7000 wholesale. By marking it down to $7600 he would have made under 10%.
FriendlyFred bought the soft graded stone for $5000 wholesale. Even after "slashing it" to $6500 he made 30%.

And BuyerBilly walked away thinking Fred made less and Stan was the tight-fisted one. Now he'll send his friends to Fred. I hope they find Pricescope first.

I've always thought it ironic that sellers willing to compromise on quality, consumer protection and future value can cash-in more, in many cases, than sellers committed to educating and protecting their clients.

 

[Garry H (Cut Nut)]

John I have a jeweller friend who had BuyerBilly in his store a few years ago.
"The same chain down the street is on sale for $1,000 reduced to $500, but yours is $50 - how come?"
My friend took his chain and walked down to the store (national 'discount' chain) and yes- it was an identical uno-erre piece.
Billy said, "well, thanks, but I am going to buy theirs because I can tell her I bought her a $1,000 necklace."

That is a true story.

 

[Rockdiamond]

Excellent post John.
An additional loss of value is also suffered by unsuspecting buyers.
Even if the stone was graded exactly as GIA would by the lesser lab, it's worth less.
Imagine your big screen TV analogy.
A guy has some Legit 60 inch screens, but they're in boxes from places known to exaggerate the size. They're worth less than 60 inch TV's in boxes from someplace known never to overstate the TV size
The bad box means the buyer must expend some effort to make sure the purchase was as promised.
Such proof is invaluable if one wanted to sell at the maximum price.
Be it consumer or store.
Pawn shops generally buy at very low prices.
Consumers wanting to sell diamonds can likely do better selling to places that specialize in diamonds.
So if Billybuyer, from your story, is in the sad position of having to sell that diamond, the next loss takes place.
Billy's expecting the price of his "G/VS2" to have some relation to the price of a G VS2.

Billy's diamond looks like an H-I to the buyer at StandupStan.. Stan has an investment in his business, and knows quality- he'll pay top prices for desirable goods.
But anyone seriously in the diamond business would have to value the "non-certified" diamond a few grades below GIA grading, just on contingency. They'd have to grade it themselves- and sometimes it's hard to see the slight differences in shade- sharp buyers will round in their own favor.
To cover the store the buyer has to figure it's a J.
Billy just got the shaft again.
If he would have spent the $7600, and was able to produce a GIA when selling, he'd probably get over $4k
But his $6500 diamond is only getting offers in the $2000 range- or less.

 

[diagem]

Could EGL graded Diamonds play as a tool allowing more wholesale hands trading cycles?
Just a thought....

Opinions?

 

[WinkHPD]

Thanks Paul.
I simply reported back to David that his analysis (bad words for David) - ? Review? ?opinion? of the 2004 survey was wrong.

You have put words in my mouth that are a long way from my opinion of what best serves consumers.

I would prefer Pricescope had no virtual diamonds and that all vendors were committed to the stones on offer and could add traditional retail services and value. Unfortunately that is ideal-istic.

(you should know by now that I say what I mean rather directly)

I meant to reply yesterday Gary, but got a bit busy and am only now getting caught up enough to respond.

Garry, I was a bit lost in what you were saying too. But it was nice to re-read the page you linked to (thank you!) and I find some portions worth highlighting. " In 9 out of 16 cases, diamonds with AGSL reports were better deals for buyers, mainly as a result of stricter clarity grades. The average price difference for these 9 stones was 12%. However the average price for all 16 AGSL graded diamonds was 1% more when compared to the prices of the GIA-GTL graded stones because of the large price difference for stones # 6 and # 14.

It is most common for diamonds submitted to AGSL to be of or close to AGS 0. Diamonds graded with AGS ‘ideal’ proportions, polish and symmetry (stones # 5 to # 10) can have a premium of about 8% - 10% over the same grade GIA-GTL diamonds (e.g. stone # 9). Because of this premium diamonds with a softer AGSL grading (e.g. stone # 14) would be unfavorable buys. However, diamonds such as # 1 are good deals with AGSL reports because of stricter clarity grading."
First thought. The survey confirms what Paul Slegers mentioned in another thread this week. Some slight extra strictness by AGS in clarity can make them come across as more expensive but they could actually be better deals according to the survey.

I'm also reminded that Polished-Prices calculated AGS0 reports as trading around 5% higher than GIA EX generally, and devalued EGL reports by nearly 10% on their face. It is kind of humorous that the same article assigns EGL and NO REPORT the same value. I remember a friend seeing that and observing "Hey EGL is worthless."

http://www.polishedprices.com/Content/?Id=methodology

All of these may be good issues to be raised in a "gaming" thread.

Wink

 

[Learning Slowly]

Thanks for that link, very interesting. I still find it interesting that these studies are 6-7 years old. Excellent thread. I'm seeing and learning a lot. Hasn't aspects of the industry changed in the last half-decade. GIA added cut grades, AGS altered "ideal" standards, EGL USA more distinct from EGL International, online sellers being much more prevalent, etc etc... Does any of this alter anything in how certificates function in the pricing, trade or selling?

 

[WinkHPD]

Thanks for that link, very interesting. I still find it interesting that these studies are 6-7 years old. Excellent thread. I'm seeing and learning a lot. Hasn't aspects of the industry changed in the last half-decade. GIA added cut grades, AGS altered "ideal" standards, EGL USA more distinct from EGL International, online sellers being much more prevalent, etc etc... Does any of this alter anything in how certificates function in the pricing, trade or selling?

This information is current.

http://www.polishedprices.com/Content/?Id=methodology

The market says no.

Wink

 

[Paul-Antwerp]

Thanks for that link, very interesting. I still find it interesting that these studies are 6-7 years old. Excellent thread. I'm seeing and learning a lot. Hasn't aspects of the industry changed in the last half-decade. GIA added cut grades, AGS altered "ideal" standards, EGL USA more distinct from EGL International, online sellers being much more prevalent, etc etc... Does any of this alter anything in how certificates function in the pricing, trade or selling?

This information is current.

http://www.polishedprices.com/Content/?Id=methodology

The market says no.

Wink

Taking that 1.028-factor of polishedprices.com as current (mind you, these are Antwerp-dealing-prices), and comparing it to the PS-study, which shows that even a premium of 8-10% (at the consumer-level) for the AGS-paper does not suffice in most cases for the extra strictness in mostly clarity-grading, it makes you wonder whether the result is a negative premium for the AGS cut-grade.

Live long,

 

[beryl]

Paul:
.. Just dropped-in to see what is going on.
.. Nice article. It mentions a point of concern to me.
.. I offered my new oval cut data to a cutter. He would not try it because there are no standards for oval cuts.
.. That supports what you are saying: that the standards are hindering progress.
.. Regards to your family.