03/01/2012 11:13 am ET Updated Apr 29, 2012

Engagement Rings -- Avoid the Online Scams

More and more people are beginning to realize that the easiest way to get the most value when purchasing a diamond is to do so online. The reason is simple -- brick-and-mortar jewelry stores need to own inventory. Diamonds are expensive, so even owning a relatively modest inventory can cost millions of dollars. Borrowing the money needed to make that kind of investment can be very pricey, and the way these stores offset that expense is to sell those diamonds at a high enough profit margin. This is how the diamond business has always operated.

Enter the Internet

Internet jewelry stores revolutionized the way the diamond market functions. The vast majority of online jewelry stores never actually own a single diamond. They simply receive electronic feeds of the on-hand inventory of diamond wholesalers, add a set (relatively small) profit margin based on a fixed formula, and then sell them to the public. When a sale is made, the Internet jeweler sends the order data to the wholesaler, who either ships the diamond directly to the customer, to a contracted jeweler for setting, or in some cases, to the offices of the Internet jeweler for inspection. This ability to sell diamonds without having to be invested in them provides an insurmountable competitive advantage over the traditional jewelry stores.

There are no shortcuts in diamonds

This, of course, is nothing new -- most people by now know that the best deals to be had are online -- especially when it comes to loose diamonds. It is precisely because people have turned to the Internet as a way to save money that so many scams have sprung up. These crooks know that people go online to search for the best possible deal -- so if they can make it look like they're offering a diamond at a price that's better than the rest, many people will fall for it. Diamonds will be, and should be, cheaper online -- but they should never be too cheap. There is more or less a universally agreed upon wholesale cost for every diamond (give or take a few percent) -- so if you see a diamond that's drastically cheaper than it should be, stay away. I always tell the readers of my blog that if the deal you're looking at really is that good, a diamond dealer would have already bought it!

eBay and clarity enhancement

James from British Columbia contacted me recently with a link to an engagement ring he found on eBay and the following question:

They claim it's "Independently Gemologist Certified." While claiming the appraised value is $9,600 they are selling the ring for $1,800. This seems like a scam to me, but where do you think their shortcuts would be taken?

As is typical with many diamonds sold on eBay, the diamond in question is "clarity enhanced." Of course, he didn't notice this, because it was written in very fine print at the bottom of the listing. Legally, sellers can list these treated diamonds as "100 percent genuine natural diamond" because they are not lab-created diamonds -- but the fact of the matter is that they are not 100 percent natural. Clarity-enhanced diamonds are diamonds that have been drilled with a laser beam to create a channel from an ugly dark imperfection to the surface of the diamond. The diamond is then boiled under high pressure in a mix of chemicals that extracts the dark matter from inside the stone, leaving a more pleasant whitish imperfection behind. Then, this cavity is filled with a proprietary mix of clear polymers to make it appear as if the diamond is completely flawless. This method always leaves behind signs -- most typically a rainbow effect when looking at the treated area in direct sunlight.

So in James' case, the answer is simple -- before the stone's treatment, it was probably only worth $1,000.

Certified, yes. But by whom?

And what about the fact that the diamond in James' link was "Independently Gemologist Certified"? Shouldn't that have protected James from making a huge mistake?

The sad fact in the diamond industry is that there are only a very small handful of trustworthy diamond grading labs. GIA (Gemological Institute of America) is the oldest and most well-respected lab around -- and they are a legitimate not-for profit-organization. AGS (American Gemological Society) is a close second behind GIA. IGI (International Gemological Institute) is known to be less strict than either of those two labs, but they are still known for their relative consistency and integrity.

There are scores of other labs out there now that exist for one purpose -- to make money. And in order for them to get customers and make profit, they need to offer something to the diamond dealers and jewelers sending them diamonds that the other established labs can't -- inflated grades. You see, every upgrade in color and clarity can translate to thousands of dollars on a given diamond.

In James' case, the no-name certificate was simply used to put a badge of credibility on an otherwise bogus listing.

The key is education

Diamonds are expensive. And for most people, they are a mystery. The best way to avoid being cheated is simply to educate yourself. There are a multitude of resources available online to help you buy intelligently and avoid the common pitfalls. Be smart like James was -- reach out and use these resources. Your fiancée-to-be (and your wallet) will thank you!

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