Thursday, June 13, 2013

Labs Grade Diamonds, But Who Grades the Labs?

JCK sent a single diamond to a quartet of industry labs to gauge their consistency (or lack thereof). The results were surprising—provoking a look into how the trade views the inherently subjective process of certification.


Labs Grade Diamonds, But Who Grades the Labs?
Bloomberg/Getty Images
In 1955, the Gemological Institute of America’s lab issued the first diamond grading report, meant to serve as a third-party verifier that would increase public confidence in the diamond industry. Yet in the years since, not everyone has maintained confidence in the system of grading labs and reports.
While there are still many respected diamond-grading labs, others have earned reputations for being overly generous in their evaluations. (And even within that subgroup, there are those with ­reputations for being somewhat generous, and others—one overseas lab, in particular—with a ­reputation for being really generous.) Within the gem trade, talk abounds of varying lab standards; ­sometimes a branch of one lab will be considered looser than another branch.
“The problem is as bad as I’ve ever seen it, and it’s not getting better,” complains Donald A. Palmieri, president of the Gem Certification and Assurance Laboratory (GCAL), a New York City–based lab.
Courtesy of GIA
A GIA diamond grader at work
Palmieri, a frequent critic of his competitors, says he’s regularly asked by dealers to evaluate diamonds a ­certain way to win their patronage. He doesn’t take them up on it, but he believes that other labs do. “There are a lot of labs out there that do what they have to do to get business,” he says.
Mark Moeller, president of R.F. Moeller jeweler, a three-store chain based in Minneapolis, says, “Diamond grading is all over the map these days and it’s across-the-board.
Courtesy of GIA
A closeup of a 1.09 ct. round brilliant-cut diamond
“Everyone is fighting over what the standard is,” he says. “How can you be consistent with so many labs? The labs are just reacting to their customers by being more lenient. It’s become a standing joke in the industry: If you don’t like the grade, shave a point off and resubmit it.”
The issue is so top of mind for members of the diamond trade that Rapaport Corp. chairman Martin Rapaport has held three annual forums on diamond certification at the JCK Las Vegas show; a fourth is scheduled to take place at this year’s fair, on Sunday, June 2. At the first forum, a ­jeweler asked attendees what she should do when a customer comes in with a report from a lab she considers overly lenient in its grading. She explained her conundrum by saying that she hates to bash the competition, but also feels the person isn’t getting exactly what they expect. No one knew how to answer her.
Moeller says he grappled with this problem for some time. Eventually, he figured, “If you can’t beat ’em, join ’em.” Tired of seeing his competitor win customers with reports from a lab that he feels “grades to a more lenient standard,” he started carrying reports from that lab as well.
“We were losing a lot of sales,” he says. “And we only do it if everything has truly failed and the customer is really just a price-shopper. So we are honest: We explain to the customer that this grading is more lenient. And usually they don’t care. If they want a 2 carat with an $18,000 budget, am I supposed to send them walking?”
As an example, Moeller sent JCK two reports for the same 2 ct. stone: The report from AGS calls the diamond a K VS1—about $11,200 on Rapaport. The other report, from the “lenient lab,” calls it a J VVS2—about $14,000 on Rap. Stones with reports from the lenient lab, however, carry as much as a 30 percent discount compared with stones with reports from more respected labs, leading consumers to feel they are getting a J VVS2 for a K VS1 price.
Part of the problem is that diamond grading, by its nature, is subjective. Sometimes even graders within the same lab will disagree about a call. And with more stones getting reports, and labs getting larger and opening more international branches, it can be hard to maintain standards worldwide. (And some worry that inconsistent standards could spread to the other important task labs perform: screening treatments and synthetics.)
To determine just how much consistency there is among the industry’s varying reports, JCK had a New York City dealer send the same diamond to a number of leading labs. (See chart.) Unlike a similar experiment JCK conducted in the mid-1990s—when a diamond received three different grades from three different labs—the stone received virtually the same grade from all four labs. Only one lab graded the color higher, but that variation was within the generally accepted one-grade tolerance. (And the dealer, naturally, said he agreed with the higher grade.)
LAB REPORT
JCK sent a round brilliant diamond in the 0.6 ct.–0.7 ct. range to four leading labs. Here are their grades:
LabColorClarityCut
International Gemological InstituteFVS2Excellent, excellent
AGS LaboratoriesFVS20 cut grade
Gemological Institute of AmericaFVS2Excellent cut grade
EGL USAEVS2Ideal Plus
While this is mostly an intratrade concern, it also has attracted intermittent attention from the consumer media. A 2005 episode of Dateline NBC had a reporter buy from a leading retailer a diamond that was described as flawless. When it was graded, it was found to be of a much lower clarity. The report also found wider disparities in lab grading than JCK did—with one diamond receiving multiple grades from the same organization.
Given the importance of labs to the industry, how can the industry ensure that the evaluators be more consistent—and accurate? There are several schools of thoughts on this:

Grade the diamonds by machine.

Courtesy of IGI
Step up to the mic! An instructor guides IGI School of Gemology students through the grading process.
Machines that automatically grade color—and to a lesser extent clarity—do exist, and many labs use them. International Gemological Institute president and CEO Jerry ­Ehrenwald predicted at the 2011 Rapaport forum in Las Vegas that “within the next decade, we will have machines that can grade color and clarity. And, eventually, that will wipe out all the labs.” (Ehrenwald and others, however, note that grading labs will still be needed to detect treated stones and synthetics.)
The Forevermark is going this route. Stephen Lussier, CEO of the De Beers brand, which is bucking convention by grading its own diamonds, says that it regularly uses machines in its color evaluations.
“The machine is currently our most reliable color grader,” he says. “One of the things we have learned is that even the best human will only be right eight out of 10 times when color grading. The eyes can’t see things the whole day; that is why you need multiple opinions.”
He says the company also is working on a device that will grade clarity. “Consistency is most important for us,” he adds. “Grading is part science, part art. You will never completely eliminate humans. But we are focused on technology because humans are not infallible.”
GIA also uses a proprietary device “to some extent” in its color grading, says spokesman Stephen Morriseau.
American Gem Society lab executive director Peter Yantzer says his lab used a color-grading device for a while, but found it became less consistent with use. But he thinks another possible answer is for all graded diamonds to be ­photographed, along with a master set of color grades. A computer or similar program then could match the diamond pictures to the master set.

Enlist an independent organization to evaluate and certify the labs.

Associations that evaluate and certify labs do exist and regularly evaluate labs that look at things like food preparation and crime scenes. They are, in a sense, third-party verifiers for the third-party verifiers. But few in our industry take advantage of them. (One exception is GCAL, which is certified by an organization called the Laboratory Accreditation Bureau.)
There is also the International Standards ­Organization, which has evaluated a number of industry labs, including IGI, HRD Antwerp, and GCAL. The Tiffany Gemological Laboratory, which the retailer uses to grade its own gems, also conforms to ISO standards.

Let the public know how the market views different reports.

In many ways, the diamond market already has developed a market-based solution: within the industry, certain “certs” are worth less than others. For instance, the RapNet listing service found that certain reports carried as much as a 30 percent price differential. PolishedPrices.com publishes a similar evaluation on its site.
Yantzer has called for these indexes to be made public to consumers; that is how it’s done in coin grading, he explains: “All you have to do is go to the online indexes and look at their prices. The ­industry adjusts those prices based on the ­consistency and quality of the grading of the lab. That is how the industry ­handles inaccurate ­grading. But ­consumers don’t know this. And retailers tell them all labs are created equal.
“This information needs to be published where consumers can get access to it,” Yantzer  says. “Sure, many consumers wouldn’t care. But some of them would.”

Ensure that the labs offer guarantees.

Palmieri believes that one solution is for labs to guarantee their grades, as his does, with a “zero tolerance” guarantee. When GCAL was owned by ­publicly listed Collector’s Universe, it guaranteed its findings within the standard one-grade tolerance. Now the lab is no longer associated with that company and it doesn’t even allow itself the one-grade tolerance. “Why shouldn’t a lab have to stand behind its grades?” Palmieri asks. “That’s what a retailer has to do.” (He admits that while there are some stones that can be called “borderline,” that doesn’t happen often and they can be marked as such.)
Yantzer says his lab is considering a similar guarantee. “I think it’s possible to create a true certificate,” he says, though his idea includes a one-grade tolerance. The question for him would be who would determine the ultimate accuracy of the grade. “You would have to have some group of ­long-term graders,” he says.

Get industry associations to crack down.

At his forum, Rapaport urged the industry to police labs that are regularly more than one grade off. “We need to say, if you are two colors off, that is not acceptable,” he says. And he speaks for many in the industry when he says that the industry needs to seriously look at what is being produced by its labs. “Right now,” he says, “there is no red line.”

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