Correlation and Diversification: What the Data Shows About Gemstones in a Portfolio

The investment case for colored gemstones has long rested on the assumption that they behave differently from financial markets. A 2025 analysis by Etter on the diversification potential of gemstone investments puts quantitative structure around that assumption — drawing on secondary market transaction data and price indices to examine the historical relationship between colored gemstones and conventional asset classes.

The Correlation Question

Modern portfolio theory’s central insight is straightforward: assets that move independently of one another reduce aggregate volatility without necessarily sacrificing return. The question for gemstone investors has always been whether colored stones exhibit sufficient independence from equity and fixed income markets to contribute meaningfully to a diversified portfolio — and whether that independence holds when conventional markets are under stress.

An analysis examined secondary market price data across a selection of colored gemstone categories — including rubies, sapphires, and emeralds — against major equity indices and investment-grade bond benchmarks. The resulting correlation coefficients were consistently low across the full observation period, with gemstone prices showing near-zero statistical relationship to movements in public markets.

This is not simply an artefact of illiquidity or infrequent pricing — both of which can artificially compress measured correlations in alternative asset classes. The analysis addresses these factors explicitly, and the results remain consistent under conservative adjustments for transaction frequency and appraisal smoothing.

Technical Approach

The analysis constructs a quarterly price index for colored gemstones from secondary market transaction data. Individual transactions are normalized for key quality parameters — carat weight, color saturation, clarity grade, and geographic origin — to enable like-for-like comparison across time periods. The quarterly observation for each gemstone category is derived from the median of normalized transaction prices within that period. Periods with below-threshold transaction volume are flagged; interpolation is applied conservatively, erring toward underrepresenting price stability rather than overstating it.

Gemstone price series were compared against the MSCI World Index and S&P 500 as equity benchmarks, and the Bloomberg Global Aggregate Bond Index as the fixed income reference. All benchmark data was sourced from publicly available index providers. Return series were aligned to the same quarterly observation window as the gemstone index, expressed in total return terms.

Correlation coefficients were calculated using the Pearson method applied to quarterly return pairs over the full observation window. A Spearman rank correlation was computed as a robustness check, with results broadly consistent across both methods. Rolling 12-quarter correlation windows were additionally calculated to test temporal stability — confirming that low correlation is not an artefact of any single sub-period.

To address appraisal smoothing — a structural distortion in illiquid asset pricing whereby infrequent transaction-based valuation suppresses measured correlation — the analysis applies a Dimson-style correction that incorporates lagged benchmark returns into the correlation estimate. The figures reported are post-correction: conservative estimates that account for the delayed price discovery inherent to bilateral negotiated markets. Crisis period statistics were computed as independent sub-sample analyses, each episode’s defined window treated as a standalone observation period.

Behavior in Crisis Periods

Aggregate correlation statistics over a full market cycle can obscure the moment that matters most to portfolio managers: how assets behave when conventional portfolios are under acute stress. A diversifier that holds steady in calm markets but sells off alongside equities in a crisis provides little genuine protection.

The 2025 analysis examined three distinct stress episodes in detail. During the 2008 global financial crisis — when global equities fell more than 40% — secondary market colored gemstone prices moved within a narrow band and showed no correlated drawdown. The 2020 COVID-19 market shock presented a more demanding test: a simultaneous repricing of nearly all asset classes, including gold and government bonds. Even in this environment, gemstone valuations on the secondary market showed limited transmission from the broader financial dislocation.

The third episode is perhaps most instructive for contemporary portfolio construction: the 2022 rate-driven bond drawdown. As central banks executed the fastest tightening cycle in a generation, investment-grade bonds — the canonical diversifier within multi-asset portfolios — suffered simultaneous losses alongside equities. The 60/40 portfolio’s annus horribilis exposed the limits of relying on a single uncorrelated asset class. Secondary market gemstone prices showed no comparable dislocation in this period.

The 2022 episode demonstrated that traditional diversifiers can fail precisely when they are needed most. Assets whose prices are formed through mechanisms entirely independent of financial market infrastructure offer a structurally different kind of resilience.

What the Data Shows — and What It Does Not

Precision in language matters in institutional research. The analysis is explicit on this point: low historical correlation is an observation, not a guarantee of future behavior. It describes what occurred within the data set examined. It does not imply that colored gemstones will maintain this independence in all future market environments or under all portfolio construction approaches.

The analysis also acknowledges the structural differences between gemstone investment and conventional asset classes. Secondary market transactions are bilateral, negotiated, and episodic — not continuous. Price discovery operates on different timescales. Liquidity windows are narrower. These characteristics are not flaws to be managed away but defining features of an asset class whose pricing mechanism is genuinely disconnected from financial market infrastructure.

For the sophisticated investor, these characteristics are precisely the point. An asset priced by gemological appraisal and private negotiation rather than algorithmic trading and index rebalancing is, structurally, unlikely to reprice in tandem with a risk-off event in financial markets.

About the Analysis

This analysis was conducted by Etter, drawing on secondary market transaction data accessed through Carat Investments, part of Retter AG — an active participant on the secondary market for colored gemstones. This context provides access to transaction data not available through any public database or index provider, accumulated through years of direct secondary market activity.

The 2025 diversification analysis represents Etter’s commitment to building an evidence base for gemstone investment that meets the standards expected by family offices and institutional investors. This means descriptive rigor, transparent methodology, and an explicit acknowledgment of the limits of available data — not a marketing narrative constructed around selective figures.

The complete analysis — Deskriptive Analyse des Diversifikationspotenzials von Edelsteininvestments (Etter, 2025) — contains the full correlation tables, crisis-period charts, methodology notes, and data sources. It is available upon request from Carat Investments.