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​​Read the full issue online​

Welcome to the Alts Sunday Edition 👋 And happy International Women's Day.

Hope you enjoyed last week's issue on ​Catastrophe Bonds​.

When people think about investing in gemstones, the first one that often comes to mind is diamonds.

But the diamond market is suffering from questionable ethics and, more importantly lab diamonds, which have led to ​unprecedented price drops​.

Meanwhile, the ​colored gemstone market​ is making a comeback, with one gem in particular breaking away from the pack. It has high growth, scarcity, and a ​timeless style​ that overcomes the initial "grandma vibes."

I’m talking about pearls.

Today, I’ll break down this ancient yet misunderstood gemstone; exploring its rich history and present state of the market.

Let’s go!

Chrissy Kapralos is a Toronto-based freelance writer who loves jewelry, even when it depreciates like mad. When she isn't writing, she's eating Greek food and hanging out with doggies.

The colored gemstone market

It may surprise you to learn that pearls are a major player in the gemstone market.

And that’s just the loose ones. Pearl jewelry is a whole other beast — a ​$20 billion​ market. That’s comparable to the market size for silk, headphones, and toothpaste (remember that for later).

Sure, pearls aren't as large as the diamond market ($100 billion) and nowhere close to gold ($272 billion). But loose pearls are still a substantial industry, which boasted a 20% CAGR during the Covid years (second only to ​Tourmaline​)

Pearl jewelry is equal parts timeless and trendy. Demand ebbs and flows in waves over decades. And right now it's back on the upswing.

Over the past five years, “​pearl jewelry​” was searched on Google 2-3x more than emerald, ruby, sapphire, and zircon jewelry.

Recently, pearls were also a new ​engagement ring trend​ thanks largely to Netflix drama Bridgerton, where Penelope famously receives a four-pearl ring:

Since Covid, growth in the pearl market has slowed considerably. ​4.9% CAGR​ is the new normal.

Over the next few years, ​price stabilization​ is expected, making the pearl market an alternative to consider.

Pearls’ shiny history

Abu Dhabi archaeologists recently discovered a pearl dating back to 5,800 BCE — 8,000 years ago.

This means pearls were being used 1,800 years before diamonds, and 2,300 years before rubies.

Pearls were like the ​Rolex watches of Ancient Greece​; the ultimate status symbol.

Royal families incorporated pearls into jewelry and decor to peacock their wealth. Egyptian pharaohs were buried wearing their pearl jewelry and accessories.

Cleopatra dissolved pearls into vinegar and ​drank them​. The drink was believed to be a healing tonic an aphrodisiac (lucky Anthony!)

In fact, pearls were so exclusive in Ancient Rome that they were illegal to purchase unless you came from an affluent heritage (not that commoners could afford them anyways). Unmarried women weren’t allowed to wear them either.

In 69 AD, Ancient Roman general Vitellius financed an entire army by ​selling just one of his pearls​.

Fast-forward 1,500 years, and saltwater pearl imports from the Americas fueled Renaissance England’s love for pearl jewelry. Henry VII had them sewn into his clothes, while his daughter Elizabeth used them to convey strength and power to her enemies.

In 1800s France, a pearl supply shortage inspired jewelers to get creative and develop fakes — thin glass spheres filled with blended fish scales.

But the thing was, people didn’t really care! Even royals were happy to adorn their clothes with "mock pearls" alongside real ones.

These synthetic pearls made pearl fashion more accessible during the roaring 1920s (flappers lovingly embraced faux pearl necklaces)

Later on, humans would take “pearl engineering” to the next level, creating pearl farms and an entire cultured pearl market. More on that in a bit.

Where do pearls come from?

Interestingly, most pearls come from the Eastern Hemisphere, where the warmth, salinity, low pollution, and healthy coral reefs create the conditions for high pearl production.

Japan, Australia, Indonesia, and French Polynesia are the world's ​biggest pearl exporters​:

The Philippines is an especially abundant location for rare, natural white pearls. Filipino divers go 30+ meters deep to snag them:

However, as we outlined in our issue on ​Investing in the Philippines​, the nation has (sadly) the most polluted waters in the world.

This means pearl survival rates (from oyster/mollusk survival rates) are ​declining​, which makes them that much more rare & desirable.

Interestingly, America isn’t a major player on the export side. The ​Tennessee River Freshwater Pearl Farm​ has the distinct luxury of selling pearls to Tiffany & Co., who has a long-standing tradition of incorporating pearls into their jewelry.

How pearls are formed (and farmed)

Natural pearls

Natural pearls are found organically in nature. These pearls are the rarest, most desirable, and most expensive on the market — found only in oysters, mussels, and other mollusks. No human intervention required.

Natural pearls are made up of calcium carbonate — similar to chalk, marble, and limestone. It's the same stuff that mollusk shells are made of.

But when particles and parasites enter the mollusk, the creature exercises a defense mechanism that coats the particle in something called nacre.

Nacre is more commonly known as ​Mother Of Pearl​ — the luminous, shiny inner layer of a mollusk.

Cultured pearls

Cultured pearls aren’t exactly man-made. Rather, think of them as man-influenced.

Cultured pearls are still birthed within the mollusk. But it turns out that if you inject an irritant (usually a small piece of tissue or bead), the mollusk secretes nacre layers around the item and grows a pearl much quicker than it would naturally.

The process of culturing pearls was first discovered by Japanese jeweler/entrepreneur ​Kokichi Mikimoto​ back in 1905.

After 12 years of experimenting, Kokichi discovered that the best irritant to use was not a piece of tissue, nor a bead, but a piece of mother of pearl itself.

This sparked the birth of the pearl farm industry.

Pearl farming

After Mikimoto’s discovery, pearl farming became organized and scaled up. By the 1950s, a whopping 90% of the world’s cultured pearls came from farms.

Across much of Asia, pearl farming companies catch thousands of oysters and other mollusks to inject them with mother of pearl and stimulate massive pearl production.

The only snag? This process still takes up to four years. (After all, you can only do so much to speed up nature). Meanwhile, these pearl farms are vulnerable to typhoons that affect the health of the mollusks.

Many pearl farms are backed by private investors like Korean PE firm ​MBK Partners​. Until 2023, the group had $500 million in shares of Tasaki, a Japanese jeweler involved in Myanmar’s pearl harvesting.

(Note: MBK later exited their position, as Tasaki was facing scrutiny for its dealings with the ​Myanmar military junta​, who is infamously fraught with human rights issues.)

How to value pearls

A pearl’s value is based on type, color, size, source, shade, and lustre. A ​quality grade​ is given from AA to AAAA.

We’ve already talked about the type (natural vs cultured). Let’s look at the other attributes.

Color

Natural, white pearls are actually the rarest — especially if they’re round, and have a reflective lustre.

For example, this natural 16-mm round, white Australian South Sea pearl from Australia is worth about $5,000.

But similar to the staying power of colored diamonds (see this ​discussion​ from Alts community expert Viral Kothari) colored pearls spark intrigue and high prices.

Size

Larger pearls are tougher to culture, and thus rarer and more expensive.

Most pearls weigh 2-3 carats, and are 2-8mm wide. However, ​South Sea pearls​ from the waters surrounding Australia and Indonesia are the largest on average. They typically weigh 5-6 carats, 9-20mm wide, and thus command higher prices.

Lustre

Lustre gives pearls their unique, luminous sheen, especially when exposed to light. Pearls with more layers of nacre (mother of pearl) tend to have a stronger luster.

Even if a pearl has unique coloring, perfect roundness, and natural sourcing, it can lose value if it has low lustre.

How to invest in pearls

1) Buy & hold loose pearls for the long-term

The first thing you need to know about investing in this market is to stay away from jewelry.

While sentimental value is high, jewelry can lose up to ​30% of its value​ immediately after purchase, and continue to depreciate at ​5% per year​ for 20 years.

Loose pearls, on the other hand, have a stable appreciation over time, and are a better way to invest.

The market is expected have a 4.9% CAGR over the next 7 years — not exactly rapid growth, but better than government bonds.