BnS Guide: Gems and Transmutation
Increasing your combat power through gems and crafting in blade and soul gold. While a martial artist's clothing doesn't provide bonuses or benefits to combat, their weapons, accessories, and Soul Shield certainly does. By upgrading a weapon, or finding new accessories or Soul Shield pieces, you can continually increase your power; in addition, stat bonuses can be added through the use of gems.
Weapons of higher quality will contain blade and soul power leveling gem slots, and by inserting a gem of a different color (Ruby, Citrine, Sapphire, Emerald, Amethyst, Peridot, Diamond), as well as increasing levels of quality (triangular, square, pentagonal, hexagonal), you can further customize your combat ability. If you socket a tradeable gem into your weapon, the gem will no longer be able to be traded. This doesn't though apply to account bound gems, which can still be mailed between your own characters.
Transmutation is a separate process that allows one to use components received by salvaging high quality weapons, accessories, costumes, and gems to improve or create items. Choosing whether to sell an item to a vendor, place it on the Auction House, or salvage it for Transmutation components can sometimes be a difficult decision.
You can use Transmutation to combine fabric to create outfit pouches that will contain random rewards, gem fragments (and occasionally some other ingredients) will create gem chests that will contain random gems, and multiples of a particular gem can be combined to create a higher quality version. In addition there are some special event items that will need to be combined through Transmutation to create event prizes. Be careful, some Transmutation recipes do have a chance to fail, and will destroy your crafting components.
While not directly related to Transmutation, the salvaging and fusing of Soul Shield pieces is a notable process. When salvaging Soul Shields you'll receive the Fusion Powder component, and through a separate Soul Shield UI you'll be able to fuse Soul Shield pieces together. When fusing one Soul Shield piece to another, it will be destroyed, and one of its attributes will be added to the new more power Soul Shield piece. By salvaging Soul Shield pieces you don't want, and using fusing others together, you can further customize and increase your character power.