Story related. In act 2 you'll meet a jeweler who's trapped in a barrel, save him and complete the quest and he will return to town like the blacksmith or merchants. By the time this happens you should have been finding some gems around with loot. Simply take 2 of the same colored gems to the jeweler, select Combine, and you will make a stronger gem.
*Thanks to noose and Solario for pointing out that this will unlock after the first combination.