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If the holder uses a damage-dealing Psychic-type move, then the holder consumes this item and the power of that move is increased by 50%. One-time use.
In single battles, Psychic Gem is not typically a useful item, unfortunately. While the one-time boost to Psychic-type attacks is nice, most Pokemon using Psychic-type attacks would rather have the more reliable power of Life Orb or Choice items.
Typically Gems are more valuable in the VGC and similar environments, and Psychic Gem is often used here to boost the power of Psychic-type attacks such as Psychic or Psyshock from Pokemon such as Reuniclus. The one-time power boost can come in very useful in such a fast-paced metagame, especially as it comes without any drawbacks, and is notable for its ability to hit most Fighting-types for super effective damage.
Occur randomly in Dust Clouds.