Diamonds act as a hedge against a falling Australian Dollar

Like precious metals, diamonds are always priced by the US dollar, providing your portfolio with a natural foreign currency hedge that helps manage the risk of a depreciating Australian dollar.

This means that should the Australian dollar fall in value relative to the American dollar, the value of your diamond portfolio in AUD goes up, thus improving the returns of your portfolio.

In terms of historic performance, the chart below covers the performance of the AUD vs the USD over the past 20 years.

Investors stand to benefit not only from the expected price appreciation of rare coloured diamonds, but also from any further weakness in the Australian dollar which would magnify gains.

20 Year Historic Rates

January 1998 – December 2017

 

Driven largely by the mining boom that occurred over the course of the past 15 years, we see the value of the Australian dollar starting to rise from about 2001, culminating to a peak of approximately AU $1.10 against the US dollar in 2011 (despite the correction experienced when the GFC hit). Not coincidently, this peak corresponds almost perfectly with a peak in Australia’s terms of trade, and also with the price of iron ore, our most lucrative export commodity.

Since 2011 however, iron ore prices have dropped significantly, and a downturn in the Australian economy has seen the AUD fall in value.

Should the economic slowdown continue as is expected, and should the Reserve Bank cut interest rates even further, the reality is that we could well see our dollar weaken further.

The likelihood of a weaker AUD together with the potential for pink diamond prices to rise in USD terms provides a compelling investment argument for allocating a portion of your investment portfolio to rare coloured diamonds. Not only do you stand to benefit from the price appreciation of the diamonds themselves, but also from any further weakness in the AUD, which will magnify gains.

The prospect of rising rates outside of Australia means further pressure on the Australian dollar. Despite its poor performance over the last two years, our local currency is still widely considered to be overvalued. If the US raises rates, as expected, and the gap between US and Australian rates is getting squeezed from both sides of the Pacific, we expect the Australian dollar to decline further.

2015 ASX Long Term Investing Report

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