Protection from market volatility
Since formal records regarding diamond pricing were first kept at the beginning of the 1970’s, prices for the highest grades of coloured diamonds have appreciated between 10 to 20% per year on average, with the more rare colours and highest grades enjoying the greatest growth in value.
Of particular significance, this appreciation has statistically been un-correlated to the stock and bond markets, an important consideration for investors seeking a diversified portfolio as cross-asset correlations have more than doubled over this time period.
Coloured diamonds do not demonstrate the volatility we’ve seen in equity markets, commodities, or indeed even with precious metals. In bullish periods for financial markets we typically see diamond prices appreciate steadily; while in times of economic slowdown or recession, prices often plateau, but importantly, they do not tend to fall.
For example, during the worst of the Global Financial Crisis, in 2008 and 2009, prices for pink diamonds remained steady, as investors held tight to existing holdings. This was followed by a significant upswing in 2010 and 2011 as new buyers flocked to these quality hard assets, even as equity markets began to recover from their GFC lows.
|CAGR Jan 2005 - Jan 2019||Total Appreciation Jan 2005 - Jan 2019|
|Fancy Intense Pink||12.0%||385.8%|
|Fancy Vivid Pink||12.2%||402.6%|
Source: Fancy Color Research Foundation
This provides investors with solid evidence that rare coloured diamonds do act as portfolio insurance when needed, helping to offset risk in a broader, well-balanced investment portfolio.
Why are rare coloured diamonds insulated from market volatility?
What we see now is that ongoing political and economic instability are causing many traditional investments to fluctuate. Many major world currencies are plunging unexpectedly, while others are becoming stronger. Commodity prices are showing high instability as well; oil dropped as much as 50% last year, its lowest drop in almost six years, while iron ore also lost more than half its value. Gold had its third straight annual loss in 2015, for the first time since 1998.
All these fluctuations have caused people to seek something they can rely on, and rare coloured diamonds provide a stable and attractive alternative for a number of reasons.
Firstly, rare coloured diamonds are not influenced by the speculative moods of equity markets that create major short-term fluctuations; there are no options, futures or short selling, nor is it a highly leveraged market. The absence of these factors, which can lead to significant levels of added volatility in financial markets, protect diamond investors from these market risks.
On a longer-term basis, coloured diamonds (in particular the rare pinks) are a scarce finite resource with no new sources of supply in the pipeline for the foreseeable future. Thus, the market fundamentals provide a solid, stable foundation for this asset class.
As a result, colored diamonds have shown very good stability and consistency over the long-term and have been considered an important holding for long-term buyers.
Diversify from traditional investments
Regardless of investment strategy, the majority of investors already have significant exposure to traditional assets. Most portfolios contain a healthy allocation to Australian equity markets, international shares, property, and corporate or government bonds.
In addition, approximately one-third of the average investment portfolio is sitting in cash and term deposits, where interest rates are sitting at record lows and likely to stay there for the foreseeable future. Many investors are thus considering alternative options, as buying more of the above listed assets would further concentrate portfolio risk.
Many advisors are thus advising clients to look at hard assets such as rare coloured diamonds, which provide an attractive higher-growth alternative to leaving cash in the bank at negative real interest rates.