Last week, the Australian Financial Review ran a great story on the strong demand being seen for Argyle pink diamonds today, and the bullish outlook for the price of these diamonds in the years ahead.

The headline you can see below, taken from the article in the Financial Review captures the mood neatly. Clearly, the release of the 2019 Argyle tender, and the pending closure of the Argyle Mine in 2020, which is of course the only steady source of pink diamond supply in the world, is reinforcing the true scarcity of this unique asset class in the minds of investors, with demand responding accordingly.

More and more people are ‘getting it’ as the article says, and we for one couldn’t agree more.

Crucially, even though the mine is located in Australia, the investment case is a truly global phenomenon. Evidence of this is seen in the fact that the article that appeared in the Financial Review was also run by Bloomberg, by the Financial Post, the National, Financial Advisor Magazine as well as a handful of other publications.

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Late last week we came across an excellent, though troubling article highlighting the very real risks facing the global economy and financial markets today.

Titled; “Severe risks ahead for markets” and written by Charlie Jamieson of Jamieson Cootes Bonds, the article highlighted the fact that September saw a continued deterioration in the global economy, which has forced the hand of central banks when it comes to the interest rate cuts and quantitative easing programs they’ve announced in recent months.

Sadly, at present the expectation is that things will get worse as we head into the first half of next year, meaning investors best be cautious when it comes to allocating capital.

The best evidence of how pronounced the global economic slowdown is becoming can be found in European manufacturing data, with the chart below showing the Purchasing Managers Index (PMI) for the manufacturing sector as a whole in Europe, with the figures for some key nations shown as well. Note that in the graph below, a reading above 50 means the sector is in an expansionary phase, whilst a reading below 50 means the sector is contracting.

Eurozone Manufacturing Purchasing Managers Indexes Final & Flash Estimates

*An index above 50 indicates an increase in manufacturing activity. An index below 50 indicates a decrease in manufacturing activity. **Flash estimates not available for Italy and Spain.
Source: HSBC, Markit, and Haver Analytics.

As you can see, the trend has been heading in the wrong direction since late 2017/early 2018, with all countries except France now in a noticeable contraction.

The real stand out, and for all the wrong reason, is Germany. Typically the beating heart of the Eurozone, German manufacturing data has fallen off a cliff in the last two years, a symbol of how weak the economic outlook in the world’s largest economic region truly is.

The case for hard tangible assets like rare coloured diamonds is boosted in uncertain environments like the one investors currently face, with nothing to suggest these economic and market challenges can be easily solved any time soon.

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Last weeks’ “In the Loupe” update focused on the likelihood that interest rates in Australia will fall all the way to zero at some point in 2020 and stay very low for years to come. Indeed, if we use the bond market as a guide, we can expect rates to stay below 2% until at least the middle of the 2030’s, some fifteen years from now.

This is worth keeping at the forefront of your mind when it comes to assessing how you are protecting and hoping to build wealth over the next decade and beyond.

The outlook for interest rates, which is one where essentially no income can be earned on cash left in the bank anymore is troubling enough, but the challenge for investors doesn’t end there.

Central banks, in their desperate bid to stimulate higher growth and inflation, are not going to stop once interest rates have hit zero, with the potential for large scale quantitative easing (QE) or money printing likely to take place all over the developed world in the decade ahead.

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Last week was a momentous one for the Australian economy, with the Reserve Bank of Australia cutting interest rates below 1% for the first time in history.

The move, which was widely anticipated by market participants, is a further blow to savers and those living on fixed incomes via term deposits, who have seen interest rates fall from over 7% before the Global Financial Crisis (GFC) hit a decade ago.

On a more positive note, the rate cut will no doubt provide some relief for heavily indebted mortgage holders, with research suggesting Australian household debt to income ratios are now over 190%, their highest level ever, with the vast majority of this debt housing related.

In terms of what happens next, it is almost certain that there will be more rate cuts to come. Market expectations are that the next rate cut will come in February 2020, bringing the cash rate down to just 0.50%.

This can be seen in the chart below from the ASX, which shows interest rate expectations between now and the end of 2020, though we’d note there are many that think the next cut will occur on Melbourne Cup Day, which is less than a month away.

ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve
As at market close on 8th October 2019

From our perspective it’s not so important guessing which month rates will fall next, but rather how low they will go. To that end, it seems inevitable now that they will fall all the way to zero – meaning you’ll earn literally nothing on the money you keep in the bank, with your real wealth declining once you take inflation into account.

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Over the last few weeks, the team at Australian Diamond Portfolio have been busy working on a special report into the impending closure of the Argyle Diamond Mine, and its impact on the Pink Diamond Market.

The report, which you can download at the link below, covers a handful of critical topics relating to pink diamond investment, looking at:

• The approaching closure of the Argyle Diamond Mine and its impact on diamond supply
• Why diamonds can be compared to fine art, and why this bodes well for future price rises
• How the supply of pink diamonds will become more like the supply of gold in the years ahead
• Why the risks in traditional asset classes will help fuel diamond demand and price rises
• Expert insights into investment markets and the future of the pink diamond market

We hope you find this special report into the impending closure of the Argyle Diamond Mine, and the implications for pink diamond investment informative.

We look forward to any feedback, comments or questions that you may have, and would welcome the opportunity to discuss the ways Australian Diamond Portfolio can assist you with your pink diamond investments.

Download Report

It’s been another busy week in financial markets and in the diamond world. This week we wanted to share three topics of interest with you, including a look at the proposed initial public offering (IPO) for WeWork, the shared office space company, as well as interesting economic news out of India. Combined, we think these elements bode well for coloured diamond prices in the years ahead.

Finally, we also look at two stories from the diamond world and why it’s looking like Australia may not have any diamond mining industry at all by the end of 2020, with supply shutting down completely.

Indian Government to Print Money to pay for Tax Cuts

Whilst most market attention was focused on another interest rate cut by the United States Federal Reserve last week, and a short-term spike in US funding markets, we were more interested by an announcement that the Indian government will be cutting corporate tax rates, in a bid to stimulate economic growth.

Whilst we are generally speaking a big fan of lower taxes, we couldn’t help but notice that the Indian government effectively plans to pay for this tax cut (in terms of replacing the income it will forego) via printed money from the Central Bank of India.

This headline from Bloomberg sums up the news.

In our opinion this is just another step on the obscene monetary path that authorities have decided to take us down in the ten years since the Global Financial Crisis (GFC) ended.

The only likely outcome from this is the one alluded to in the subheading above, with weakness in the Indian currency, and higher inflation almost certain to arrive.

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The biggest news in markets over the last week has been the attacks on the Abqaiq oil facilities in Saudi Arabia.

The attacks, which amount to one of the biggest disruptions to oil supply on record are expected to temporarily remove half of Saudi oil output, with global production likely to be cut by 5%.

The reaction in markets has been quick and severe, with the price of oil jumping 20% higher at one point, the biggest price move since the 1980’s.

The situation may take months to resolve and indeed could deteriorate in the period ahead, with tensions between the United States and Iran (who are being blamed for the attack) already fraying.

What does it Mean?

In short, the oil price spike is likely to lead to both higher inflation, as well as lower growth, adding to the recessionary fears that are already well-established given market concern about negative yielding sovereign bonds and an inverted yield curve in the United States.

For evidence of the impact of an oil price shock, consider the chart below, which comes from Oxford Economics. It shows the impact on growth rates and on inflation rates in various oil price scenarios.

Source: Oxford Economics

The chart highlights the fact that as the oil price rises, we should expect to see GDP growth decline and inflation rise. That’s the worst of all outcomes, with John Payne from Oxford Economics stating that higher oil prices could push global inflation rates toward 5%.

To protect against this eventuality, it’s vital that investors have exposure to tangible hard assets, which can protect against inflation. Rare coloured diamonds are one such asset class.

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It seems barely a month goes by without some high-profile commentator from the funds management industry warning about the risks in financial markets; and why investors should be protecting their wealth with tangible hard assets.

This time around, it’s the world’s largest asset manager, Blackrock, who last week published an article titled; “The monetary policy endgame”.

The article looks at the current state of financial markets, discussing some of the themes we have been talking about with readers of “In the Loupe” this year, including the implications of negative interest rates.

Most importantly the article looks at what central banks will do in the years ahead. Their key takeaways are as follows:

• Don’t expect today’s low interest rates to go away anytime soon as according to Blackrock, real interest rates will need to be negative for the foreseeable future.
• Don’t be surprised if we see helicopter money, which is basically central banks printing money outright and giving it to people to spend.
• Expect to see a currency war, as countries engage in what is called competitive devaluation, each trying to push down the value of their own currency more than other nations.

We could potentially see helicopter money – central banks printing money outright and giving it to people to spend.

What can an investor do?

The article itself ponders the investment implications of such a monetary environment, noting that any “nominal instrument will be devalued in real terms”. This means that going forward, whilst cash will still be useful for day to day transactions, it looks like it will be useless as a savings asset as it will continue to lose value.

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