As a follow on from our last two articles in which we compared diamonds with gold and with superannuation funds, this week’s “In the Loupe” is going to look at rare coloured diamonds vs. Australian property.

The article starts by comparing the long-term returns of diamonds to the returns on Australian property, as well as the recent decline in house prices.

We also look at other characteristics of both investments that are important for investors to consider, with a particular focus on diversification.

Long-Term Returns Favour Diamonds

Whilst residential property prices have increased in value for most of the last twenty-five years, the returns across the nation as a whole have been more subdued over the last decade or so, with prices increasing by just under 5%.

Diamonds, as you can see in the chart below, have risen far more noticeably over this time period.

Source: Australian Bureau of Statistics, Fancy Colour Research Foundation (FCRF)

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Following on from last week’s article where we compared diamonds with gold, this week’s “In the Loupe” is going to look at superannuation.

This is another very popular topic amongst the more than 10,000 investors who receive our “In the Loupe” newsletters, which is no surprise given superannuation is for many Australians the largest and fastest growing financial asset they have.

We are going to be looking at this from two angles, firstly comparing the long-term returns of diamonds to the returns on superannuation funds, as well as other characteristics that are important for investors.

After that we are going to look at how your superannuation can be used to invest in rare coloured diamonds.

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At Australian Diamond Portfolio, we get asked a lot of questions about rare coloured diamonds, and the key drivers of the market. For this reason, our regular ‘In the Loupe’ market updates typically focus on the supply and demand factors impacting diamonds, and why we think prices will move higher in the coming years.

This week we wanted to write an article specifically comparing rare coloured diamonds with gold, as this is a question we are often asked by our clients.

Over the next few weeks we will follow up with other articles comparing rare coloured diamonds with housing, and also look at diamonds in the context of superannuation investments, another popular topic amongst our client base.

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The aptly named the ‘Bubble Gum Pink’ diamond. A 3.43 carat internally flawless Fancy Vivid Purplish Pink, which sold for AU $11 million at Christie’s in Hong Kong this week.

The case for investing in rare coloured diamonds gets stronger by the week, with a much-anticipated interest rate cut delivered by the Reserve Bank of Australia (RBA) yesterday.

Markets were expecting the cut, so it didn’t come as a shock, and indeed the Australian dollar actually rose after the decision was announced, though we expect it’s just a matter of time before more currency weakness comes into play.

The RBA decision, which brings the cash rate to a new all-time record low of just 1.25%, likely won’t be the end of the stimulus measures we see from the RBA in the coming year.

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In this week’s update, we wanted to share some insights from the overwhelmingly positive feedback we received at last week’s Australian Shareholders’ Association (ASA) National Conference, as well as key questions we were asked at our recent Diamond Master Class held in Sydney.

Combined, they reinforce why the outlook for pink diamond prices is so positive for the years ahead.

Starting with the ASA conference, aptly titled; “Investing in the Age of Uncertainty,” it was a real pleasure to speak to several hundred knowledgable and passionate investors about the opportunities pink diamond investments offer.

Speakers at this year’s Australian Shareholders’ Association Conference.

There were a handful of key themes we picked up on in our conversations with the investors who attended, and they all bode well for the future direction of pink diamond prices.

1) People didn’t realise they could buy diamonds in their SMSF

The fact that you could invest in pink diamonds was news to a lot of the attendees, who didn’t realise they could diversify their portfolios with this asset class. Given SMSF’s as a whole have over AUD $700bn of funds to invest, we think there is still plenty of diamond buying demand to come from this section of the market.

2) Hardly anyone knew the Argyle Mine was set to close

The fact that the Argyle mine is set to close in 2021 was a real eye-opener for many of the investors we spoke too. These people are savvy enough to have accumulated large portfolios over their working lives, and they understand what a massive reduction in supply can do to the price of an asset class that is seeing strong demand.

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Despite all the polls suggesting a Bill Shorten led Labor party would romp to victory in the just completed Federal election, Scott Morrison retained the Prime Ministership, with the Coalition looking like they will be able to form a majority government.

The result, whilst unexpected, has so far pleased the markets, with the ASX, and banking stocks in particular, enjoying a solid rally in the first two trading days of this week.

This short-term (and we want to stress short-term) reaction was entirely to be expected, as a Labor loss has allayed the fears of many investors in both the Australian property market, and the Australian share-market.

This is because Labor’s proposed changes to franking credits, negative gearing, and capital gains tax, are all now confined to the dustbin of history.

Whilst this has undoubtedly come as good news for some (the mood at the recently completed Australian Shareholders’ Association National Conference, of which we’ll write more about next week, was one of jubilation at the result), it’s important that investors look past the noise of day to day market moves, and keep an eye on the big picture instead.

And this big picture is entirely unaffected by the events of the weekend, and like it has for the last fifteen plus years, continues to support investing in tangible discreet assets like pink and blue diamonds.

Why do we say nothing has changed?​

It’s simple really – and it all comes down to the fact that, despite the election result, the Australian economy (which has been run by the Liberal party for the last few years), remains incredibly weak.

The best evidence on this was seen on Tuesday, when the Reserve Bank of Australia all but guaranteed interest rate cuts are coming. The RBA always has to be somewhat cautious in how it communicates with the market, but Phil Lowe, the current governor, stated that when the RBA meets in June, it “will consider the case for lower interest rates.”

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There are many factors that give us confidence about the outlook for pink and blue coloured diamond prices in the years ahead.

There is the strong historical performance, the fact that they are effective portfolio diversifiers, that they have proved better long-term investments than cash in the bank (especially now that interest rates are so low) and the fact that as discrete, tangible assets, they are growing in popularity amongst investors wanting to secure their wealth.

Finally, there is the rarity of the stones themselves – a factor that will be enhanced by the imminent closure of the Argyle mine by 2021.

These are themes that we discuss regularly with our clients at Australian Diamond Portfolio, either via emails, or in our Diamond Master Classes and consultations.

In this update though, we wanted to share with you another insight which helps highlight the strong demand for rare pink and blue diamonds. That insight is the operating results for the Argyle Mine itself, and the returns it is generating for its owner, Rio Tinto.

Whilst Rio Tinto makes the vast majority of its money from iron ore and aluminium, its diamond business does add to its bottom line, with a fascinating article in the Financial Review published in early May 2019 pointing out that revenues from the Argyle mine had soared to their highest levels in a decade.

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