17 Feb

30 trillion reasons to buy pink diamonds!

It’s been another interesting week in financial markets, with inflation, a subject we discussed in detail in our last update, hitting 7.5% in the United States.

These are amongst the highest inflation readings in decades, ensuring it will remain front page news, supporting investments into assets like pink diamonds that have a history of protecting and growing their purchasing power.

In this week’s update, we look at two other factors supporting the bullish case for pink diamonds, including the outlook for interest rates, and one of the many reasons they won’t rise to offset inflation like they did in the past.

We also look at an update on supply dynamics in the pink diamond market, and why the scarcity of these assets is another bullish factor supporting higher prices going forward.

Interest rates won’t rise much!

While it didn’t get much attention at the time, January 31st was a momentous day in the United States, as it was the day the debt owed by the United States government topped $30 trillion US dollars.

This debt pile is larger than the entire size of the US economy, with the country’s debt to GDP ratio rising from 35% in 1980 to 59% in the year 2000 to 125% today.

The debt is also almost 8 times larger than the entire tax take the government levies each and every year and comes to some USD $240,000 for each and every taxpayer.

The problem is getting worse too, with this debt pile exploding in size in the last fifteen years. US government debt was less than USD $10 trillion back in 2007, so it’s grown by $20 trillion since the Global Financial Crisis hit, with USD $6 trillion of this debt added since the COVID pandemic hit.

The table below highlights the growth of this gargantuan debt load since the early 1980s.

US National Debt – History (1981 – Today)

US National Debt chart - History (1981 - Today)

Source: Compound, CharlieBilello.

It’s clearly a problem, and it’s one that is accelerating rapidly.

The reason this is important for interest rates is simple.

The higher rates go, the higher the interest payments the US government needs to cough up just to service, let alone repay any of that debt. Those higher interest payments means less money for education, health, infrastructure, defence, and the myriad other items people expect the government to provide.

In terms of visualising how big a problem this is, consider the table below, which shows how much interest needs to be paid on this debt (which is growing every day by the way) at various interest rates, and what percentage of total tax revenue would need to be dedicated to interest payments at each rate.

Table comparing interest rates and payment

As you can see, even at just a 2% interest rate, this debt pile will cost USD $600 billion to service, which is some 15% of total tax revenue. For every percentage point interest rates rise, an additional USD $300bn, equivalent to some 7-8% of total tax revenue would need to be dedicated to interest payments.

The math works, but the economy won’t if this situation eventuates.

The bottom line is this –

Even though interest rates may go up by 1 or even 2% in the next year or so, we simply aren’t going back to the good old days where you could get 5-10% in interest by simply leaving your money in the bank.

Politicians and policymakers have no choice but to keep interest rates very low, and likely below the rate of inflation for a decade or longer.

That is the big picture worth focusing on.

It will not change any time soon, and for as long as these dynamics are in play, they will continue to drive investment into genuinely scarce hard assets, like pink diamonds.

Diamond supply won’t rise anytime soon

Regular readers of our market updates know that our bullish outlook for pink diamond prices is driven by an understanding of both the demand, and the supply dynamics at work in the diamond market.

This week, we came across a great article published on Stockhead which reinforced how scarce diamonds are, and why supplies, especially for pink diamonds, won’t be rising meaningfully anytime soon.

The article quoted a report published by Bain and Co, which noted that production of rough diamonds, which has fallen by more than 15% in the last two years, will likely see a minor bounce back this year, but will then only grow by 1-2% per annum for the next half decade.

These views were expanded upon by Bain partner Olya Linde, who stated; “We have not seen such strong demand for a long time. Actually, I have not seen such a big boom in all my time in the industry. Going forward, it’s not that easy to just add production. So, while demand will continue to remain strong, the ability for players to increase production in the short term is very limited.”

The issue of constrained supply is of course particularly relevant for pink diamonds, given the 2020 closure of the Argyle Diamond Mine, which was responsible for over 90% of the production of all pink diamonds.

The article touched on this issue specifically, with one expert noting “You can’t replace Argyle, it’ll never get found again.”

Truer words have never been spoken, with the ingrained scarcity of pink diamonds, combined with the rising demand for these truly unique assets that we see every day at Australian Diamond Portfolio set to push prices much higher in the next few years.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and we look forward to any questions or comments you may have.


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