18 Oct

Another win for pink diamonds

Fresh from the recent records that were set at auction in Hong Kong, pink diamonds are again in the news this week, as Argyle mine operator Rio Tinto discusses the plans for their remaining stock of pink diamonds from the mine.

The demand side of the equation also looks strong for pink diamonds, with Australian Diamond Portfolio continuing to see new buyers accessing this asset class.

This demand is being driven by investors seeking strong long-term returns, portfolio diversification, and of course inflation protection, which has only become more important as 2022 unfolds.

We delve into this in some detail below.

More great signs from the pink diamond market

It’s not just record highs being set at auctions that highlight the strength of the pink diamond market these days.

Last week, we saw news that Rio Tinto, the operator of the Argyle mine, has released one of its last pink diamond products, since the mine was shut in 2020.

The product, a hand-crafted ring with pink diamonds sourced from the mine embedded within it, is expected to sell for as much as $6 million, as per the below headline from a Sydney Morning Herald article that discussed the ring itself, and Rio Tinto’s broader plans in the diamond space.

Headline from Sydney Morning Herald saying 'Rio Tinto's best friend: Argyle pink diamond ring to fetch $6 million'.

Patrick Coppens, general manager at Rio Tinto’s diamond division discussed the ring, and Rio’s plans regarding releasing pink diamonds to the market going forward, noting that; “Rather than [selling] them in a very short period of time, we really want to create special pieces that reflect the rarity and the magic that are Argyle pink diamonds.” 

Rio’s plans for the future of the pink diamond market are a huge win in our view for investors in these assets. After all, given the scope of their broader business operations, one can’t help but see their continued investment in the Argyle brand as a sign that they themselves think this market will see strong growth going forward.

The article also highlighted several other key points, relating to Rio Tinto’s plans in the diamond market, the Argyle mine, and the pink diamond market more specifically, noting that:

  • While Rio plans to close its last remaining supply of diamonds within 3 years, it aims to stay in the diamond business for years to come.
  • Argyle really was a game changer in the diamond market, producing more than 875 million carats of diamonds in almost 40 years of operations. Critically, it was the only mine to consistently produce coloured diamonds (i.e. pinks), with attempts to find “another Argyle” so far failing, according to Rio.
  • Pink diamonds have grown in value year on year, with the price rises; “getting a bit stronger now the mine has closed”, according to Rio Tinto’s head of minerals, Sinead Kaufman.

All of this echoes comments we’ve made at Australian Diamond Portfolio.

It also bodes well for the future of pink diamond prices, with Patrick Coppens noting; “natural diamonds, because they are becoming rarer and rarer, will probably be used more in top-end luxury pieces that are going to retain their value over generations.”

We couldn’t agree more, with the team at Australian Diamond Portfolio remaining incredibly optimistic on the outlook for pink diamond prices, irrespective of whether they are being purchased as investments outright, as part of a jewellery piece, or as a combination of the two.

Inflation remains the big challenge

Over the past couple of years, in particular, one of the key drivers of pink diamond demand has been inflation protection. It comes up regularly with clients at Australian Diamond Portfolio, with investors increasingly seeking out assets that are:

  1. Genuinely scarce, in that they are limited in total supply, and perhaps more importantly, not easy to increase the production of.
  2. Have a history of at least matching, and indeed ideally exceeding increases in consumer prices.

Pink diamonds are of course one of the few assets that meet both of these criteria, being incredibly limited in supply, with that supply limitation something that has obviously been exacerbated by the closure of the Argyle mine.

Pink diamonds have also been able to generate strong long-term returns, outpacing the rise in consumer prices, including in the aftermath of the COVID pandemic, where inflation has surged, and many other asset classes have crashed.

News out of America last week suggests that the desire for inflation protection is not going to go away anytime soon, and indeed may get stronger in the years to come.

For while many market analysts were expecting that inflation rates would show signs they are falling, there is scant evidence of this so far, with the latest inflation results showing consumer prices are rising at 8.2% per annum.

While that’s lower than the peak seen earlier in the year, it’s still near multi-decade highs, and will put more pressure on central banks to keep hiking interest rates aggressively, and keep them at a high level, even though these higher interest rates are hurting the economy, as well as share and property markets.

Perhaps more alarmingly, subsets of the inflation data continue to climb on a year-on-year basis, which suggests the challenge of rising prices is at risk of becoming embedded in the economy as a structural force.

The most notable of these inflation subsets is core inflation (which strips out food and energy prices because they are notoriously volatile), which is now rising at 6.6% per annum.

Average inflation, or mean inflation as it’s technically called, as well as median inflation, which is also useful gauges of price pressures across the economy, are now both running at 7% per annum or higher, as the below chart highlights.

Median Consumer Price Index

Chart of consumer price indexes.

Bottom line: As much as we all wish inflation would slow down and quickly return toward the sub 2% per annum level we’d all grown accustomed to in the last 10-plus years since the Global Financial Crisis hit, it doesn’t look like that’s going to happen any time soon.

Investors need to be prepared for this, with hard assets like pink diamonds likely to benefit from this trend.

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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