18 Jul 2016

BREXIT: Impact on the Diamond Market

Market Commentary:
Diamonds as a post-Brexit Safe Haven

50 pound sterling bank notes with diamonds closeup view business background

Impact on investors

Last month’s unexpected vote in the UK has wreaked havoc in currency markets and stock exchanges, with huge moves in the Japanese yen, declines in bond yields, and a rally in gold, as investors flocked to safe haven assets.

While EU and British commercial demand will likely drop due to declining currencies and equity markets, global investment demand for rare coloured diamonds as a store of value will likely increase due to global economic and political uncertainty.

Over the last five to ten years, the high-end London housing market has been one of the major beneficiaries of the search for tangible assets amongst global high net worth investors. In the aftermath of Brexit, it is less likely that foreign investors will be as willing to move money into the UK, due to the heightened political risk, and fears over the next move for pound sterling.

The challenge for these investors of course is that there is no guarantee that what happened in the UK won’t occur on the continent in the coming years, with anti-EU parties gaining popularity in Italy, France and Germany, as well as southern Europe. Investment diamonds could well be beneficiaries should these investors increasingly look for assets that are not only tangible, but rare, and just as importantly, easily transportable.

From a currency perspective, the Brexit result is also good news for local investors, with the heightened   uncertainty almost sure to see the US Federal Reserve hold fire on any potential interest rate hikes this year.

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Reduced expectations of a US interest rate hike have seen the Australian dollar rally back beyond $0.75 vs. the USD, a level that may hold for the short-term, but not for too long if the Reserve Bank of Australia cuts interest rates in August, as the market now expects.

As such, Brexit should be seen as a short-term opportunity for those acquiring USD denominated assets now, as they are quite literally getting more bang for their Aussie buck!

Impact on the general trade

A likely negative however, is that in the aftermath of Brexit we will likely see the pressure banks are putting on the diamond trade intensify. Liquidity may continue to be reduced. While Brexit is not expected to significantly reduce overall demand it will indirectly impact trade liquidity which may result in some price volatility.

It is vital that rough diamond producers maintain price levels that ensure profitability and liquidity in the manufacturing sector during these uncertain times.

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