It’s hard to believe that we are already into the second month of the year, with 2021 so far looking like another difficult year in terms of the economy, and freedom of movement for us all unfortunately.
Whilst we in Australia have gotten accustomed to reading about significant lockdowns in Europe and other parts of the world, it struck closer to home this week with the news that the city of Perth and some parts of Western Australia have gone into a five-day lockdown, after a case of COVID-19 was detected in a hotel worker.
Whilst we understand the rationale (not to mention the politics) behind lockdowns are complicated and sometimes divisive, there is little doubt regarding the economic outcome of these decisions, which must be reckoned with eventually.
Output and employment will be negatively impacted, while more small businesses will suffer. There is also the fact that the government will see both a hit to taxation revenue and an increase in welfare payments, which only serves to boost already ballooning national debt levels.
To get a sense of the problem as it stands today, consider the table below, which looks at the Federal Budget, highlighting expected tax revenue, and planned expenditure both in this financial year and forecasts for each financial year to June 2024.
As per the above, in this current financial year, the government is expected to run a deficit of more than AUD $200 billion, equivalent to 11% of GDP. Four years from now, the numbers will still be more than AUD $65 billion, noting that this is based on incredibly optimistic forecasts for the growth of the Australian economy over this time period, with the numbers likely to come in lower than hoped for.
In practice, much of this debt is likely going to be ‘paid for’ by The Reserve Bank of Australia (RBA), who will digitally print the money required to buy the bonds issued by the Government to fund planned deficit spending.
Over the course of the next few years we expect the challenge posed by record public debt levels will be very supportive of hard assets.
Whether it be fears of higher inflation, or the fact that share markets and property continue to face significant risks, there seems little doubt that investors will move at least a portion of their capital into hard assets.
This would be an entirely logical thing to do given the record hard assets have in terms of providing capital protection and outperformance in periods of higher inflation and/or financial market turmoil.
These factors will be particularly acute in hard assets that are genuinely limited in supply, such as pink diamonds, which are well placed to deliver market leading gains in the next decade.
Developments in pink diamond markets
Whilst the impact of COVID-19 meant that a lot of the regular data we use to monitor the coloured diamond market was not available last year, the regular conversations that we have with our contacts in the industry around the globe mean we are still able to keep an eye on pricing developments.
This has been particularly important in the aftermath of the closure of the Argyle Diamond Mine, which ceased production in Q4 last year. Most industry participants and investors, ourselves included, expected the closure to help kick-start an uptick in pink diamond prices, but the question has always been around how much of an increase we would see.
Whilst the closure of Argyle and its impact on prices will take years to play out, the short-term signs are encouraging. In the run up to Christmas last year, there were multiple media reports which suggested that Rio Tinto (the mine operator) saw record results off the back of the 2020 Argyle Diamond Tender, with prices seeing more than double-digit price growth.
Patrick Coppens, the General Manager of Sales and Marketing for Rio Tinto’s diamond business was quoted as saying that; “We (Rio Tinto) are delighted with the results of the 2020 Argyle Pink Diamonds Tender, a testament to the unique Argyle ore body and its place in the history of the world’s most famous diamonds.”
Recent speculation suggests that prices for the more than 60 coloured diamonds included in last years Tender actually saw an increase of closer to 20%, which is far higher than the returns delivered by most traditional asset classes in 2020.
This is testament to the ongoing allure of this truly unique asset class, and why its popularity as an investment will only grow in 2021, now that the Argyle Diamond Mine has closed.
A Valentine’s Legacy
For those of you looking for a genuinely timeless gift for that special someone, look no further than The Australian Diamond Portfolio Legacy Collection.
Available from $1,0000 to $10,000, these beautiful stones, carefully curated by our own gemmological team, are designed to suit any budget.
Please note that we’d suggest making your purchase by no later than Friday the 7th February in order to ensure your Legacy pink diamond can be delivered on time.
Make this a Valentine’s day to remember forever with the perfect memento.
As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.