02 Dec

Bull market in hard assets set to surge

While we were all hoping the worst of the COVID-19 lockdowns and restrictions on movement were behind us, this past week few weeks brought troubling news of the emergence of a new Omicron variant of the virus.

Countries in Europe and Asia have already closed their borders to travellers from certain nations believed to be most exposed to the virus, while lockdowns and restrictions on movement, which were already coming back into place in parts of Europe, are likely to be ratcheted up in the next weeks.

Australia has also responded, with heightened quarantine procedures in place, though the data available so far (acknowledging the situation could change) doesn’t as yet suggest this new variant is any more dangerous than the preceding variants of the virus.

While all this will, and indeed already has, added to financial market volatility, with share markets selling off sharply, it’s too early to tell how much of an impact it will have as we head into next year.

Regardless of what happens on the COVID-19 front, the outlook for pink diamonds, and the rationale to invest in them grows stronger by the day.

This week, we look at another market indicator suggesting prices for hard assets, which obviously include pink diamonds, will surge in the years to come.

Commodity prices set to boom

Last week, we came across a chart that really stood out to us, as it highlighted just how difficult the environment for investors in traditional assets will be going forward, and how big the opportunity in hard assets, like pink diamonds will be.

The chart, which you can see below, shows the real yield (i.e. it accounts for inflation), on a 10-year US Treasury bond, and goes all the way back to the 1960s. The chart highlights that at present, the current yield on a US bond is negative 4.6%.


10 Year Treasury Rate – US Consumer Price Index YoY

Chart of 10 Year Treasury Rate - US Consumer Price Index YoY

Source: Compound Advisors, Charlie Bilello.

As Charlie Bilello, the Founder and CEO of Compound Advisors who created the chart wrote; “After adjusting for inflation, U.S. bond investors have almost never been compensated less than they are today. With the exception of a single month back in 1974, today’s real 10-year yield of -4.7% is the lowest we’ve ever seen.

“The 6.2% inflation rate (CPI, highest in 31 years) caught many investors by surprise, but perhaps more surprising has been the lack of a meaningful rise in interest rates, with the 10-year treasury yield sitting at only 1.5%.”

If history repeats, or even just rhymes, it suggests the next 5 years are going to see a huge bull market in commodities and other hard assets, just like we saw between 1974 and 1980.

As an example, between mid 1973 and mid 1980 the price of crude oil rose by more than 500%, from USD $22 to USD $133 per barrel.

The question for investors to ask is, how do we capitalise on a period of rising prices for hard assets, should we see a similar trend play out between now and say 2030 or thereabouts?

From our perspective at Australian Diamond Portfolio, of all the hard assets an investor can turn too, we remain steadfast in our view that pink diamonds will be one of the best performers going forward.

While other commodities should also do well if inflation rises and/or real interest rates stay low (which we expect them too), no other commodity has the true scarcity that pink diamonds do.

Most other commodities are also not able to be easily purchased and securely stored (it’s not really possible to stockpile bushels of wheat or barrels of oil for example), with that tangibility and very real sense of ownership an important factor driving astute investors toward pink diamonds today.

Double diamond at Ellendale

Coloured diamonds were again in the news last week, with the announcement that a very rare 0.85 carat ‘double diamond’ (effectively a diamond sitting within another diamond) was discovered at the Ellendale mine in Western Australia. The discovery is likely to see production levels at the Ellendale mine increase in the year ahead.

While we’d be happy to see this happen, there is no need to fear that increased supply will negatively impact the roaring bull market we see in pink diamonds today.

For while Ellendale is famous for the yellow diamonds it produces, increased output from the mine will have next to no impact on the supply of pink diamonds in the market.

It also has nowhere near the brand recognition of Argyle, with the pink diamonds produced at the now closed Argyle Diamond mine set to remain the ‘go-to’ investment choice for coloured diamond investors worldwide.

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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