22 Feb

Cash vs pink diamonds – where to turn?

Markets remain in limbo this week, with little in the way of overall movement, as investors continue to sit on the sidelines. This is impacting all asset classes, after rapid moves to both the upside and the downside, which gave investors momentum to follow, encouraging them to take action.

Pink diamonds, while largely immune from the volatility facing other asset classes, are still caught up in this phenomenon to some degree, with prices incredibly robust, even as demand has waned somewhat.

That’s entirely to be expected, and something we expect to see resolve itself in due course, as the tailwinds supporting pink diamonds remain as strong as ever.

We explore one of those tailwinds in this week’s market update, looking at where investors may wish to turn in a scenario where property prices continue to tumble, and the share market continues to underperform.

After all, genuine safe haven assets remain hard to find, especially in a period of high inflation, with pink diamonds being one potential solution for risk conscious investors.

Where to turn if markets crumble again

In previous market updates, we’ve done investment comparisons looking at the merits of investing in pink diamonds vs a range of other asset classes, from property, to shares, to bonds, cryptocurrencies and the like.

This week, we wanted to revisit one of the simplest, but arguably most important comparison in the current market environment: pink diamonds versus cash.

This is particularly topical given:

  • There has been a huge spike in interest rates over the last year, which means the interest income you can earn in a bank account has gone up, though rates remain way down on historical averages (as per the chart below).

Graph of the Cash Rate Target

Graph of the Cash Rate Target

Source: RBA

  • Broader economic uncertainty, inflation threats, volatile markets and the like make it easy to understand why investors today are placing more emphasis on wealth protection.
    Given this background, and the way conventional finance textbooks teach us about how to keep our money safe, the answer is simple right – leave your money in the bank.

From our perspective, while there’s nothing wrong with that advice per se (we try and save a portion of our salary after all), the problem with money in the bank is the decline in purchasing power it experiences due to inflation.

This is particularly acute now, with consumer prices rising by the better part of 8% over the course of last year, with high inflation likely to be a persistent challenge for years to come.

Today, cash, while safe in day to day terms, and paying higher interest than it has in a decade, is a guaranteed loser.

After all, if you assume you can earn 3% in a bank account (you might be able to earn more in a term deposit, but that would sacrifice the flexibility of cash, which is one of its great appeals), then you are probably going backward by about 5% in real terms, and that’s before you account for taxes on your interest earnings.

Do that for 10 years, and while $100,000 invested at 3% per annum in your bank account would have grown to $134,000 (assuming no tax), consumer prices would have risen so much that you’d need $215,000 to afford the same level of goods and services as you’d have been able to afford at the beginning of the decade.

Even 5% inflation means your money will lose more than half its value over a decade, which is a potential scenario more and more investors are preparing themselves for in the years to come.

Given this potential scenario, it’s hard to argue that cash is really a safe haven at all.

How about pink diamonds?

While it may seem counterintuitive at first, a great case can be made that pink diamonds are a more reliable safe haven, especially in the current market environment.

After all, pink diamonds, like cash, can offer protection against a decline in other asset prices, as they don’t suffer the same volatility that share prices and cryptocurrencies do.

This was seen first-hand during the Global Financial Crisis just over fifteen years ago, and again during the COVID pandemic. Markets crashed, while pink diamond prices either remained steady, or saw gradual increases.

Pink diamonds are also stable long-term investments, or at least have proved to be historically, with their performance typically being a mixture of years where prices increase very quickly (as they have in the last two years since the Argyle mine in Western Australia closed), and other years where prices are more stable.

Furthermore, given their extreme scarcity and demand, they have seen price increases that have blown away not only interest income earned from money in the bank, but inflation itself.

From that perspective, while they aren’t as liquid as money in the bank, they are likely a more effective safe haven, if what you are seeking is safety from inflation over a five to ten-year period.

The many conversations we are having with our clients at Australian Diamond Portfolio suggest that this is indeed one of the motivators for people looking at these unique assets today, which bodes well for both demand, and potential price movements in the years ahead.

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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