15 Feb

Cheap money to fuel pink diamond market

It is halfway through February, and it feels like the year is now properly “up and running” with people back from their holidays, and investors, including those that buy pink diamonds, looking at all markets, and working out what to do with their portfolio this year.

So far, what they would be seeing is a slowdown in the local property market, and minimal movement in the stock market, with the ASX -1% since the start of the year.

They would also be reading news that suggests we have likely seen the peak in interest rates globally (Australian rates may go a fraction higher, though even this is uncertain), and central banks likely to cut rates substantially as we approach the second half of 2024.

Should this come to fruition, it will have bullish implications for pink diamonds, as we discuss below.

How low will interest rates go this year

When COVID-19 first shocked the world some four years ago, it was only natural that central banks, in a bid to provide support to world markets and the economy, cut interest rates incredibly hard.

While these lower rates helped in many ways, they also contributed to a spike in inflation (noting that the shutdown of the global economy was also a huge factor). This first began to be felt by early to mid 2021, when annual consumer price rises in the United States, Europe and Australia approached, and in some cases exceeded 10%.

By that time, central banks realised it was time to change course. They commenced a rate hiking cycle that was amongst the most severe that we have seen in decades, in terms of the speed at which interest rates rose.

All of this is demonstrated in the chart below, which shows the net number of interest rate cuts seen delivered by central banks globally (the pink line), and its impact on global manufacturing output (the black line).

In simple terms, the higher the pink line, the greater the number of central banks there are that are cutting rates, and vice versa, with the three highest points for the pink line on the chart aligning with:

  • The recession and market crashes that accompanied the September 11 terrorist attacks of 2001.
  • The Global Financial Crisis (GFC) which was at its most severe between late 2007 and early 2009.
  • The COVID-19 pandemic, which took off in early 2020.

Global Monetary Policy Stimulus

Chart of Global Monetary Policy Stimulus.

Sources: Topdown Charts, LSEG.

The chart also shows the sharp spike in interest rates that occurred from 2021 to 2023, evidenced by the pink line falling to its lowest level since the turn of the century.

As you can see though, the line has begun to turn higher again indicating that central banks are, on the whole, again in rate cutting mode.

These lower rates will likely be very bullish for pink diamonds, as investors realise that:

  • Cash in the bank is paying less and less in terms of interest.
  • The reason that rates are being cut is because the economy is weak, magnifying the risk in more traditional assets like shares and property, and increasing the value of trusted diversification assets like pink diamonds.
  • Inflation, which is still at higher levels than it should be, will only likely accelerate if interest rates do come down, further eroding the value of cash in the bank.

The above is largely how things played out in previous periods where global interest rates were moving in such a fashion.

There is no reason to think that it will be any different this time, which is why pink diamonds are set to remain a go-to asset as the year unfolds.

A local catalyst for pink diamonds

Despite some of the misconceptions about the diamond market that lead some investors to think that it is inaccessible, the truth is that pink diamonds have always been fairly easy to incorporate into a portfolio.

This is especially true when working with an expert brokerage like Australian Diamond Portfolio, who can not only ensure that you are buying the best possible diamonds at any given price point, but also provide a comprehensive solution that includes:

  • Secure storage of these valuable and discrete assets.
  • Ongoing portfolio valuations.
  • Eventual re-sale should you decide to liquidate your holdings.

This ease of investment, combined with the broader financial market and economic environment that we have been through over the past fifteen odd years, has seen a huge increase in demand for these assets in Australia.

And while this stronger demand has come from many different types of investors, no segment of the market has been more important than Self-Managed Superannuation Fund (SMSF) trustees, who collectively hold more than AUD $800 billion in assets that they are managing.

Given their importance to the pink diamond market in Australia, any policy developments that make it easier to buy pink diamonds should be welcomed. To that end, we were delighted to read that the ATO has released guidance stating that pink diamonds are not considered personal use assets or collectables when held in a SMSF.

We will be discussing this in more detail in the coming weeks.

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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