27 Nov 2019

Diamond Demand Soaring as Central Banks Cut Rates

Last week we commented on the large increase in demand that we have seen at Australian Diamond Portfolio, with many clients either opening or adding to their pink diamond investment portfolio as 2019 comes to a close.

As we discussed, this has been driven by a number of tailwinds, including the pending closure of the Argyle Diamond Mine, which is on track to shut for good by the end of next year.

In this week’s “In the Loupe”, we wanted to share with you the latest news from the Argyle mine itself, which reinforces how strong the demand for Argyle pink diamonds is around the world today.

The headline below comes from a 20th November 2019 press release from Rio Tinto (the owner of the Argyle Diamond Mine), which discusses the results from this year’s 35th Argyle Pink Diamond Tender.

Rio Tinto press release

The press release noted that the 2019 Argyle Pink Diamond Tender saw double digit growth in the number of bids for diamonds, relative to the demand seen last year.

Successful bidders came from nine different countries, further evidence of the intense global demand for these diamonds, with one successful bidder stating that, “no other diamonds on earth match the rarity and provenance of Argyle pink diamonds.” 

We very much agree with and share that sentiment, as both of these features, rarity and provenance, are essential characteristics of any investment diamond we present to clients of Australian Diamond Portfolio.

Commenting on this demand, Alan Chigwin, the Vice-President of Sales and Marketing for Rio Tinto’s Copper and Diamond Division, noted that: “The 2019 Argyle Pink Diamonds Tender was highly sought after with a set of results that underscores the ongoing value appreciation of these gems in the history of rare coloured diamonds.”

If history is to repeat, the successful bidders are likely to be well rewarded in the years to come, with the Rio Tinto press release noting that “over the past 19 years the value of Argyle pink diamonds sold at Tender has appreciated more than 500 percent, outperforming all major equity markets.”

Central Banks Easing at a Record Rate

Clients of Australian Diamond Portfolio who follow our regular updates will know that we think the performance of pink diamonds in years to come may well exceed the strong results seen over the last two decades.

The closure of the Argyle mine itself is one reason we believe that will happen, but it is far from the only one. Monetary easing from central banks (either via low to negative interest rates or actual money printing) is another powerful tailwind that will drive both the demand and the price of pink diamonds higher in the years to come.

Astute investors, like our clients, will not sit idly by while the value of their savings is destroyed via inflation, and will instead diversify into hard tangible assets, which should not only maintain but indeed should increase in real value in the years to come.

Last week was another reminder of how strong this trend will be, and how entrenched the monetary easing cycle is around the world. The chart below plots the percentage of central banks around the world that are easing i.e. cutting interest rates.

 

World: The most synchronised easing cycle in a decade
Share of central banks cutting rates (%)

Easing cycle

NBF Economics and Strategy (data via Financial Times)

As you can see, at a global level there are now more central banks easing than at any point in the last decade, with approximately 60% of banks cutting interest rates at least once in 2019.

The only time this has ever been matched or exceeded was at the height of the Global Financial Crisis, and before that the recession and NASDAQ crash of the early 2000s. This is a clear indicator of how difficult things are in the global economy now, and a warning sign for investors that they need to diversify some portion of their wealth out of financial markets and into hard assets.

Of course, on top of cuts to interest rates, we’re also seeing more central banks decide to increase the size of their balance sheets, or print money, with this money used to buy assets like government bonds and stocks.

The Japanese, the Europeans, the Americans, the Swiss, they are all doing it, and in 2020 this policy is almost certain to make its way Down Under.

Last week, Westpac Chief Economist Bill Evans discussed the ways in which the Reserve Bank of Australia (RBA) will implement Quantitative Easing (QE), noting that the most likely option is for the RBA to buy government securities. “Large scale asset purchases” is the term you are likely to hear in coming months, with the RBA speaking on this matter this week.

No matter what they choose to call it, or how exactly they plan to implement it – the whole purpose of QE is to create higher inflation, and potentially sink the value of the Australian dollar.

Low to negative real returns in cash, or the opportunity to generate returns of over 10% per annum in pink diamonds, a hard asset whose supply will only become more constrained.

We know which one we prefer.

Final “In the Loupe” for 2019

Next week we will publish our final “In the Loupe” for 2019. The report will give a detailed look at the performance of pink diamonds and the outlook for investment in 2020 and beyond, as well as touch on:

  • Risks in defensive assets like cash and bonds.
  • How far equities could fall in the next correction.
  • Why Australia will continue to struggle economically next year.

If you have any specific questions you’d like addressed in this report, please send them through to [email protected] and we will address them accordingly.

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.

 

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