26 Aug

Diamond Market Activity Heating Up

This week’s update looks at recent reports on the increased activity being seen in the global diamond industry, which like many other industries, has been severely impacted by COVID-19.

More importantly, we share our view on how these developments will impact the investment market for pink diamonds going forward.

We also share another warning sign from the stock-market, which will have astute investors worldwide looking to diversify their wealth and move some of their assets into alternative hard assets, like pink diamonds.

Activity returning to the diamond market

Whilst demand for pink diamonds amongst our ever-growing investor base at Australian Diamond Portfolio has been strong all year, there is no doubt that COVID-19 has caused a slowdown in the broader diamond industry.

From miners, to logistics companies, to polishers, to cutters, to brokers and auction houses, many have seen turnover and activity decline meaningfully.

The impact was significant enough that the Fancy Colour Research Foundation (FCRF) decided they would delay publication of their much-watched diamond indexes until more normal levels of trade activity were taking place.

Whilst we are not there yet, there are reports of a notable uptick in activity in the global diamond trade, with an IDEX Online article published recently noting that sales of fancy coloured diamonds are increasing on a worldwide basis.

The New York based FCRF noted that whilst activity in the diamond market was almost non-existent in April, “in the months of May and June, activity started to gradually increase, and today we are hopeful about activity in the second half of 2020 and a rehabilitation of the industry by mid-2021.

Our perspective on these developments is as follows:

  • The fall in activity in the diamond market due to COVID-19 in no way altered the investment potential of the pink diamond market. If anything, quite the opposite, as the risks in the economy and in financial markets are more apparent than ever now.
  • Whilst activity for the diamond market as a whole declined, the pink diamond industry (which is only a tiny portion of the diamond market given the true rarity, scarcity and value of pink diamonds) remained robust in terms of pricing, and demand in Australia.
  • Many astute Australian investors have used this period as an opportunity to either add to or purchase their first pink diamond as an investment, taking advantage of the bounce back in the share market and the value of the Australian dollar to diversify their wealth into this unique asset class.

Moving forward, we of course will be as happy as anyone and everyone in the diamond industry to see activity return to pre COVID-19 levels.

From an investment perspective, this expected increase in activity around the globe, combined with the pending closure of the Argyle Diamond Mine (which is still set to take place later this year) will not only see values for pink diamonds well supported, but in fact may well be the catalyst to trigger the next surge in prices.

Another warning sign for financial assets

We regularly share warning signs about the risks in financial markets and mainstream asset classes in these market updates, as they help explain:

  • why diversification is so important.
  • why investors shouldn’t be complacent about their portfolio today.
  • why investors need to look to alternative assets to protect and build wealth in the current environment.

This week we came across another timely warning in the Financial Times, which ran an article with the following headline.

The article then went on to include the below chart, which shows that the short interest on stocks in the S&P500 fell below 2% recently, the lowest on record.

For clarification, this measure calculates the value of the investments betting that the share price of a company will fall, relative to the value of the company itself.

 

Bets against US stocks tumble

Median S&P 500 stock short interest as percentage of market capitalisation

Bets against US stocks tumble

Source: Goldman Sachs, Factset

Obviously the higher this ratio is, the more nervous investors are, and the lower it is, the more optimistic they are.

What’s striking about the ratio is that it’s even lower today than where it was in 2006 and 2007, which was just before the onset of the Global Financial Crisis.

Clearly investors are in a bullish mood.

That’s great for the outlook of the stock market in the next week or even month. But history suggests very clearly that this kind of investor euphoria is a very bad sign in terms of what might happen to the stock market over the next year or two.

The fact that the economy is in far worse shape today that it was during the GFC, with the threat from COVID-19 a long way from resolved only exacerbates the risk in the stock market today.

Whilst we are happy to keep some of our own money in the stock market, data like this is yet another reason why we, and many astute investors we know are happy to have truly diversified their portfolio.

The key to that is making sure that a meaningful portion of one’s wealth is invested in hard assets, which tend to strongly outperform in periods of financial market stress and/or higher inflation.

For obvious reasons, pink diamonds remain our hard asset of choice, with a unique supply/demand profile that offers the best return potential in our view.

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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