14 Nov 2019

Diamond Market Stable as AUD and Equity Market Risks Build!

It’s been another solid quarter for rare coloured diamonds, with the Fancy Colour Research Foundation (FCRF) releasing their Q3 2019 diamond index data last week.

Overall, pink diamond prices were steady, with the highest performance seen amongst fancy vivid pinks, particularly 1 and 3 carats fancy vivid pinks, which rose by 1.6% and 1.7% respectively.

Whilst not enormous gains for one calendar quarter, these price increases do translate to gains of approximately 7% per annum in USD terms, a very solid return in the difficult investing environment we find ourselves in.

Pink diamond prices were also substantially more resilient than other parts of the diamond universe, with yellow diamonds falling by 1.5% for the quarter, with losses of approximately 5% over the last year.

This performance discrepancy is one of the key reasons why Australian Diamond Portfolio focuses its efforts on the pink diamond market.

Our decades of experience in the industry, and the pending closure of the Argyle Diamond Mine give us confidence that pink diamonds, and pink diamonds alone are the sector of the rare coloured diamond market that offers the best return potential for our clients in the next decade.

Pile of Australian Dollars

Under the proposed “Currency (Restrictions on Use of Cash) Bill 2019” businesses and individuals would be limited to $10,000 for cash transactions.

Cash Ban Coming?

One of the interesting developments taking place in Australia right now is the discussion around limiting the use of cash in day to day commerce. Under a proposed law, called the “Currency (Restrictions on Use of Cash) Bill 2019” which looks like it may well get the legislative go ahead, all cash transactions between businesses and individuals would be limited to $10,000, with a range of punishments for those who breach this limit.

This bill, and previous legislation surrounding Bail In laws, which allow APRA (the prudential regulator of our banking system) to utilise depositor funds to help recapitalise a failing bank, is yet another blow to the safety and security of money kept in the financial system.

It can only continue to help encourage investors to seek out discrete hard assets like pink diamonds, which can be held outside the banking system, especially when one considers this legislation is being developed alongside the reduction in interest rates to all-time lows below 1%, and the growing chance we’ll see money printing by the RBA at some point in the next year or so.

The opportunity cost of moving your money out of the bank is almost nothing. The cost, and the risk of keeping it there only grows by the day.

Australian Dollar Rally to Stall

During October, the Australian dollar rose by over 2% versus the US dollar. This happened despite the cut in local interest rates, and continued weakness in the local economy, which saw retail sales volumes fall to the lowest levels seen since the recession of the early 1990s.

The weakness in retail, which is itself a symptom of the malaise affecting the broader economy, is strong evidence that the AUD rally will only be a short-term phenomenon, with the risk strongly to the downside.

Indeed, even the RBA are openly agitating for a lower AUD, in the hope that it will stimulate the economy, with the following heading from a Business Insider article on November 8th encapsulating the views of the bank.

Business Insider headline

As the article states, the RBA believes a lower AUD will help the economy, stimulating job growth, higher GDP, and higher rates of inflation. This can be seen in the following chart, with the orange lines highlighting what will happen to a variety of economic indicators if the AUD depreciates (i.e. loses value).

Economic Indicators
Exchange rate scenarios

Economic Indicators

*Dotted line represents forecasts and scenario outcomes. Sources: ABS; RBA.

Their views, and their outlook for the economy have led some economic commentators, including David Bassanese of Betashares, to forecast that the AUD will decline to just USD $0.62 by the end of next year

That would represent a fall of just over 10% from the level the currency was trading at by the end of October 2019 and would provide a major boost for clients of Australian Diamond Portfolio who are investing in pink diamonds.

It’s also a good prompt for those considering adding to their diamond portfolio or indeed purchasing their first ever stone, as the current value they are getting for their Australian dollars looks unlikely to last.

Equities hit all-time highs – time to diversify

The Australian dollar isn’t the only market at risk of a serious correction, with many equity markets hitting all-time highs in recent weeks. Running for over ten years now, this equity bull market is one of the longest on record, which is in and of itself a major warning sign.

The warning only gets more significant given the valuations investors are paying to buy stocks are also near all-time highs, and the fact that long-term profit expectations have collapsed.

Add all this up and whilst some investors will happily chase markets higher and inevitably get caught up in the next crash, it need not be that way.

Risk conscious investors who want to build and protect wealth in the coming decade, like our clients at Australian Diamond Portfolio, will be using the recent strength in equity markets to diversify into hard assets, including pink diamonds.

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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