15 Feb

Diamond prices strong as investors assess outlook

It’s been an interesting start to the year for pink diamond markets.

Prices remain strong and well supported, which is unsurprising given their scarcity, and given the many tailwinds that support the rationale for making an investment into this unique asset class. Based on anecdotal evidence from our global trade partners however, despite strong prices, sales volumes appear to be softening a little.

In many ways, a slowdown in sales volume combined with robust price strength and performance is not unexpected, especially after the boom years we saw in the aftermath of COVID, and the closure of the Argyle diamond mine back in late 2020.

It’s also worth acknowledging that the outlook for investing in general is quite uncertain right now, which may explain part of the hesitation investors are feeling today when it comes to working out how to position their portfolios, with pink diamonds caught up in that uncertainty to some degree.

Indeed, this very subject was raised in a recent article for Solitaire International, with analysts noting that “reports that the momentary let-up in the expectational stone market may be partly due to the volatile global macro-economic conditions affecting buyer confidence and purchasing power”.

Crucially, they went onto note that: “Nevertheless, the long-term value of diamonds as a tangible and rare asset remains strong, and the market is expected to rebound as the global economy stabilises.”

We explore the topic of broader investor uncertainty, and some of the challenges ahead in more detail below.

A challenging outlook in 2023

There’s no question that it’s not an easy time to be an investor. While there are always uncertainties, the current period is shaping up as one of the most difficult in many decades, with multiple headwinds for investors to navigate.

Understandably, this is having an impact on investment flows, as many investors, almost by default, embrace a ‘do nothing’ approach, given that they are unsure what the best thing to do with their money is.

There are also confusing signals on where the economy currently sits, with some figures (like unemployment, and overall GDP growth), still fairly resilient in large parts of the world, while consumer confidence has tanked, including in countries like Australia, as higher inflation, and higher interest rates depress sentiment.

The following chart and table best sums up where we currently sit, and the likely direction we are headed across the course of 2023. It was produced by @CallumThomas who publishes the TopDown charts substack, with the chart plotting four data points over time.

  • Hard data: things like retail sales, manufacturing output etc.
  • Soft data: confidence levels etc.
  • Leading indicators: items that suggest direction economy is headed in.
  • Inflation: The rate at which prices are heading.

Global Economic Data Pulse (z-score)

A graph titled "Global Economic Data Pulse (z-score)".

Source: Topdown Charts, Refinitiv Datastream

The chart and table show that leading indicators are currently weak and getting worse, soft data is weak (though stabilising), while hard data is also weak and softening, while inflation, which is very high, is at least easing somewhat.

Overall, it’s a troubling picture, with Thomas himself noting that; “while nothing is ever certain in macro, markets, or life in general, the logical conclusion if we follow the data is that the global economy enters into recession this year.”

If a recession were to occur, we expect that many investors will remain plagued with indecision, and largely leave their portfolios as they are. This will likely prove problematic, given share markets and property markets may fall further.

It will also mean they’ll likely miss out on opportunities, with only those with the foresight and decisiveness to act likely to bolster their portfolio with assets that have typically held their value through recessionary environments.

This of course includes pink diamonds.

Inflation sticking around

While the headline numbers are dropping, inflation looks like it is sticking around this year, with signs it won’t fall away as fast as policy makers are expecting, and indeed hoping.

This was evident in recently released data from the United States, which showed headline inflation rates of 6.4% in the year to end January. While this is a notable fall since August 2022, when headline rates were over 8% per annum, the underlying data is less encouraging, with median inflation still rising at more than 7% per annum.

What makes the challenge even more problematic is that some items have crashed in price in the last few months, meaning that they’ve already exerted downward pressure on recent inflation results. This includes global shipping rates, which are down 80% from their peak, and natural gas prices, which have fallen by the better part of 70% since last year.

Higher inflation poses a big problem for markets, and by extension, investors in those markets, for it means central banks will need to raise rates higher than they would like and will need to keep them higher for longer.

That’s problematic for the housing market and is no doubt one of the reasons that more people in the US for example feel that they are worse off rather than better off compared to a year ago. This can be seen in the chart below, with similar results observable in other developed market nations.

Americans’ Financial Situation Now Versus a Year Ago

Would you say that you are financially better off now than you were a year ago, or are you financially worse off now?

A graph titled "Americans' Financial Situation Now Versus a Year Ago".

Note: Volunteered percentage “same” not shown. Source: Gallup.

Data like this is very problematic when it comes to the outlook for other mainstream assets like the share market.

Combined with the likelihood of a recession, and still high inflation, it also reinforces why investors may wish to assess pink diamonds as a potential alternative source of growth and wealth protection today.

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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