16 Jun

Diamonds rock solid as markets crater!

This week is shaping up as a historic one for financial markets, and not in a good way.

The release of inflation data in the United States late last week, which showed prices are now rising at more than 8.5% per annum, has sparked a crash in global asset prices.

Australia is not immune.

In this week’s market update, we’ll look at what’s happened in global markets in the past few days, and why there might be more pain ahead.

We also look at why these developments, as uncomfortable as they are, only reinforce the need for owning hard assets like pink diamonds in a portfolio today.

Markets are sinking!

No matter where you look, financial markets are sinking, and appear on the verge of imploding.

In Australia today (note that this report is being written on Tuesday 14 June), the ASX 200 is down almost 5%, having now fallen toward 6,500 points, a level it first reached some 15 years ago.

That translates into a decade and a half of zero capital growth in Australian shares. 

The move on the ASX today mirrors weakness seen in the United States, and on global stock exchanges, with the S&P 500 now down 9% in the last 5 trading days. As per the chart below, it’s down over 20% year-to-date.

Factor inflation in, and it’s lost a third of its value.

Graph of S&P 500 over the last year

The bond market is no better.

Despite being touted as the natural safe haven asset, because government bonds in particular will always be repaid, they are having their worst year on record, with US 10-year treasury bonds down 13% (over 20% after inflation).

Finally, there are cryptocurrencies.

About a month ago we wrote about cryptocurrency prices, and the significant decline they had seen since hitting all-time highs in late 2021.

It’s gone from bad to worse in this sector in the weeks since, with the market in absolute free fall now.

Bitcoin has fallen toward USD $22,000 per coin (down 28% in the last month), and at levels that are within 10% of where they were in 2017, while the total value of all cryptocurrencies has now dropped below USD $1 trillion.

That is barely a third of the level it was just six months ago.

No matter where you look, most investors are taking significant losses right now. And it likely isn’t over.

Is there more pain to come?

While it’s tempting to think that a more than 20% fall in share markets is a “buying opportunity”, and that the worst of the correction is now behind us, that may not be accurate.

The chart below, often referred to as the Buffet Indicator, show the market value of the US stock market divided by annual economic output, or GDP, in the United States.

Despite the recent pullback in this ratio, it is still near all-time highs, and sitting at roughly similar levels to where it was at the turn of the century, just over twenty years ago.

Recent Declines Cut Valuations From All-Time Records… But They Are Still Above The Dotcom Peak
The Buffett Valuation Metric: Total Market Cap to GDP

Graph of The Buffett Valuation Metric: Total Market Cap to GDP

Source: Kailash Capital, LLC

The market is a long way from being cheap.

And unlike every market correction we’ve seen since the 1980s, this time around policymakers are going to be increasing interest rates, not reducing them.

Indeed, with interest rates set to rise both in the USA and locally (markets are now pricing this in; in Australia, the RBA will raise rates to 3.75% by late next year), prices in both the stock market, and in real estate, could fall a lot further.

Diamonds rock solid!

In the aftermath of what was a clear bubble back in 2000, investors in traditional assets like shares went on to lose money in the ten years that followed, while hard assets, which include pink diamonds, prospered.

This time around, the case for hard assets is even stronger. After all, unlike in 2000, investors now face:

  • Much higher levels of inflation, which are already at multi-decade highs.
  • Falling bond prices, meaning fixed income assets are no longer acting like the safe haven assets investors are used too.
  • Falling or stagnating real estate prices, which are at or near record highs, including in Australia.

As it pertains to pink diamonds, the bullish outlook is only reinforced by the supply side of the equation.

After all, back in 2000, the Argyle Diamond Mine, which generated upward of 90% of annual global pink diamond output, was fully operational. Today, it’s shut, meaning new supply of pink diamonds to the market is almost non-existent.

These factors, coupled with the price stability pink diamonds offer, their profit potential, and their diversification benefits all bode very well for the demand side of the pink diamond equation, which should support prices for the foreseeable future.

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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