16 Sep

Diamonds to shine as tech bubble bursts

It’s been a volatile first two weeks of September in financial markets, with the share prices of market darlings in the technology space particularly vulnerable.

This is a subject we explore in detail in this market update, highlighting why we think hard assets like pink diamonds are better placed to deliver strong long-term returns in the years to come.

We also look at the latest news regarding the recently released 2020 Argyle Pink Diamonds Tender; titled “One Lifetime, One Encounter”, which has sparked a wave of buying interest from clients at Australian Diamond Portfolio.

The market loves Argyle Pink Diamonds

As expected, the release of the penultimate Argyle Pink Diamond Tender; “One Lifetime, One Encounter” has acted to stimulate even greater media interest in pink diamonds, as well as heightened investor interest both locally and overseas.

Some of the key points that we have seen highlighted in recent media coverage about the Tender that we think are most relevant to investors include the following:

  • Competition for this year’s Argyle Pink Diamond Tender, and indeed all pink diamonds from the Argyle Mine is going to be fiercer than ever, given the pending closure of the mine in late 2020.
  • Over the past 20 years, Argyle Pink Diamonds sold at tender have risen by more than 500%, outperforming all major equity markets.
  • Argyle pink diamonds are graded foremost on colour before clarity and cut, with their value determined by their intensity. This is different to colourless diamonds.
  • There is growing interest from investors looking to use their SMSF to invest in pink diamonds.

Many of the points highlighted above reinforce the key messages that we communicate to clients at Australian Diamond Portfolio on a daily basis.

Those key messages focus not only on the merits of investing in pink diamonds, and why this unique asset class is set to go from strength to strength performance-wise in the years ahead, but also some of the things to look out for when buying pink diamonds.

We also think it’s critically important that investors appreciate the different structures that can be used to maximise the returns generated by investing in pink diamonds, as well as understand the practicalities of how to invest in this asset class, looking not only at purchasing, but storage, insurance and certification.

Hard Assets to Shine as Tech Bubble Busts

We want to be clear that we love using new technology, and we think some of the most popular technology companies in the world like Apple are truly great businesses.

That doesn’t mean that there isn’t a bubble in technology stocks, and that the risk of this bubble bursting should see astute investors looking to diversify their portfolios by holding assets like pink diamonds.

The key thing to understand is that there is a massive difference between a great business, and a great investment. A company can be making incredible profits, and have achieved market penetration that is almost impossible to disrupt (think Apple, as well as Google and Facebook etc), but if investors are paying a crazy multiple of earnings to own the stock, the share price can still decline, and by a long way.

As a way of visualising how much investors are paying today consider the chart below, which highlights the price to earnings ratio of infotech companies listed on the ASX.

IT Valuations

The chart is telling you that today, investors are paying more than 60 times earnings of these stocks. Expressed another way, the companies in this sector won’t earn the money (at current rates) investors are paying to be owners of stock today until 2080.

It is madness.

As a further way of visualising how crazy the activity in the technology space has been, consider the chart below.

Major Central Bank Balance Sheets

It shows the average value in notional terms of call options purchased on the major tech stocks, and of the market as a whole. As you can see, the numbers have exploded in recent months, and recently approached USD $200 billion.

For those that aren’t familiar, when someone buys a call option, they have the right (but not the obligation) to buy a stock at a given price at some point in the future. The price of the option itself can move up (and down) by a lot more in percentage terms than the stock itself.

The fact that there has been so much buying of late tells you investors have wanted to take extra risk on a previously unimaginable scale, hoping to magnify their gains.

It is classic bubble psychology, and it almost always ends in tears.

Last time a tech bubble like this burst, it coincided with a massive bull market rally in hard assets. There is very good chance we will see something similar play out in the years to come, with pink diamonds likely to be a standout performer in this environment.

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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