13 Jul

Dollars and Diamonds

While pink diamonds have been the long-term market leader in terms of asset price growth, they will always remain something of a niche asset, which in many ways is part of their appeal.

In saying this, we mean that while pink diamonds are accessible to all, most investors tend to stick with more mainstream assets, like stocks, bonds, real estate and cash for a range of reasons.

It’s only those investors who don’t want to follow the herd, and who are willing to put in the extra research to learn about assets like pink diamonds, who are able to reap the rewards that they can offer.

And while the market’s attention will in all likelihood continue to be primarily focused on mainstream assets, and the factors that drive these assets, such as interest rates and inflation, there is another catalyst building.

This catalyst is the US dollar.

Below, we look at why the trend in the US dollar is one factor set to propel pink diamond prices even higher going forward.

Diamonds and dollars

In the investment world, the US dollar is often referred to as King Dollar.

By that, market commentators simply wish to highlight that the US dollar is the most influential and important currency in the world, with movements in the US dollar helping to drive asset prices and economic performance worldwide.

The chart below shows the performance of the US dollar over the last five years, measured against a range of other currencies. Since mid 2021, it’s primarily been in an uptrend, increasing from around 90 to more than 110 at one point in late 2022.

This more than 20% rally is one of the reasons that some commodity markets, like oil, have fallen as sharply as they have over the last year, with pink diamonds a notable outperformer over this period.

A chart of the performance of the US dollar over the last five years, measured against a range of other currencies

Source: Yahoo! Finance.

Importantly, in the last six months, the US dollar has grown weaker and weaker, and now looks like it may have further to fall. This is also evident in the chart above, which shows a clear downtrend.

This downtrend in the US dollar is in all likelihood a sign of trouble for the global economy, and also a sign that we may see a sharp increase in commodity prices from here.

In turn, this would contribute to higher inflation, with pink diamonds one of the few tangible assets that can not only protect, but actually grow wealth in such an environment.

What about Australia?

While the notion of a falling US dollar vs multiple other currencies might lead some to think that means the Australian dollar is going to rise, that might not necessarily be the case.

The US dollar could fall vs other major global currencies such as the Euro, the Japanese Yen or the Pound, while staying strong relative to the Australian dollar.

The softness in our local housing market, our dependency on commodity exports (to a narrow group of nations), and the overall slowing in our economy could mean the Australian dollar continues to fall vs the US dollar.

Indeed, such a result would align with our long-term view, with regular readers of these updates aware that one of the reasons we are particularly bullish on pink diamonds for Australian investors is the potential for further weakness in the Australian dollar.

Based on some of the research we read, there is a very good chance the Australian dollar may fall all the way back to, and possibly below $0.50 US dollars in the years to come.

In percentage terms, that would be a fall of almost exactly 25% from current levels, given the Australian dollar is currently trading at close to $0.67 US dollars.

A fall of such magnitude would also dramatically boost the return one has generated from their pink diamond investment, as the below table highlights.

It shows a potential return profile based on someone buying a $35,000 US dollars pink diamond today. That number has been chosen as it aligns to a budget of just over $50,000 Australian dollars at current foreign exchange rates, which is the kind of investment level we see from a lot of our clients. Incidentally, an investment figure like that helps highlight just how accessible pink diamonds are.

The table then goes on to show the returns in US dollars alone, and in Australian dollars, based on the pink diamond doubling in the next 5 years (which equates to a 100% return in USD terms), and the Australian dollar falling to USD $0.50, which boosts the return for the local investor to 168%.

Table of USD to AUD at various exchange rates.

While no one can be 100% certain what will happen with any asset class or currency, the bullish case for pink diamonds remains firmly intact, and likely will for years. The reasons to be bearish about the outlook for the Australian dollar are also very strong.

As a result, while the above is not a price prediction per se, movements like this, were they to play out, would merely represent a continuation of the existing price strength in pink diamonds, and the secular weakness in the Australian dollar, which dates back more than a decade now, given that the local currency peaked back in 2011.

It would also be the perfect scenario for Australian pink diamond investors, including our clients at Australian Diamond Portfolio, who would likely see their pink diamonds be the best performing asset in their portfolio.

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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