23 Oct 2019

Economic Risks Build as Argyle Diamonds continue to Shine

Late last week we came across an excellent, though troubling article highlighting the very real risks facing the global economy and financial markets today.

Titled; Severe risks ahead for markets” and written by Charlie Jamieson of Jamieson Cootes Bonds, the article highlighted the fact that September saw a continued deterioration in the global economy, which has forced the hand of central banks when it comes to the interest rate cuts and quantitative easing programs they’ve announced in recent months.

Sadly, at present the expectation is that things will get worse as we head into the first half of next year, meaning investors best be cautious when it comes to allocating capital.

The best evidence of how pronounced the global economic slowdown is becoming can be found in European manufacturing data, with the chart below showing the Purchasing Managers Index (PMI) for the manufacturing sector as a whole in Europe, with the figures for some key nations shown as well. Note that in the graph below, a reading above 50 means the sector is in an expansionary phase, whilst a reading below 50 means the sector is contracting.

 

Eurozone Manufacturing Purchasing Managers Indexes Final & Flash Estimates

Eurozone Manufacturing

*An index above 50 indicates an increase in manufacturing activity. An index below 50 indicates a decrease in manufacturing activity. **Flash estimates not available for Italy and Spain.
Source: HSBC, Markit, and Haver Analytics.

 

As you can see, the trend has been heading in the wrong direction since late 2017/early 2018, with all countries except France now in a noticeable contraction.

The real stand out, and for all the wrong reason, is Germany. Typically the beating heart of the Eurozone, German manufacturing data has fallen off a cliff in the last two years, a symbol of how weak the economic outlook in the world’s largest economic region truly is.

The case for hard tangible assets like rare coloured diamonds is boosted in uncertain environments like the one investors currently face, with nothing to suggest these economic and market challenges can be easily solved any time soon.

Australia also at risk

Australia is not immune to the forces at play globally, with the article going on to list a handful of risk factors facing the Australian economy right now. These include;

  • How leveraged Australia is to China, and how the slowdown in China will impact the local economy, putting further downward pressure on the AUD
  • The expectations of the major banks in Australia that the RBA will continue to cut interest rates, with some expecting the next cut to happen in early November
  • The fact that the RBA may implement quantitative easing (QE) here in Australia, possibly as soon as next year
  • The likely pressure to come on our terms of trade in the months and years ahead, with the boost in the iron-ore price caused by the Vale damn accident in Brazil that temporarily hit global supply likely to be transitory

Interestingly, the article noted that the Australian dollar was already in the midst of a secular decline in value versus the USD, and suggested that the ongoing trade war between the United States and China, which even President Trump is saying could go on for another year, could be one of the catalysts that helps push the Australian dollar below USD $0.60.

If that were to happen, it would add to the gains many clients at Australian Diamond Portfolio have made on their diamond investments, which benefit from any fall in the local currency.

Argyle Pink Diamonds Shine

Earlier this month, we released a special report into the closure of the Argyle Diamond Mine, and why this closure, scheduled to take place next year, combined with the economic risk factors at play in financial markets today should see pink diamonds continue to outperform traditional financial assets in the decade to come.

For those that missed it, you can download the report via the link below.

Special Report: Argyle Mine Closure

The reason we mention that report in this update is that we came across a fantastic article last week; titled “Here’s Why the 2019 Argyle Pink Diamonds Tender is Very, Very Special” which reinforces many of the conclusions we came to in our research.

Some of the highlights of the article include the fact that at present, it is expected that the Argyle Mine has less than 100 carats of pink coloured diamonds that will be mined prior to its closure.

That’s reinforcement of just how rare these stones are, and why the outlook for prices is so strong for those who are prepared to take a long-term approach with their investments.

Everlastings collection

The Everlastings Collection, which comprises 64 lots of stones weighing 0.14 carat or less. Image © Rio Tinto 2019.

The other fascinating news that the article highlighted is the development of an Everlastings collection, which comprises 64 lots of stones weighing 0.14 carat or less. This collection includes highly sought-after red diamonds, through to purplish pinks and the more standard pink coloured diamonds.

We are fascinated to see how this collection progresses, as stones like this are evidence of how accessible the pink diamond market is, and why at Australian Diamond Portfolio we have been able to help thousands of Australians build and protect wealth through exposure to this unique asset class.

We also love the name of the collection. After all, if you want to build everlasting wealth, then you need to invest in everlasting assets.

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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