15 May 2019

Electing to Invest in Pink Diamonds

There are many factors that give us confidence about the outlook for pink and blue coloured diamond prices in the years ahead.

There is the strong historical performance, the fact that they are effective portfolio diversifiers, that they have proved better long-term investments than cash in the bank (especially now that interest rates are so low) and the fact that as discrete, tangible assets, they are growing in popularity amongst investors wanting to secure their wealth.

Finally, there is the rarity of the stones themselves – a factor that will be enhanced by the imminent closure of the Argyle mine by 2021.

These are themes that we discuss regularly with our clients at Australian Diamond Portfolio, either via emails, or in our Diamond Master Classes and consultations.

In this update though, we wanted to share with you another insight which helps highlight the strong demand for rare pink and blue diamonds. That insight is the operating results for the Argyle Mine itself, and the returns it is generating for its owner, Rio Tinto.

Whilst Rio Tinto makes the vast majority of its money from iron ore and aluminium, its diamond business does add to its bottom line, with a fascinating article in the Financial Review published in early May 2019 pointing out that revenues from the Argyle mine had soared to their highest levels in a decade.

Workers at Rio Tinto’s Argyle Mine. Image © Rio Tinto 2019

Revenue from the mine of just over $370 million was not only 26% higher than the result generated a year earlier, but it was also the highest result reported by Argyle since the height of the Global Financial Crisis (GFC).

What was particularly interesting is the fact that the outstanding results delivered by Argyle occurred despite a decline in diamond output of 18%, with the “big increase in revenue driven by higher sales volumes.”

These trends will almost certainly continue, with production set to continue declining, whilst demand will be boosted by investors keen to get their hands on an asset that will “enjoy greater scarcity value”, as the article in the Financial Review stated.

We couldn’t have put it better ourselves.

Trade War Tensions Building

Last week we commented on the rising risks in the economy and in financial markets from the continued trade war rhetoric between the United States and China.

Rather than cooling off, tensions continue to mount, with the Chinese announcing retaliatory tariffs on $60bn worth of US goods.

Market reaction was swift and severe, with the S&P 500 falling almost 2.5%, whilst technology stocks fell by more than 3%. The losses are flowing through to Australia too, with the ASX down over 1% on Tuesday the 14th May as this article is being written.

The risk aversion from investors is also feeding through to currencies, with the Australian dollar now trading below USD $0.70, boosting the returns Australian investors in tangible assets like diamonds will earn.

Election Wait Almost Over

We couldn’t finish this week’s update without a brief mention of the Federal Election, which is on this weekend. Betting markets seem pretty sure we will all be going to bed Saturday night with a new Prime Minister and a change of government, though if Trump and Brexit taught us anything, it’s that anything can happen in politics these days.

If the result goes the way punters suggest, there will be a lot for investors to digest, with significant reforms in the works when it comes to franking credits, negative gearing for property, and capital gains tax.

On top of all of that, we are also still likely to get lower cash rates between now and Christmas, whilst the housing market continues to weaken, putting pressure on big companies like the banks and their ability to continue to pay out high dividends.

No doubt many of these issues will be top of mind for investors, and we will provide a more detailed post-election update, and the implications the result has for blue and pink diamond investment, next week.

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