We hope that you had a lovely break over Christmas and the New Year.
We’d like to welcome you back to our regular In the Loupe market updates, which will again be published on a weekly basis this year.
Speaking of this year, and whilst the calendar has ticked over into 2021, much of what we’ve seen take place in the first few weeks of January represents a continuation of the issues that plagued us in 2020.
These include continued problems with COVID-19, mutations of which are beginning to develop, and spread across the developed world. This means lockdowns are likely to continue, with economic activity continuing to suffer as a result.
Political tensions are also still evident, despite the change in the White House, which is particularly relevant for Australia given our reliance on commodity exports to China (more on this below).
Most importantly, we are seeing a continued euphoria in markets that is now completely divorced from economic reality: Whether it be Bitcoin, shares in companies such as Tesla or GameStop, or the proliferation of capital being raised via Special Purpose Acquisition Vehicles (SPAC), there are numerous examples of investor exuberance in the markets today.
Perhaps the best way of visualizing this is looking at the chart below, which shows movements in the CitiGroup Panic and Euphoria Index from 1987 through to the start of 2021.
The Panic/Euphoria Model
There are multiple inputs into this model, but in essence, it is a very easy way to visualize the ‘mood’ of the market at any point in time, and whether or not investors are feeling optimistic (euphoric) or pessimistic (panic) on the whole.
As the chart suggests (look at the black arrow and question mark on the right of the chart) the model is now at its highest reading ever, indicating investors have never been more euphoric than they are today.
This is a huge red flag and warning sign for investors, with CitiGroup’s own Chief Economist Tobias Lekovich stating that this reading now suggests there is; “100% historical probability of down markets in the next 12 months at current levels.”
From our perspective, we are incredibly encouraged when looking at charts like the one above. Market excess in either direction never lasts. It will be no different with the extreme bullishness we are seeing in the market today.
When it unwinds, not only will financial assets like shares suffer, but hard assets will flourish, as investors see the hard assets as the best way to protect and increase their wealth.
This will be incredibly bullish for pink diamond prices in 2021 and beyond.
White House stimulus to push higher inflation
The last few months of 2020, and indeed the first few weeks of this year were a particularly contentious period for US Politics, with one of the most bitterly fought US Presidential Elections, and a contested aftermath dominating media attention.
With Joe Biden now firmly installed in The White House, attention turns to the economic policy agenda he will attempt to unleash, the centrepiece of which is a USD $1.9 trillion stimulus package.
While we are sympathetic toward the argument that governments need to provide support in these extraordinary times, there is always the question of who will pay for it to consider.
A stimulus package of this nature, combined with the deficit spending over the last year (The US ran a budget deficit of over USD $3 trillion in 2020, which was the equivalent to 15% of GDP, more than any other deficit since the end of WWII) will raise market concerns regarding higher inflation, especially as a meaningful portion of the deficit will likely be funded by money printing from the US Federal Reserve.
This fear of higher inflation will only be heightened by the fact that hard assets historically performed strongest whenever the US Democratic Party controls the US Congress, as they now will for the next few years.
We see this as being particularly bullish for those kind of hard assets that are faced with unique supply constraints, coupled with rising demand.
Pink diamonds are obviously one such asset.
What to look for in 2021
On balance we remain incredibly optimistic regarding the outlook for pink diamonds in 2021, and indeed for the decade to come.
The closure of the Argyle Diamond Mine, which cuts off 90% of the supply of new pink diamonds to the market, coupled with the economic and financial market environment investors must now navigate, will likely see a surge in demand for these assets, much like we saw in the second half of 2020.
Over time, this can’t help but manifest itself in higher prices for pink diamonds, which in our view will outperform traditional assets like shares, cash and property in the years ahead.
For Australian investors, we think there is a good chance they’ll benefit not only from pink diamond price appreciation, but also a potential fall in the value of the Australian dollar, which started 2021 near USD 0.77, one of its highest readings in years.
With tensions between Australia and China continuing to build, all it will take is for a slight reduction in demand for our key commodity exports to see the Australian dollar fall sharply.
Pink diamond investors will be protected, with their investment set to benefit should such a decline eventuate.
At Australian Diamond Portfolio, we will continue our focus on sourcing the most profitable investment opportunities in this boutique asset class for our valued clients and delivering the comprehensive end-to-end services that have seen us build the largest network of pink diamond investors in Australia.
We will also continue to l provide our regular weekly commentary on all financial market and economic topics that impact the investment case for pink diamonds.
Finally, we will continue to provide Australian’s like yourself with the opportunity to own a piece of Australian history, through The Australian Diamond Portfolio Legacy Collection.
On behalf of the team at Australian Diamond Portfolio, I wish you the very best for 2021.
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.