11 Aug

Falling Aussie dollar to boost pink diamonds

Despite the good news that Queensland looks like it will be easing restrictions and hopefully coming out of lockdown soon, much of the east coast of Australia remains “shut”, with attempts to limit the spread of COVID-19 likely to remain in place for months at this stage.

The economic cost, which we alluded to last week, is starting to express itself more directly on the employment front, with the latest data suggesting the country lost just over 175,000 jobs in July across all the mainland states.

Research from Roy Morgan also suggests there are now 2.76 million Australians, approximately 18.8% of the workforce, that are either unemployed or underemployed.

Given this backdrop, it’s safe to say that it will be a long-time before the economy can properly recover, with households likely to be particularly cautious when it comes to their finances, while businesses will remain reluctant to invest.

The impact on the Australian dollar is also likely to be negative, though it will of course support assets like pink diamonds.

We explore this in more detail below.

Australian dollar on the ropes!

The Australian dollar has fallen by almost 8% in the last six months, after a massive rally which pushed it all the way back toward $0.80 vs. the United States dollar (USD).

The weakness in the Australian dollar is expected to continue, with the COVID-19 challenges we are facing only part of the problem. The bigger issue relates to Australia’s continued dependence on commodity exports to China, the most notable of which is iron ore.

And while iron ore exports to China, and the iron ore price itself, remain high by historical standards, there seems little doubt that both have peaked, and are set to fall by a lot more in the months ahead.

Starting with the price itself, and iron ore has now fallen to just USD $170 per tonne, down 20% from the highs closer to USD $220 per tonne seen just a few weeks ago.

As sharp as the fall has been, it could go a lot lower, with some suggesting the price could, and indeed likely will fall all the way back toward USD $100 per tonne by Christmas this year.

Demand for iron ore is also rolling over, and looks likely to head lower, which will obviously contribute to the negative price trajectory. Evidence of the falling demand (from record high levels) is captured neatly in the chart below, which shows total volumes of iron ore imports into China (blue bars), as well as the rolling annual change (pink line) in total imports.

China iron ore imports

China iron ore imports

Source: MacroBusiness

Note that the above chart goes all the way back to the year 2001, so provides a great illustration in how this dynamic has played out across a 20-year cycle that included the Global Financial Crisis, and the COVID-19 crash we saw last year.

The year on year trend seen in the pink line is clearly pointing downward now, and it suggests the Australian dollar could go a lot lower going forward.

Astute investors should be aware of this developing trend, and make sure their portfolio is appropriately positioned to not only sidestep the damage a falling AUD can have on their wealth, but instead profit from it.

Pink diamond investors to benefit!

Pink diamonds benefit from a falling Australian dollar, with a decline in the local currency boosting the returns that clients of Australian Diamond Portfolio can generate on their investments.

This can be seen in the following table, which highlights the results a client might receive after five years, assuming:

  • An original investment of just over AUD $65,000 – based on a USD investment amount of $50,000, and a current FX rate of 0.7391
  • Recent pink diamond price growth of approximately 20% per annum continues for the next five years
  • The Australian dollar returns to USD $0.50, like it did more than twenty years ago, when it last bottomed out

The table also highlights the results a client might receive after five years, assuming the currency doesn’t move at all.

The table also highlights the results a client might receive after five years

As you can see, in an environment whereby the AUD merely returns to 0.50 vs the USD, the investor would end up making almost 5 times their money, with an original AUD $67,649.84 investment turning into AUD $336,668.92 after five years.

They would also generate more than AUD $100,000 in additional profit relative to the scenario where the currency doesn’t move at all.

This is one of the key reasons why we think it’s still such a great time to invest in pink diamonds today. For not only is the tailwind of a closed Argyle Diamond Mine only just now starting to express itself in higher prices, but the Australian Dollar is still fetching a good rate vs. the United States dollar.

That currency strength is being sorely tested though now, and in due course, we expect the AUD to fall a lot. When it does, pink diamond investors will be major beneficiaries.

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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