08 Feb

Five factors driving pink diamonds in 2024

It’s hard to believe that it is already February.

We hope that you had a wonderful and relaxing holiday period with family, friends and loved ones, and are now fully re-energised to take advantage of the opportunities this year will bring.

On behalf of the entire Australian Diamond Portfolio team, we look forward to serving you again in 2024, which we believe is shaping up as another wonderful year for pink diamond investors.

We touch on some of the reasons why we have such an optimistic view of the pink diamond market below, with future versions of these market updates delving into these factors in more detail in the coming weeks and months.

Catalysts driving pink diamonds higher in 2024

Pink diamonds have been fantastic investments in the last twenty years.

From a pure performance perspective, they’ve grown in value by more than 600%, with the highest quality stones tending to see even greater price growth.

They’ve also offered inflation protection, portfolio stability, and diversification benefits to investors over this time period, which are investment traits that have only grown more important in recent times.

As 2024 unfolds, we see several catalysts that will help push the price of pink diamonds higher, discussed below.

Constrained supply

The closure of the Argyle diamond mine took place in late 2020, just over three years ago. As we commented at the time, it was a genuine end of an era moment which instantly eliminated more than 90% of the newly mined supply. No meaningful new sources of supply have come on stream since, nor are there any new pink diamond mines of significance even on the radar.

While this closure, and the extremely limited supply of pink diamonds to the market is no longer news, it will still have profound implications over time and will continue to exert upward pressure on prices.

The desire for inflation protection

While inflation has fallen from the sky-high rates of more than 10% that we saw in some cases across the developed world by the middle of 2022, it still remains uncomfortably high.

For example, in the United States, core CPI (which excludes energy and food) finished last year just under 4%, while some inflation readings are again turning higher, not lower.

This can be seen in the chart below, which looks at various measures of inflation in the United States from 2014 through to end 2023.

Median Consumer Price Index

Graph of Median Consumer Price Index

Source: Bureau of Labor Statistics, Federal Reserve Bank of Cleverland, Haver Analytics.

Given current geopolitical events, inflation is likely to remain uncomfortably high for years to come.

Pink diamonds will continue to benefit from this, as investors gravitate toward hard assets with a history of protecting, and indeed growing purchasing power in periods of higher inflation.

Lower interest rates are coming

Interest rates have moved sharply higher in the last two years in North America, Europe, and of course Australia. Locally, the cash rate is currently sitting at 4.35%, having risen from just 0.10% in April 2022, a more than 4% increase in just 18 months.

The impact has been severe, with recession warning signs abounding in countries like the United States, while in Australia, we’ve been in per capita recession for more than 6 months.

Markets, most notably in the United States, now expect interest rates to head lower, with suggestions that rates will be up to 1% lower by the end of Q3 2024, with another 1% or more of rate cuts to come by late 2025.

This makes cash in the bank less attractive for investors, a reality that will be compounded if inflation does indeed remain at problematic levels.

For assets like pink diamonds, it’s a benefit – as the lack of income from owning a pink diamond becomes less problematic in an environment when alternatives, like a savings account or term deposit see their real rates of return slashed.

Protection will be needed

The last twelve months have been very rewarding for those willing to speculate in higher risk assets like crypto, and indeed the share market, with the S&P 500 for example rising by 20% in the last twelve months, while technology stocks performed even more strongly.

At the margin, this may have slowed the pink diamond market – which often sees an increased investor appetite for those looking for diversification when there is more volatility in the stock market.

In 2024, we expect this investor demand to rise, and likely substantially, as exuberance in the stock market has reached levels that we often see before a major market crash.

This was summed up in the below comments from Callum Thomas at TopDown Charts who also shared the chart included.

Stocks and Investor Sentiment

Graph of Stocks and Investor Sentiment

Source: Hi Mount Research.

Too much bullishness can be a bad thing if it means everyone is already on board… if expectations are for perfection then it doesn’t take much to undershoot expectations.”

That undershooting of expectations likely means a major pullback for risky assets like shares and crypto. Should that happen, don’t be surprised if pink diamonds boom, especially if it occurs against a backdrop of falling interest rates, higher inflation and a general slowdown in the economy.

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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